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IAS 12 – INCOME TAXES

LECTURE MATERIAL
LECTURE 1
PREPARED BY BIANCA NEL CA(SA)

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CONTENT OF IAS 12

RECOGNITION
[JOURNALS]
MEASUREMENT Current tax PRESENTATION
OBJECTIVE IAS 12.12
Current tax &
IAS 12 DEFINITIONS IAS 12.46 &
=> How to account for
IAS 12.5 &
DISCLOSURE
current and future tax Deferred tax
consequences. Deferred tax IAS 12.15 - 33 [AFS]
IAS 12.47 IAS 12.71-88

IAS 12.57
onwards

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IAS 12 INCOME TAXES

Part 1 Part 2

CURRENT TAX DEFERRED TAX

Part 3
ADDITIONAL PRINCIPLES: Part 4
1. Deferred tax assets
2. Change in tax rate
3. Foreign tax
Presentation &
Disclosure
4. Under/over provisions

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Part 1 CURRENT TAX

Profit before tax
Non-taxable/Non-deductible items:
Donations - Not tax deductible
Fines - not tax deductible RECONCILING ITEMS:
Dividends received 1. Expenses
Profit after exempt differences 2. Expenses
Temporary differences: 3. Income
Depreciation 4. Income
*Example: Pink Ltd
Tax allowance

Taxable profit JOURNAL

Dr. Income tax P/L XXX
Current tax expense Cr. Tax Payable SFP XXX
(Taxable profit x TAX RATE)

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1.
Prepare the
CURRENT TAX CALCULATION
of Pink Ltd for the year ended
29 February 20.22:

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Example 1: PINK LTD

The following information relates to Pink Ltd, a manufacturing company, which was
incorporated on 1 March 20.19.

On 1 September 20.19 property and plant were acquired at the following amounts (it may be
assumed that these assets were immediately brought into use):
R
Land 1 750 000
Factory buildings 4 000 000
Office buildings 2 000 000

Property and plant are measured in terms of the cost model of IAS 16 Property, Plant and
Equipment.

Pink Ltd provides for depreciation on the straight-line basis. Depreciation has already been
provided for on property and plant and is included in the accounting profit before tax.

The depreciation rates are as follows:

 Factory and office buildings at 2,5% per annum, apportioned for a part of a year.
 Plant at 20% per annum, apportioned for part of a year.

The South African Revenue Service (SARS) allows the following capital asset allowances:
 section 13(1)(b) - 5% per annum on factory buildings on the straight-line basis (not
apportioned for part of a year).

The SARS does not allow any allowances on the office buildings.

During the year the Land was sold for an amount of R1 950 000 and the profit on the sale was
included in the profit before tax amount.

The following balance relating to insurance is included in other receivables:

20.22 20.21
R R
Prepaid insurance premiums 40 000 30 000

These prepaid expense balances were tax deductible in the years in which the expenses were
incurred, in accordance with section 11(a) read with 23H of the Income Tax Act.

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The profit before tax for the year ended 29 February 20.22, amounted to R950 000. Included
in the R950 000 are, inter alia, the following items:

R
Dr/(Cr)
Dividends received (not taxable) (180 000)
Fine for contravention of the Companies Act (not tax deductible) 15 000
Value of inventory destroyed in hail storm (deductible for tax purposes) 95 000
Donations paid (not tax deductible) 30 000
Revenue earned in the United States of America (taxed in the USA at 35% and (150 000)
not taxable in South Africa)
Research costs of R100 000 (correctly expensed for accounting purposes) (100 000)
[Assume that 150% of this amount is deductible for tax purposes for the
current year.]

The Minister of Finance announced during his budget speech in February 20.22 that the
normal taxation rate applicable to companies will decrease from 28% to 27% for all financial
years starting on or after 1 March 20.22.
There are no temporary differences other than those that are apparent from the question.

Prepare the following of Pink Ltd for the year ended 29 February 20.22:

1. Current tax calculation

2. Deferred tax calculation
3. Income tax expense note (include the tax rate reconciliation)
4. Deferred tax note
SOURCE: FAC 4863 TL 102 Question 5.1 Amended

Please note:
The movement in temporary differences in the current tax calculation must be calculated
using the statement of financial position method.
 Comparative figures are not required.
 Ignore any Value-Added Tax (VAT) implications.
 Round off all amounts to the nearest Rand.
 Your answer must comply with International Financial Reporting Standards (IFRS).

EXAM TECHNIQUE STEPS:

1. Include templates
2. Read info & complete calc
3. Transfer calc to NOTE
4. Ensure you have met the
requirements
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Prepare the following of Pink Ltd for the year ended 29 February 20.22:

1. Current tax calculation

Legend:
ITEn = Income tax expense note
DT = deferred tax
CT = current tax
TD = temporary difference

Current tax calculation R

Profit before tax 950 000

Non-taxable/non-deductible items:
Foreign revenue taxed in the USA (150 000)
Depreciation – administration building 50 000 Deductible for ACC,
Donations paid not deductible 30 000 may not deduct for TAX
Fine for contravention of the Companies Act 15 000 => add back

Dividends received (180 000) Received for ACC, may not include for TAX => take out
Research costs (50 000) SARS allows 150% deduction, 100% was deducted for acc.
Gain on Land Sold (40 000) R200 000 included for accounting purposes, for tax
purposes we may only include 80% => ADD back (take
[1 950 000 - 1 750 000] x 20%
out) 20% of the profit.
Taxable profit before temporary differences 625 000
Movement in Temporary difference: (110 000) TAXABLE Dr. Income tax expense (P/L) 30 800
Depreciation (Factory Building) 100 000 Cr. DTL (SFP) 30 800
Tax allowance (Factory Building) (200 000) Income tax payable in future
Prepaid insurance (20.21) 30 000 In 20.21: Dr. Prepayment. Cr. Bank
Amount due: Dr. Expense PL Cr. Prepayment
Expense included in PL, deducted when paid in 20.21 therefore
ADD back (+)
In 20.22: Dr. Prepayment. Cr. Bank, expense for tax purposes when
Prepaid insurance (20.22) (40 000) paid

Taxable profit 515 000

Current tax @ 28% 144 200 Dr. Current tax expense (P/L) 144 200
Cr. Liability (SFP) 144 200
Tax expense usually in P/L, but recognised
Note: Tax rate at 28%, the change is effective
tax consequences where item was recognised.
from 1 March 20.22 (P/L, OCI, Equity)

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Part 2 DEFERRED TAX

CA - TB = TD X TAX RATE = DEFERRED TAX

Carrying Tax Temporary DT asset /

Deferred tax
amount base difference (liability) If the transaction effects P/L = tax
will affect P/L
Asset If the transaction effect Equity =
Liability tax will affect equity

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TAX BASE OF ASSET: TAX BASE OF LIABILITY: TAX BASE OF REVENUE

[IAS 12.7] [IAS 12.8] RECEIVED IN ADVANCE:
Amount that - DEDUCTABLE = CA LESS any amount that is [IAS 12.8]
for tax purposes in future DEDUCTABILE for tax = CA LESS any amount that
against any taxable purposes in respect of that will be NOT DEDUCTABILE for
economic benefits liability in future tax purposes in future

IF THE ECONOMIC
BENEFITS ARE NOT
TAXABLE:
TB = CA

CA - TB = TD X TAX RATE = DEFERRED TAX

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CA - TB = TD X TAX RATE = DEFERRED TAX

EXEMPT TAXABLE TD [IAS12.16] DEDUCTABLE TD [IAS12.25]

Admin building CA of Asset > TB of Asset CA of asset < TB of asset
OR OR
* Goodwill => IAS 12.15 CA of Liability < TB of liability CA of liability >TB of liability
= =
DEFERRED TAX LIABILITY DEFERRED TAX ASSET
(INCOME TAX PAYABLE IN FUTURE) (INCOME TAX RECOVERABLE IN FUTURE)
JOURNALS JOURNALS
Dr. DT P/L XXX Dr. DTA SFP XXX
Cr DTL SFP XXX Cr. DT P/L XXX
[IAS 12.15] [IAS 12.24]

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CA - TB = TD X TAX RATE = DEFERRED TAX

MANNER OF RECOVERY:
1. THROUGH SALE => CGT
2. THROUGH USE => INCOME TAX RATE

*IAS 12.51B – Land

NB! Question: Shakes Ltd
*IAS 12.51C - Investment Property

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CA - TB = TD X TAX RATE = DEFERRED TAX

DEFERRED TAX ASSETS: DEFERRED TAX LIABILITIES:
amounts of income taxes Taxes provided in the SFP for the
RECOVERABLE amount of income taxes
in future periods in respect of: PAYABLE
 deductible TD;
in future periods in respect of
 the carry forward of unused tax losses;
and taxable TD.
 the carry forward of unused tax credits.

DTL
Carrying Tax Temporary DT asset / Dr. DT P/L XXX
Deferred tax
amount base difference (liability) Cr DTL SFP XXX
YEAR 1 XXX
DTA
Dr. DTA SFP XXX
YEAR 2 XXX
Cr. DT P/L XXX

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2.
Prepare the
DEFERRED TAX CALCULATION
of Pink Ltd for the year ended
29 February 20.22:

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Prepare the following of Pink Ltd for the year ended 29 February 20.22:

2. Deferred tax calculation

DT asset /
Deferred tax calculation CA TB TD (liability)
@ 28%
20.21
Land 1 750 000 1 750 000 - -
Land cannot be depleted through use and therefore no depreciation is allowed on land. The carrying amount of land is assumed
to be recovered through sale under the assumption relevant to revalued land (IAS 12.51B). Therefore the tax base would then
be equal to the base cost for CGT purposes, as this amount will be allowed as a deduction against the proceeds from the sale
when calculating the capital gain on disposal.

Factory building Calc 1 3 850 000 3 600 000 250 000 (70 000) DTL (CA of A>TB of A)
Office building Calc 2 1 925 000 - Exempt
SARS does not allow any deductions on the office buildings.

Prepaid insurance 30 000 - 30 000 (8 400) DTL (CA of A>TB of A)

Section 23H of the Income Tax Act limits the tax deductibility of prepaid expenses, however, since these expenses fall within
the R100 000 exclusion provided in section 23H, the total expense will be tax deductible in the financial year in which the
expense was incurred. The tax base of prepaid expenses amounts to Rnil as the SARS is allowing the full prepaid expense as a
tax deduction in the current year. As a result, there are no tax deductions in future years.

Deferred tax 7 555 000 5 350 000 280 000 (78 400) DTL

20.22
Factory building Calc 1 3 750 000 3 400 000 350 000 (98 000) DTL (CA of A>TB of A)
Office building Calc 2 1 875 000 - Exempt
Prepaid Insurance 40 000 - 40 000 (11 200) DTL (CA of A>TB of A)
Deferred tax liability @ 28% 390 000 (109 200) DTL

Change in tax rate [109 200 / 28 x 1] Decrease in rate with 1% 3 900

Deferred tax liability @ 27% 390 000 (105 300) DTL

Movement in TD 110 000 (26 900)

OCI Movement Determince OCI Portion - - OCI
P/L Movement TAXABLE Determince P/L Portion 110 000 (30 800) PL
Unused tax loss movement NOTE & CT calc
Change in tax rate 3 900 NOTE & CT calc

DTL Opening bal (78 400)

Dr. DT (P/L) 30 800 increase in ITEnote

Cr. DTL (SFP) 30 800 increase in DTL

Dr. DTL (SFP) 3 900 decrease DTL

Cr. DT (P/L) 3 900 decrease ITEnote

DT Closing bal (105 300) © CA Campus

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Calc 1 Factory building COST 4 000 000 Not apportioned for part of a year
20.20 CA TB
Depreciation/Tax allowance =4 000 000 x 2.5% x 6/12 50 000 =4 000 000 x 5% 200 000
CA/TB =4 000 000 - 50 000 3 950 000 =4 000 000 - acc tax allow 3 800 000
20.21
Depreciation/Tax allowance =4 000 000 x 2.5% 100 000 =4 000 000 x 5% 200 000
CA/TB =4 000 000 - acc dep 3 850 000 =4 000 000 - acc tax allow 3 600 000
20.22
Depreciation/Tax allowance =4 000 000 x 2.5% 100 000 =4 000 000 x 5% 200 000
CA/TB =4 000 000 - acc dep 3 750 000 =4 000 000 - acc tax allow 3 400 000

Calc 2 Office building COST 2 000 000 CA The taxable temporary differences on the office
20.20 buildings, do not give rise to deferred tax as a result of
Depreciation =2 000 000 x 2.5% x 6/12 25 000 IAS 12.15(b)(ii). IAS 12.15(b)(ii) states that a taxable
CA =2 000 000 - acc dep 1 975 000 temporary difference is exempt from deferred tax if at
20.21 the time of the transaction, it affected neither the
Depreciation =2 000 000 x 2.5% 50 000 accounting nor taxable profit. At the time of the
CA =2 000 000 - acc dep 1 925 000 transaction, the accounting profit was not affected by
20.22
the acquisition of the office buildings, as office
Depreciation =2 000 000 x 2.5% 50 000
buildings were debited and bank/creditor was credited.
CA =2 000 000 - acc dep 1 875 000
The taxable profit was not affected in the accounting
period in which the initial recognition occurs (no tax
allowance is granted by the SARS). As a result, no
deferred tax is raised for the office buildings.

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Part 3 ADDITIONAL PRINCIPLES:

DEFERRED TAX TAX RATES OVER/UNDER
FOREIGN TAXES
ASSETS TO BE USED PROVISION OF SARS
[IAS 12.84]
[IAS 12.34] [IAS 12.48] PAYABLE
• DTA • DTA/DTL • Relationship between tax
=> unused tax losses and => measured at tax rates that exp/inc & accounting P/L may
are expected to apply to the be affected by factors:
unused tax credits to the
period when the asset is • revenue that’s exempt from
extent that it is realised or the liability is tax,
PROBABLE that FUTURE settled based on tax rates/tax • expenses not deductible for
TAXABLE PROFIT will be laws that have been legislated tax, • AFS finalised = current tax
available to utilize. or substantively legislated by
• effect of tax losses and recognised of R260 000.
the end of the reporting
period. • effect of foreign taxes. • R10 000 Under payment
• Recognise?
•Dr. Income tax exp P/L (foreign tax) XXX
Cr. Payable: Foreign tax authority SFP XXX
• Example: Pink Ltd • Understand GL
• Example: Pink Ltd • Question: Shakes Ltd
SEPARATE LECTURE ON
IF Change in tax rate:
ASSESSED LOSSES 1. CT calc 1. Income tax expense note
1. Income tax expense note
2. Income tax expense note 2. Tax rate recon
2. Tax rate recon
3. Tax rate recon
3. DT Calc [NOT DT Note, use
TD of DT calc X NEW RATE]

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Part 4
PRESENTATION & DISCLOSURE
• IAS 12.69 Onwards NB!
Templates. Refer to IFRS Standards Part B. There
are keywords to help you remember the templates.

Statement of financial position as of 31 December 20.XX

ASSETS Rand EQUITY & LIABILITIES Rand

Equity
Non-current assets Share capital
Property, plant and equipment Accumulated profits
Product development costs Revaluation surplus
Investment in Associate
Deferred tax asset DDD Non-current liabilities
Deferred tax liability DDD
Amount should agree with DT calc CURRENT =>
Current assets and DT note Expect to
realise
Trading investments within
Trade receivables Current liabilities 12 months
from YE
Inventories Trade payables
Cash and cash equivalents Income tax payable EEE

TOTAL ASSETS TOTAL EQUITY & LIABILITIES

Statement of profit or loss and other comprehensive income for

the year ended 31 December 20.XX
Revenue XXX
Cost of sales XXX
Gross profit XXX

Operating costs XXX

Amount
should
Profit from operations XXX
agree with
Income tax
Finance costs XXX
expense
Profit before taxation XXX note
Income tax expense (CCC)
Profit after tax XXX

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NB! Expense account:
Dr. INCREASE;
Cr. DECREASE
Income tax expense NOTE R

Major components of tax expense

Current tax expense
- Current period CALC 1 XXXX
PY OVER provision:
- Under/(over)-provision in prior period (XXXX) = Deduct
Deferred tax expense CALC 2 THINK JNLS:
- Movement in temporary differences (tax rate %) AAA Dr. Tax payable SFP
- Unused tax loss created (CAPITAL LOSS?) XXX
Cr. ITEnote PL XXX
- Unused tax loss utilised
- Change in tax rate XXX PY UNDER provision:
SA Normal Tax + XXX = Add
THINK JNLS:
Foreign Tax [total tax amount paid]
Dr. ITEnote PL XXX
Total Income tax for the year Should agree to Income
tax amount in P/L Cr. Tax payable SFP
CCC XXX

Tax rate reconciliation

Accounting profit
Tax at 28%
Tax effect of deductible/non-taxable items:
Dividends not taxable
Fine not deductible
Donations paid not deductible
Depreciation on office buildings not deductible PY OVER provision:
Under provision for current tax for prior year (XXXX) = Deduct
Unused tax loss not recognised PY UNDER provision:
Unused tax loss utilised that was not previously recognised + XXX = Add
Change in tax rate XXX
Effect of different tax rate in foreign income
Income tax expense CCC

CHANGE IN TAX RATE – additional info REFER IAS 12.81 (d)

Deferred tax NOTE

Analysis of temporary differences
Property, plant & equipment
- Accelerated deductions for tax purposes
- Revaluation
Provision (Legal Claim)
Income Received in advance
Prepayment Expense
Unused tax loss for normal tax
Net deferred tax liability/asset Should agree to deferred
tax amount in SFP REFER
CALC 2 YR 2 AMOUNT
DDD

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NB! Read the information

CALCULATION: CURRENT TAX carefully. There might be
adjustments to the PROFIT
BEFORE TAX due to journals
not yet recognised or
possible errors (IAS 8).
R
Profit before tax
- Prior year error (IF ANY) XXXX
Adjusted Profit before tax
Non-taxable deductible items:
Dividends not taxable
Fine not deductible
Donations paid not deductible
Depreciation on office buildings not deductible
Foreign revenue

Taxable profit before temporary differences

Movement in TD (100% or 80%) BBB
Taxable profit before unused tax loss
Unused CAPITAL tax loss (from DT calc)
Unused tax loss (from DT calc)
Taxable profit
Tax at TAX RATE (%) EEE

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CALCULATION: DEFERRED TAX

CA TB TD DEF TAX
YEAR 1

Unused tax loss

Deferred tax XXX

Movement in TD
- Movement in P/L BBB AAA
- Movement in unused tax loss

YEAR 2

Unused tax loss

Change in tax rate XXX

Deferred tax DDD

Link between CONCEPTUAL FRAMEWORK AND

DEFERRED TAX:
The components of the framework
• Deferred tax assets
• Resource?
• Controlled?
• Past entitling event?
• Future benefits expected to flow IN?
• Deferred tax liabilities
• Present obligation?
• Due to a past obligating event?
• Future benefits expected to flow OUT?
• Recognition criteria (probable & reliable measured)

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3.
Prepare the
INCOME TAX EXPENSE NOTE
of Pink Ltd for the year ended
29 February 20.22:

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4.
Prepare the
DEFERRED TAX NOTE
of Pink Ltd for the year ended
29 February 20.22:

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Prepare the following of Pink Ltd for the year ended 29 February 20.22:

3. Income tax expense note (include the tax rate reconciliation)

NB! Expense account:
Dr. INCREASE; Cr. DECREASE

Income tax expense note R

Major components of tax expense Dr. DT (P/L) 144 200 increase ITEnote

Current tax [Calc 1] 144 200 Cr. SARS Pa yabl e 144 200 increase payable

Deferred tax 26 900

- Movement in temporary differences [Calc 2] 30 800 TAXABLE TD Dr. DT (P/L) 30 800 increase ITEnote
Only P/L Cr. DTL (SFP) 30 800 increase DTL

- Change in tax rate (3 900) Dr. DTL (SFP) 3 900 decrease DTL
Cr. DT (P/L) 3 900 decrease ITEnote

SA Normal tax 171 100

Foreign tax (150 000 x 35%) 52 500

Income tax expense 223 600 Income tax

expense
amount in

Tax rate reconciliation: (IAS 12.81(c))

Accounting profit 950 000
Tax at 28% 266 000

Tax effect of non-taxable/non-deductible items:

- Dividends not taxable (50 400) Received for ACC, may not include for TAX => take out
- Fine not deductible 4 200 Deductible for ACC,
- Donations paid not deductible 8 400 may not deduct for TAX
- Depreciation on office building not deductible 14 000 => add back

Effect of different tax rate on foreign revenue

- Amount paid in foreign country 150 000 x 35%USA
= 52 tax
500
- Amount included in tax amount above 150 000 x 28%SA tax000
= 42
= paid MORE in foreign country 10 500 Amount included in ITEnote exceeds amount included in
266 000
Extra research cost deductible (14 000)
R200 000 i ncl uded for accounti ng purpos es , for ta x
purpos es we ma y only i ncl ude 80% => ADD back (ta ke
Accounting profit on sale of land not taxable (11 200) out) 20% of the profi t.
Change in tax rate (3 900)
223 600
(IAS 12.81(d))
The income tax rate will decrease from 28% to 27% for the financial year starting 1 March
20.22 and as a result deferred tax is raised at 27%.
The income tax expense note represents income tax at the tax rate that is applicable for the
financial year ended 28 February 20.22 (which is 28%). The current tax and tax rate
reconciliation will therefore be performed at 28%.

The movement in deferred tax that is included in the income tax expense must also reflect
28%. In the case of Pink Ltd, the change in tax rate to 27% is only calculated at the end of the
year after the movements in deferred tax has been calculated at 28%.

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Prepare the following of Pink Ltd for the year ended 29 February 20.22:

4. Deferred tax note

Deferred tax R

Analysis of temporary differences:

Property, plant and equipment:
- Accelerated deductions for tax purposes 94 500
[437 500 x 27%]
Prepaid insurance 10 800
[35 000 x 27%]
Deferrred tax liability 105 300
Should agree to
deferred tax
amount in SFP
NOTE: Don’t use the DT amounts in the DT column of the DT calc to complete
the DT note above as this amount was calculated at 28% (and not the future
tax rate of 27%). The TD must be multiplied with 27% to calculate the correct
DT for the DT note.

EXAMPLE OF INCOME NOT RECOGNISED, BUT INCLUDED UNDER TAX LAWS

A company recognised the following journal entries in the 20.21 and 20.22 financial years:

Dr. Cr.
Interest receivable (SFP) 20 000
Interest income (P/L) 20 000
Recognition of interest receivable for the year ended 28 February 20.21
Bank (SFP) 20 000
Interest receivable (SFP) 20 000
Recognition of interest received for the year ended 28 February 20.22
The interest will be taxes once received, cash basis. [Read the scenario!]

What will the effect be on the CURRENT TAX CALCULATION OF 20.21 & 20.22?

20.21 20.22
Profit BEFORE tax [accounting purposes] XXX XXX
Income SHOULD not be included for accounting = take (20 000)
RECON ITEM:
Income NOT out. Income cannot be recognised for tax in 20.21 as the
include for CASH was not yet received.
accounting.
INCLUDE for
In 20.22 the CASH was received, INCLUDE for tax purposes +20 000
tax.

Taxable profit of loss [tax rules apply] XXX XXX

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Example 2 Deferred tax (Descriptive Accounting)

Print this handout and work through the example with me in the video. The details relating to this
table are included on the next page.

Deferred tax Carrying Tax base Temporary Deferred tax

amount difference 28%
calculations R R R R
Plant
Dividends received
Trade receivables
Development costs
Costs incurred

Loan (capital)
Interest expense accrual

Water and electricity accrual

Leave pay accrual
Subscriptions received in
advance

Trade receivables
Gross amount
Allowance for credit losses

Asset

What is the carrying amount? CA of Asset > TB of Asset

= DTL
CA of asset < TB of asset
= DTA
What is the tax base?

CA of Liability < TB of liability

Is this a deferred tax asset or liability? = DTL
CA of Liability > TB of liability
= DTA

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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?

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).

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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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ITEn = Income tax expenseONLY
note
DT = deferred tax
CT = current tax

FAQ: TD = temporary difference

PY = Prior year
CY = Current year

I don’t understand the debit/credit of TAXABLE TD AND DEDUCTIBLE TD?

Before we discuss the TAXABLE AND DEDUCTIBLE TEMPORARY DIFFERENCES, we need to

understand the recognition (journals) in terms of the
IGNORE
1. Deferred tax, TAXABLE AND DEDUCTIBLE TD FOR
PURPOSES OF THE TABLE BELOW
2. Current tax and
3. Income tax expense note.

*Amounts included for explanation purposes only. Assume a tax rate of 28%.

DEFERRED TAX CURRENT TAX INCOME TAX

CALCULATION CALCULATION EXPENSE NOTE
Calculate the MOVEMENT Taxable profit of This is an
from PY to CY. R100 000 EXPENSE
The MOVEMENT => taxation to be paid to account:
will be recognised (Jnl). Tax Authority DR = INCREASE
=> R28 000 CR = DECREASE
PY is a DTA = 100 000
CY is a DTA = 120 000
 Increase in DTA of 20 000 Dr. ITE (P/L) 28 000
Dr. DTA [SFP] 20 000 Cr. Payable [SFP] 28 000
Cr. DT [P/L] 20 000
PY is a DTL = (70 000) IAS 12.34
CY is a DTL = (100 000) Taxable LOSS R60 000
 Increase in DTL of 30 000 =>
Dr. DT [P/L] 30 000 We want to be able to
Cr. DTL [SFP] 30 000 “USE” this LOSS in future
PY is a DTA = 65 000 against PROFITS.
CY is a DTL = (10 000)
 Decrease in DTA of A DTA may only be
65 000 and Increase of DTL of 10 000 recognised if PROBABLE
 Total movement: 75 000 FUTURE TAXABLE PROFITS
Dr. DT [P/L] 75 000 WILL BE AVAILABLE
Cr. DTA [SFP] 65 000 => R16 800
Cr. DTL [SFP] 10 000
PY is a DTL = (12 000) *Assume there will be
CY is a DTA = 20 000 sufficient future taxable
 Decrease in DTL of 12 000 and Increase of profits available
DTA of 20 000
 Total movement: 32 000 Dr. DTA [SFP] 16 800
Dr. DTL [SFP] 12 000 Cr. ITE (P/L) 16 800
Dr. DTA [SFP] 20 000
Cr. DT [P/L] 32 000

Please work through the following pages.

Start by reading from the LEFT side of the page “THINK WITH ME”
Move on to the CT calc, then the DT calc and view the effect in the ITEn.

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TAXABLE TDs and what the effect will be on the CURRENT TAX CALCULATION and the INCOME TAX EXPENSE NOTE.

TAXABLE TEMPORARY DIFFERENCES:

THINK WITH ME: Income tax expense note R

Look at the journal, this is a TAXABLE TD,
We need to prepare the Major components of tax expense we “provide” for a payable in FUTURE, we
INCOME TAX EXPENSE Current tax [Calc 1] XXX DEBIT INCOME TAX EXPENSE,
Deferred tax XXX expense account, INCREASE.
NOTE.
- Movement in temporary differences [Calc 2] 28 000
TAXABLE TD = INCREASE IN ITENote
To be able to do this. TAXABLE [only P/L portion from DT calc]
Dr. DT (P/L) 28 000 Increase ITEnote
We need to calculate the
Cr. DTL (SFP) 28 000 Increase DTL
Current tax and the
Deferred tax. SA Normal tax XXX DTA /
Foreign tax XXX Deferred tax
CA TB TD (DTL)
calculation
@ 28%
Income tax expense XXX
20.21

Deferred tax 280 000 (78 400) DTL

FUTURE Income Tax PAYABLE. TAXABLE TD
We recognise a DTL in the SFP, 20.22
to “provide” for that payable in
Deferred tax 380 000 (106 400) DTL
FUTURE. We will NOT pay TAX TAXABLE TD
in the CURRENT YEAR,
Movement in TD
only in FUTURE. Hence, we
1. OCI Movement - - OCI portion
deduct the TAXABLE TD 2. P/L Movement TAXABLE 100 000 (28 000) PL portion
in the CY CT calculation. 3. Unused tax loss movement NOTE&CT calc
4. Change in tax rate - NOTE&CT calc

DTL Opening bal (78 400) DTL

Dr. DT (P/L) 28 000 Increase in ITEnote

Cr. DTL (SFP) 28 000 Increase in DTL
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DT Closing bal (106 400) DTL

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Let’s look at the DEDUCTIBLE TDs and what the effect will be on the CURRENT TAX CALCULATION and the INCOME TAX EXPENSE NOTE.

DEDUCTIBLE TEMPORARY DIFFERENCES:

Income tax expense note R
THINK WITH ME: Look at the journal, this is a DEDUCTIBLE TD,
Major components of tax expense
We need to prepare the Current tax [Calc 1] XXX
income tax can be recovered in FUTURE, we
INCOME TAX EXPENSE Deferred tax XXX CREDIT INCOME TAX EXPENSE,
NOTE. - Movement in temporary differences [Calc 2] (14 000) expense account, DECREASE.
DEDUCTIBLE [only P/L portion from DT calc] DEDUCTIBLE TD = DECREASE IN ITENote
To be able to do this. Dr. DTA [SFP] 14 000
Cr. DT (P/L) 14 000
We need to calculate the
Current tax and the SA Normal tax XXX
Foreign tax XXX DTA /
Deferred tax. Deferred tax
CA TB TD (DTL)
Income tax expense XXX calculation
@ 28%
20.21

Deferred tax (150 000) 42 000 DTA

FUTURE Income Tax RECOVERABLE. DEDUCTIBLE TD
We recognise a DTA in the SFP, to 20.22
“provide” for that RECEIVABLE in Deferred tax (200 000) 56 000 DTA
FUTURE. Hence, if we ADD this DEDUCTIBLE TD
amount to the CY Profit, it’s Movement in TD
included in the taxable profit for the 1. OCI Movement - - OCI portion
CY, resulting in current tax being 2. P/L Movement TAXABLE (50 000) 14 000 PL portion

calculate on this amount and 3. Unused tax loss movement NOTE&CT calc

recognised via the CT journal: 4. Change in tax rate - NOTE&CT calc

Dr. Income tax exp (P/L) XXX

Cr. Tax payable (SFP) XXX DTL Opening bal 42 000 DTA

Dr. DTA [SFP] 14 000 Increase in ITEnote

Cr. DT (P/L) 14 000 Increase in DTA
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DT Closing bal 56 000 DTA

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NET EFFECT OF TEMPORARY DIFFERENCE ON THE INCOME TAX EXPENSE NOTE

Now that you are familiar

with the concept of taxable
TD’s and deductible TD’s.

Let’s look at the NET EFFECT

of the TDs on the INCOME
TAX EXPENSE NOTE.

TD amount DEDUCTED IN CT CALC

=> DEDUCTED from TAXABLE PROFIT
=> TAXABLE PROFIT (is less) x TAX RATE
=> CURRENT TAX.
CURRENT TAX IS INCLUDED IN INCOME TAX EXPENSE.

TAXABLE TD

Income tax expense note R

Major components of tax expense
Recognition of current tax:
Current tax [Calc 1] XXX Dr. Income tax expense (P/L) XXX
Deferred tax XXX Cr. Tax payable (SFP) XXX
- Movement in temporary differences [Calc 2] 28 000
TAXABLE [only P/L portion from DT calc] => + in the INCOME TAX EXPENSE
NOTE
Dr. DT (P/L) 28 000 Increase ITEnote
Cr. DTL (SFP) 28 000 Increase DTL TD [100 000] X tax rate = 28 000, this is ADDED to the
INCOME TAX EXPENSE NOTE
SA Normal tax XXX
In the CT CALC, this is DEDUCTED.
Foreign tax XXX
NET EFFECT IS ZERO IN THE INCOME TAX EXPENSE NOTE.
Income tax expense XXX
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Do you understand the lecture on IAS 12?

You’ve been invited for an interview at an auditing firm.
In the interview, the Audit Manager asks you the following questions to test you knowledge.

• What is Income tax?

• How do you calculate (measure) current tax of a company?

• How do you recognise (journal) current tax of a company?

• How do you calculate (measure) deferred tax of a company?

• How do you recognise (journal) deferred tax of a company?

• Once you are able to calculate the current and deferred tax, how do you disclose these amounts in the
Annual Financial Statements of a company?

If you are able to answer these questions correct in your interview,

you may continue to the next round. 

Refer to Tutorial Question Shakes Ltd

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