ACCA SBR ^INT Syllabus C. Reporting The Financial Performance Of A Range Of Entities - Income Tax - Notes ^{1 / 3}

The amount of income taxes payable or receivable in a period

Any tax loss that can be carried back to recover current tax of a previous period is shown as an asset

If the gain or loss went to the OCI, then the related tax goes there too

Let´s say we have credit sales of 100 (but not paid until next year).

There are no costs.

The tax man taxes us on the cash basis (i.e. next year).

The Income statement would look like this:

This is how it should look.

The tax is brought in this year even though it´s not payable until next year, it´s just a temporary timing difference.

Illustration

• Tax Base

  Let’s presume in one country’s tax law, royalties receivable are only taxed when they are received

• IFRS

  IFRS, on the other hand, recognises them when they are receivable

Now let’s say in year 1, there are 1,000 royalties receivable but not received until year 2.

The Income statement would show:

Royalties Receivable  1000
Tax     (0) (They are taxed when received in yr 2)

This does not give a faithful representation as we have shown the income but not the related tax expense.

Therefore, IFRS actually states that matching should occur so the tax needs to be brought into year 1.

Dr Tax (I/S)
Cr Deferred Tax (SFP provision)

Deferred tax is caused by a temporary difference between accounts rules and tax rules.

One of those is a revaluation:

Accounting rules bring it in now.
Tax rules ignore the gain until it is sold.

So the accounting rules will be showing more assets and more gain so we need to match with the temporarily missing tax.

A company revalues its assets upwards making a 100 gain as follows:

This is how it should look.

The tax is brought in this year even though it´s not payable until sold, it´s just a temporary timing difference.

Notice the tax matches where the gain has gone to.