When to recognise deferred tax ?

TiGeR KiNgS

I'm studying Deferred tax (DT) at the moment but I am unsure when to recognise it in the financial stmts.

My understanding is that DT is a special type of provision used to smooth profit when temporary differences arise between the tax and accounting worlds.
e.g. Capital allowances.

Why do I never see DT in Sole traders accounts and very rarely in SME's ?

LiamACA

TiGeR KiNgS wrote: »

I'm studying Deferred tax (DT) at the moment but I am unsure when to recognise it in the financial stmts.

My understanding is that DT is a special type of provision used to smooth profit when temporary differences arise between the tax and accounting worlds.
e.g. Capital allowances.

Why do I never see DT in Sole traders accounts and very rarely in SME's ?

IAS 12 DT liabilities are the amount of Income Taxes payable in future periods in respect of temporary timing differences.

In essence it is the accruals concept to taxation. Only companies account for deferred tax. it's only an estimate of the tax effect of a transaction that may be payable/repayable in the future and is not a tax charge.

Differences include items which:

the accounts allow as a deduction on an accurals basis but tax law allows as a deduction on a paid basis, or which

the accounts amortise while tax law allows for a once off deduction

1) let's say a company is loss making in 2009 (€1000) and hopes to make a profit in 2010 of €500 and €1000 in 2011

As it expect to use the tax losses and to obtain a benefit from them it should recognise the deferred tax asset as follows:

Dr Deferred tax asset €125 (ie 1000*12.5%)
Cr Deferred Tax charge €125 (P&L)

being the creation of a deferred tax asset for tax losses

If the company didn't think it was going to be profitable it would not be allowed to create a tax asset

2)

Now for Fixed assets say P&M

Cost Depreciation Net
Accounting 10000 1000 9000 Dep over 10 years
Tax 10000 1250 8750 W/O over 8 years as per Revenue guidelines

Temporary diff 250

liability/(asset) @12.5% is 31

Dr Deferred Tax Charge (P&L) 31
Cr Deferred Tax Liability 31

Being the creation of a deferred tax liability

The thing to remember is that if the depreciation rate > 12.5% you will have a deferred tax liability and vice versa

So from the two examples above you may net them off giving a Deferred Asset of €94

barneystinson

Re: sole traders - the reason you don't see deferred tax in there is the same reason you don't see current year tax in their either - the tax liability arises on the individual who has earned the profit, in conjunction with the rest of their income / losses, rather than on the trade in respect of which the accounts are prepared...