FAC 4861/3

INCOME TAXES (IAS 12)

LECTURE 1 OF 2
LECTURE EXAMPLES
Prepared by BIANCA NEL CA (SA)

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1. IAS 12 Revision sheet a

Example 1 Current tax (Source: Descriptive Accounting Amended) 2. IAS 12 Templates a
3. IAS 12 Standard a

The accounting profit of Flower Ltd for the year ended 31 December 20.15 amounted to
R2 000 000.

Included in the accounting profit is the following:

• Dividends received of R80 000
• Research costs of R100 000 (correctly expensed for accounting purposes) [Assume
that 150% of this amount is deductible for tax purposes for the current year.]
Flower Ltd acquired an item of plant on 1 January 20.15 at a cost of R500 000. The plant is
depreciated evenly over 8 years with no residual value. For tax purposes, a 40/20/20/20 tax
allowance is applied.

The normal income tax rate is 28% and the capital gains tax inclusion rate is 80%.
Flower Ltd made two provisional tax payments of R230 000 and R240 000 respectively
during the year.

Requirement: STEP 1 (T)

1. Calculate the Current tax payable,
2. Prepared the Income tax note, STEP 2 (Read info and complete calc)

3. Prepare the Journal entries

STEP 3 (Transfer calc to Note)
for the year ended 31 December 2015
STEP 4 (Ensure you have met the requirement)

Calculation of current tax for the year ended 31 December 20.15:

Gross
Tax at 28%
amount
R R
Accounting profit 2 000 000 560 000
Non-taxable items and additional deductions:
Dividends received – accounting income reversed (80 000) (22 400)
Extra research costs deductible (R100 000 x 50%) (50 000) (14 000)
Accounting expense reversed 100 000
Tax deduction claimed (150 000)
1 870 000 523 600
Temporary differences*:
Depreciation and tax allowance on plant (137 500) (38 500)
Depreciation on plant reversed (R500 000/8 years) 62 500
Tax allowance on plant claimed (R500 000 x 40%) (200 000)
Taxable income and current tax payable 1 732 500 485 100

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Notes
2. Current tax payable (current liability)
R
Total current tax payable 485 100
Provisional tax payments made (R230 000 + R240 000) (470 000)
Amount payable as at 31 December 20.15 15 100

7. Income tax expense

Major components of tax expense
Current tax expense 485 100
Deferred tax expense* CA TB TD DT 38 500
Tax expense 437 500 > 300 000 137 500 38 500 [DTL] 523 600
Tax reconciliation# is as follows:
Accounting profit 2 000 000
Tax at the standard tax rate of 28% (R2 000 000 x 28%) 560 000
Dividends received (R80 000 x 28%) (22 400)
Extra research costs deductible (R50 000 x 28%) (14 000)
Tax expense 523 600
Effective tax rate (R523 600/R2 000 000 x 100) 26.18%

Journal entries:
Current tax payable (SFP) 230 000
Bank 230 000
Recognition of first provisional payment
Current tax payable (SFP) 240 000
Bank 240 000
Recognition of second provisional payment
Income tax expense (P/L) 485 100
Current tax payable (SFP) 485 100
Recognition of current tax payable to SARS
Income tax expense (P/L) 38 500
Deferred tax* (SFP) 38 500
Recognition of movement in deferred tax* for the current year

LAND + 120 000

Cost 300 000 Profit before tax 2 000 000
Selling Price 420 000 OUT (120 000) (24 000)
120 000 IN [80%] + 96 000

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Use the IAS 12 - Example 2

Example 2 Deferred tax (Descriptive Accounting) Lecture handout included in
Col Campus in the "Lecture
Material" section
Property, plant and equipment
At the end of the reporting period, a company has plant with a cost of R200 000 and
accumulated depreciation of R40 000. For tax purposes, the SARS has permitted a tax
allowance of R50 000 on the plant.
Carrying Tax base Temporary Deferred tax
amount difference 28%
R R R
Plant (*) 160 000 150 000 10 000 2 800

What is the carrying amount?

What is the tax base?

Is this a deferred tax asset or liability?

(*) (R200 000 – R40 000); (R200 000 – R50 000)

Note:
The income generated by the plant as it is used (carrying amount recovered) will be taxable in the future and if the plant is
sold at a profit, the profit will also be taxable to the extent that it represents a recoupment of the tax allowances, and
capital gains tax (CGT) is applicable. The remaining tax base of the plant is deductible as a tax allowance and/or a scrapping
allowance in future periods against taxable income.

Dividends receivable
A company recognises a debit account (Dividends receivable) in the statement of financial
position for dividends of R60 000 receivable from a listed investment. Dividends are not
taxable.
Carrying amount Tax base Temporary difference
R R R
Dividends received 60 000 60 000 –

What is the carrying amount?

What is the tax base?

Note:
When dividend receivable is recovered (i.e. cash received), the amount is not taxable. Therefore, the tax base
of the asset equals the carrying amount.

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Trade receivables
A company’s trade receivables balance at the end of the reporting period amounted to
R86 000.
Carrying amount Tax base Temporary difference
R R R
Trade receivables 86 000 86 000 –

What is the carrying amount?

What is the tax base?

Note:
When the carrying amount of the receivables is recovered (i.e. received in cash), the amount will not be taxable since it was already taxed
when the revenue was recognised (sales). As the future economic benefits are not taxable, the tax base equals the carrying amount.

Capitalised development costs

A company capitalised development costs of R320 000 during the year. An amount of
R50 000 was recognised as an amortisation expense. Assume SARS will allow the capitalised
cost to be written off over a period of 4 years as a tax allowance. The temporary difference
is calculated as follows at the end of the reporting period:
Carrying Tax base Temporary Deferred
amount difference tax (28%)
R R R
Development costs (*) 270 000 240 000 30 000 8 400

(*) (R320 000 – R50 000); (R320 000 – (R320 000 x 25%))

What is the carrying amount?

What is the tax base?

Is this a deferred tax asset or liability?

Note:
The development costs will generate taxable economic benefits as the carrying amount is recovered. The balance of the tax base will be
deductible for tax purposes over the remaining three years.

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Tax base of items not recognised as assets

During the year, a company incurred costs of R10 000 in cash and immediately recognised it
as an expense. Assume SARS allows such costs to be deducted over three years on a
50/30/20 basis.
Carrying Tax base Temporary Deferred
amount difference tax (28%)
R R R
Costs incurred (*) – 5 000 (5 000) 1 400

(*) (R10 000 – (R10 000 x 50%))

What is the carrying amount?

What is the tax base?

Is this a deferred tax asset or liability?

Note:
The temporary difference arose because the total expense is not immediately deductible for tax purposes. The tax base is the amount that
is deductible against future taxable income, namely (30% + 20%) x R10 000.

Long-term loan and interest accrued

A company received a 12% long-term loan of R800 000 at the beginning of the year. At the
end of the reporting period, no capital has been repaid and no interest has been paid.
Carrying Tax base Temporary difference
amount
R R R
Loan (capital) (800 000) (800 000) –
Interest expense accrual (96 000) (96 000) –

What is the carrying amount?

What is the tax base?

Note:
The repayment of the loan does not have tax implications, therefore there is nothing to be deducted from the carrying amount to
determine its tax base (carrying amount of R800 000 less an amount of Rnil deductible in the future).
Interest is deductible for tax purposes as it is incurred. Thus there will be no future tax deduction (carrying amount of R96 000 less an
amount of Rnil deductible in future).

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Liabilities
A company recognised the following items at the reporting date:
Water and electricity accrual R1 250
Leave pay accrual R4 500

The leave pay accrual was created for the first time in the current year, and SARS only allows
the expense when it is paid in cash to employees.
Carrying Tax base Temporary Deferred
amount difference tax (28%)
R R R
Water and electricity accrual (1 250) (1 250) –
Leave pay accrual (4 500) – (4 500) 1 260

What is the carrying amount?

What is the tax base?

Is this a deferred tax asset or liability?

Note:
The water and electricity expense has already been allowed as a deduction for income tax purposes in the current year, because the
service has already been provided to the company. (It is in the tax year in which the liability for the expenditure is incurred, and is not in
the tax year in which it is actually paid (if paid the subsequent year), that the expenditure is actually incurred for the purposes of section
11(a) of the Income Tax Act.) Consequently, no further amounts will be deductible for tax purposes in future periods. The tax base is
therefore equal to the carrying amount (carrying amount of R1 250 less an amount of Rnil deductible in the future).
The leave pay accrual is only deductible for tax purposes once it has been paid. The tax base is therefore R4 500 – R4 500 = R0, or the
carrying amount less the amount that will be deductible for tax purposes in future

Revenue received in advance

At the reporting date, a company created a current liability of R380 for subscriptions
received in advance. The subscriptions are taxed immediately because they have been
received in cash by the company.
Carrying Tax base Temporary Deferred tax
amount difference (28%)
R R R
Subscriptions received in (380) – (380) 106
advance

What is the carrying amount?

What is the tax base?

Is this a deferred tax asset or liability?

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Note:
The tax base of the subscriptions received in advance is R380 – R380 = R0, or the carrying amount of the liability less any amount of the
revenue that will not be taxable in future periods (i.e., the full amount in this instance).

Trade receivables after allowances for credit losses

A company’s trade receivables balance at the end of the reporting period amounted to
R74 000 after an allowance for credit losses of R12 000. Assume SARS allows a deduction of
25% of the doubtful debts (credit losses).
Carrying Tax base Temporary Deferred
amount difference tax (28%(
R R R
Trade receivables 74 000 83 000 (9 000) 2 520
Gross amount 86 000 86 000 –
Allowance for credit losses (*) (12 000) (3 000) (9 000)

(*) (R12 000 x 25%)

What is the carrying amount?

What is the tax base?

Is this a deferred tax asset or liability?

Note:
When the carrying amount of the trade receivables is recovered (i.e., received in cash), the amount will not be taxable, since it was already
taxed when the revenue was recognised. As the future economic benefits are not taxable, the tax base equals the carrying amount.
The carrying amount of the allowance is R12 000. The tax base of the allowances is R3 000 (carrying amount of R12 000 less amount of
R9 000 deductible in future). The temporary difference is therefore 75% of the allowance, which is deductible against future taxable
income when the full allowance realises.

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Non-taxable government grant

A company receives a non-taxable government grant of R20 000 on an asset with a cost
price of R100 000. The grant is presented as a deduction from the asset in terms of IAS 20.
Carrying amount Tax base Temporary difference
R R R
Asset 80 000 100 000 (20 000) #

What is the carrying amount?

R100 000 - R20 000 = R80 000

What is the tax base?

R100 000

Is this a deferred tax asset or liability?

The tax base is larger than the carrying amount and results in a deductible temporary
difference. This deductible temporary difference is, however, not recognised, # because the
difference arose upon the initial recognition of the asset and does not affect the accounting
or the taxable profit.

The reversal of the difference is also not recognised.

Also refer to IAS 12.33: Government grants may also be recognised as deferred income
(refer to section 11.4.1), in which case the difference between the deferred income and its
tax basis is Rnil is a deductible temporary difference. Whichever method of presentation an
entity adopts, the entity does not recognise the resulting deferred tax asset.

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1. IAS 12 Revision sheet a

Example 3 Recognising a deferred tax liability (Descriptive Accounting) 2. IAS 12 Templates a
3. IAS 12 Standard a
Tango Ltd is a manufacturing entity which has diversified its operations, and now owns a
shopping mall and an apartment block. Details of the property owned by Tango Ltd for the
year ended 31 December 20.19 are as follows:

Land at Building Date brought

Building use
cost at cost into use
R R
Stand 502, Brenton 100 000 270 000 1 Jan 20.15 Administrative
Stand 503, Brenton 110 000 330 000 1 Jan 20.15 Manufacturing
Stand 1112, Brenton 50 000 180 000 1 Jan 20.15 Commercial
Stand 844, Seadune 120 000 420 000 1 Jan 20.19 Residential
380 000 1 200 000

1. Land is not depreciated.

2. Tango Ltd depreciates buildings on a straight-line basis over 30 years. There are no
residual values.
3. The tax allowances are as follows:
SARS does not allow a deduction on land, nor is a deduction claimable on the administrative
building (purchased 31 December 20.14). Tango Ltd can claim a tax allowance of 5% on the
cost of the manufacturing building, not apportioned for part of the year (construction
completed 31 December 20.14).
Tango Ltd can claim a tax allowance of 5% on the cost of the commercial building in terms of
section 13quin, as the building is mainly used for the purpose of producing taxable income.
Tango Ltd can claim a tax allowance of 5% on the cost of the apartment block (residential
units) as it qualifies in terms of section 13sex for the allowance (construction completed
1 January 20.19).
4. The deferred tax liability at 31 December 20.18 was R9 520.
5. The normal income tax rate is 28% and the carrying amount of all buildings will be
recovered through use.

Requirement:

Perform the deferred tax journal entry for the year ended 31 December 20.19.

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The deferred tax balance on 31 December 20.19 will be calculated as follows:

Deferred Movement
Carrying Temporary tax balance for the year
Tax base
amount difference @ 28% in P/L
Dr/(Cr) Dr/(Cr)
R R R R R
Opening balance (9 520)
Land 380 000 – 380 000 Exempt
Administrative building 225 000 – 225 000 Exempt
Manufacturing building 275 000 247 500 27 500 (7 700)
Commercial building 150 000 135 000 15 000 (4 200)
Residential building 406 000 399 000 7 000 (1 960)
(13 860) 4 340
Journal entry
Dr Cr
R R
Income tax expense (P/L) 4 340
Deferred tax (SFP) 4 340
Recognition of movement in deferred tax for the current year

NOTE
ü TB of land is Rnil => SARS does not allow a deduction on land. However, the deferred tax
has not been recognised, because the temporary difference arises from the initial
recognition of an asset which is not a business combination and which, at the time of the
transaction, affected neither the accounting profit nor the taxable profit (IAS 12.15).
The TD is exempt. (The same result for the deferred tax on land would be achieved if the
tax base is measured at the cost of land, namely R380 000. IAS 12.51B assumes that the
carrying amount of non-depreciable assets (measured using the revaluation model in IAS
16) will be recovered through sale. The cost of the land would be deductible against the
proceeds when the land is sold. In this example, the land was not revalued.)
ü CA of administration building is R225 000 (270 000 – 45 000 (270 000/30 x 5)) and the TB
= R0 (no amount is deductible in future) However, the deferred tax has not been
recognised, because the temporary difference arises from the initial recognition of an
asset which is not a business combination and which, at the time of the transaction,
affected neither the accounting profit nor the taxable profit (IAS 12.15). The temporary
difference is exempt. Jnl entry: Dr. Building, Cr. Bank/Supplier => No effect on
accounting profit or taxable profit
ü CA of manufacturing building is calculated: R275 000 (330 000 – 55 000 (330 000/30 x5)).
TB is R247 500 (330 000 – 82 500 (330 000 x 5% x 5)).
ü CA of commercial building is R150 000 (180 000 – 30 000 (180 000/30 x 5)).
TB is R135 000 (180 000 – 45 000 (180 000 x 5% x 5)).
ü In the first year, the entity depreciates the residential building by R14 000 (420 000/30).
TB is R399 000 (420 000 – 21 000 (420 000 x 5%)).

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Example 4 Deferred tax on revalued assets

Deferred tax on revalued Land

Sigma Ltd acquired land at a cost of R800 000 on 1 July 20.10. The entity’s year end is
31 December. The land was revalued to R950 000 on 31 December 20.12. Assume a normal
income tax rate of 28% and the capital gains tax inclusion rate of 80%.

Deferred
Carrying Temporary
Tax base tax
amount difference
(liability)
R R R R
Land at cost (non-depreciable asset) 800 000 800 000 – –
Revaluation surplus 150 000 – 150 000 (33 600)
Land at revaluation 950 000 800 000

Requirement:
Calculate and explain the deferred tax calculation on the Land for the year ended 31 December 20.12.

Journal entries
31 December 20.12
Revaluation surplus: Tax effect (OCI) 33 600
Deferred tax liability (SFP) (150 000 x 80% x 28%) 33 600
Recognition of deferred tax on revaluation of land

Land = non-depreciable asset (IAS 16) and the defined tax liability is recognised on the basis
that the carrying amount of land will be recovered through sale.

CA = Land at revalued amount (R950 000)

TB = is amount deductible in future.

When the land is recovered through sale (deemed), the cost would be deductible.
Therefore, the tax base is equal to the cost of R800 000.

The deferred tax on the revaluation of land is recognised against other comprehensive
income as the item to which it relates (the revaluation led to the temporary difference) was
recognised in other comprehensive income.

Non-depreciable assets, for example, land, will not lead to the recognition of deferred tax
under the cost model. The temporary difference that arises on initial recognition of an asset
is a transaction which at the time of the transaction does not affect either the accounting
profit or the taxable profit. [IAS 12.15]

If the land is revalued, the revaluation relates to the subsequent remeasurement and is
therefore no longer an exempt temporary difference.

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Deferred tax on revalued plant

Plant with a carrying amount of R400 000 and a tax base of R375 000 was revalued of
R650 000. The original cost of the plant was R500 000. Assume a normal income tax rate of
28% and the capital gains tax inclusion rate is 80%.

What will the different deferred tax recognition be if the plant is

1. Recovered through use?
2. Recovered through sale?
If the carrying amount is recovered through use, the deferred tax will be calculated as
follows:
Deferred
Carrying Temporary
Tax base tax
amount difference
(liability)
R R R R
Plant 400 000 375 000 25 000 (7 000)
Revaluation 250 000 – 250 000 (70 000)
650 000 375 000 275 000 (77 000)

Deferred tax is measured on both temporary differences at 28%.

If the carrying amount is recovered through sale, the deferred tax will be calculated as
follows:
Deferred
Carrying Temporary
Tax base tax
amount difference
(liability)
R R R R
Plant 400 000 375 000 25 000 (7 000)
Revaluation 250 000 – 250 000 (61 600)
Up to cost * 100 000 (28 000)
Above cost ** 150 000 (33 600)
650 000 375 000 275 000 (68 600)

* R500 000 – R400 000 = R100 000

** R650 000 – R500 000 = R150 000; R150 000 x 80% x 28% = R33 600

Revalued amount = R650 000

Capital nature:
R150 000 x 80% x 28%
Cost = R500 000
R100 000 x 28%
CA = R400 000
TD:
R25 000 x 28%
TB = R375 000

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A sale of the plant will result in a recoupment of R125 000 => will be taxed at 28% => tax
consequence of R35 000 (R125 000 x 28).
Only 80% of the capital gain of R100 000 will be taxed at 28% => tax consequence of
R33 600 (R150 000 x 80% x 28%). Deferred tax on the temporary difference of R25 000 (as a
result of the difference between the depreciation and the tax allowance) is measured at
28%.

Deferred tax on the revaluation surplus is measured as follows:

on the amount up to the original cost (R100 000) at 28%; and
on the amount above the original cost (R150 000) at 80% x 28%.

The notes relating to the deferred tax balance in the statement of financial position may be
disclosed as follows:

Notes
3. Deferred tax
Recovery Recovery
through through
use sale
R R
Analysis of temporary differences:
Tax allowances on property, plant and equipment 7 000 7 000
Revaluation 70 000 61 600
Deferred tax liability 77 000 68 600

The following information should also be disclosed in respect of the expected recovery
through sale:

The company has revalued its plant (refer to note xx) and expects to recover the carrying
amount through sale. Included in the deferred tax balance is a temporary difference of
R150 000 on which capital gains tax is expected.

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