Deferred Tax & Tax Effect Accounting
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      How do I do deferred tax IAS 12

      We have a worksheet for you, please download it and create your journal entries for current and deferred tax.

      What are deferred tax assets and liabilities?

      Deferred tax assets and deferred tax liabilities arising from temporary differences reflect the future tax consequences (as distinct from current tax consequences) of:
      1. The future recovery of assets
      2. And the future settlement of liabilities

      Deferred tax usually creates some headaches for our customers. Think of deferred tax as:

      1. A journal I do every year
      2. That changes the balances of deferred tax assets and / or deferred tax liabilities 
      3. The journal reflects the differences between a carrying amount and a tax base
      4. These always change, every year

      You need to know the TAX BASE

      The carrying amount, is accounting 101, you know what that is, such as the carrying amount of PPE.  

      But what happens when the carrying amount and the tax base are different?

      For example, what if the carrying amount of machinery is $1,000,000 but in the tax records it is only $500,000. 

      That is a $500,000 difference. 

      The tax base is something that you need to understand.

      Think of a tax base as:

      Assets = Paragraph 5 of AASB 112/IAS 12 simply states that the tax base of an asset is the amount attributed to that asset for tax purposes.

      Liabilities = Unlike assets that by their nature are expected to generate revenues which in most cases will be taxable in the future, liabilities are outflows of funds and do not generate future taxable amounts.

      What do you need to know?

      You need to look at the assets and liabilities and find the carrying amounts and the tax bases, and then you need to enter them into the worksheet.

      The worksheet helps you find out the differences.

      Then it calculates the deferred tax and shows you the journals. 

      Common accounts that are included in deferred tax are:

      1. Fixed assets
      2. Prepayments
      3. Provisions
      4. Revenue received in advance
      5. Accumulated losses

      Here is what the journals do:

      Current tax expense = amount of income tax payable for the period recognised in the profit and loss.

      Deferred tax expense = movement in deferred tax assets and liabilities for the period recognised in the profit and loss.

      Set up the chart of accounts

      You will need:

      1. Income tax expense account
      2. Current income tax liability account
      3. Deferred tax asset account
      4. Deferred tax liability account

      Deferred tax assets and deferred tax liabilities are always classified as non-current assets and liabilities in the statement of financial position, including the portion expected to be reversed within the next 12 months.