TECNOLOGÍA LED

A deferred tax balance is simply an estimate of the tax owing to the tax authority in the long-term or the tax savings expected from the tax authority in the long-long-term. The estimate is made based on the temporary differences multiplied by the applicable tax rate. If this tax rate changes, so does the estimate of the amount of tax owing by or owing to the tax authority in the future. Therefore, if a company has a deferred tax balance at the beginning of a year during which the rate of tax changes, the opening balance of the deferred tax account will need to be re-estimated. This is effectively a change in accounting estimate, the adjustment for which is processed in the current year’s accounting records.

Since the tax expense account in the current year will include an adjustment to the deferred tax balance from a prior year, the effective rate of tax in the current year will not equal the applicable tax rate. The difference between the effective and the applicable rate of tax results in the need for a tax rate reconciliation in the tax note.

Example 9: rate changes – date of substantive enactment

A change in the corporate normal tax rate from 30% to 29% is announced on 20 January 20X1. No significant changes were announced to other forms of tax.

The new tax rate will apply to tax assessments ending on or after 1 March 20X1.

Required:

State at what rate the current and deferred tax balances should be calculated assuming:

A. The company’s year of assessment ends on 31 December 20X0.

B. The company’s year of assessment ends on 28 February 20X1.

C. The company’s year of assessment ends on or after 31 March 20X1.

Solution to example 9: rate changes – date of substantive enactment

• The date of substantive enactment is 20 January 20X1 (no significant changes to other taxes were announced at the time).

• The effective date is 1 March 20X1

Current tax payable/ receivable 30% 30% 29%

Deferred tax liability/ asset 30% 29% 29%

Explanations: (1) (2) (3)

Explanations:

1) Since the year ends before the effective date of the rate change, the current tax payable will still be based on the old rate. Since the year ends before the date of substantive enactment, the deferred tax balance must still be estimated based on the old rate although a subsequent event note should be included to explain that the deferred tax balances will be reduced in the future due to a rate change that occurred after the end of the reporting period.

2) Since the year ends before the effective date of the rate change, the current tax payable will still be based on the old rate. Since the year ends after the date of substantive enactment, the deferred tax balance must be estimated using the new rate.

3) Since the year ends after the effective date of the rate change, the current tax payable will be based on the new rate. For the same reason, the deferred tax balance will be based on the new rate.

Example 10: rate changes

The opening balance of deferred tax at the beginning of 20X2 is C45 000, credit and is due purely to temporary differences caused by capital allowances on the property, plant and equipment.

• The tax rate in 20X1 was 45% but changed to 35% in 20X2.

• The profit before tax in 20X2 is C200 000, all of which is taxable in 20X2.

• No balance was owing to or from the tax authority at 31 December 20X1 and no payments were made to or from the tax authority during 20X2.

• There are no other temporary differences or permanent differences.

• There are no components of other comprehensive income.

Required:

A. Calculate the effect of the rate change.

B. Show the Calculation of Deferred tax using the balance sheet approach.

C. Calculate the current normal tax for 20X2.

D. Post the related journal in the ledger accounts.

E. Disclose the above in the financial statements for the year ended 31 December 20X2.

Solution to example 10A: rate change

The opening balance in 20X2 (closing balance in 20X1) was calculated by multiplying the total temporary differences at the end of 20X1 by 45%. Therefore, the temporary differences (TD) provided for at the end of 20X1 are as follows:

Deferred tax balance = Temporary difference x applicable tax rate C45 000 = Temporary difference x 45%

Temporary difference = C45 000/ 45%

Temporary difference = C100 000

The credit balance means that the company is expecting the tax authority to charge them tax on the temporary difference of C100 000 in the future. If the tax rate is now 35%, the estimate of the tax we expect to pay on this C100 000 needs to be changed to:

Deferred tax balance = Temporary difference x applicable tax rate Deferred tax balance = C100 000 x 35%

Deferred tax balance = C35 000

An adjustment to the deferred tax balance must be processed:

Deferred tax balance was 45 000 Balance: credit Deferred tax balance should

now be

35 000 Balance: credit

Adjustment needed 10 000 Adjustment: debit deferred tax, credit tax expense

Solution to example 10B: rate change (deferred tax) Depreciable assets Carrying

amount

Movement (there are no temporary differences in 20X2)

0 0 0 0

Closing balance – 20X2 xxx xxx 100 000 35 000 Liability

Notice that the question stated that there were no other temporary differences other than the balance of temporary differences at 31 December 20X1.

Solution to example 10C: rate change (current tax)

Taxable profits and current normal tax - 20X2 Profits Tax at 35%

Profit before tax (accounting profits) (given) 200 000

Adjusted for permanent differences: (given) 0

Taxable accounting profits and tax expense 200 000 70 000

Adjusted for movement in temporary differences: (given) 0 0

Taxable profits and current normal tax 200 000 70 000

Notice that the question stated that there were no permanent differences and no other temporary differences other than the balance of temporary differences at 31 December 20X1.

Solution to example 10D: rate change (ledger accounts)

The credit balance of the deferred tax account must be reduced, thus requiring this account to be debited. The contra entry will go to the tax expense account, since this is where the contra entry was originally posted when the 45 000 was originally accounted for as a deferred tax liability.

Tax: normal tax (E) Current tax payable: normal tax (L)

CTP: NT 70 000 Deferred tax 10 000 Tax 70 000

Solution to example 10E: rate change (disclosure) Entity name

Statement of comprehensive income For the year ended 31 December 20X2

Note 20X2

Other comprehensive income 0 0

Total comprehensive income 140 000 xxx

Entity name

Statement of financial position As at 31 December 20X2 LIABILITIES

Notes to the financial statements For the year ended 31 December 20X2

Tax expense per the statement of comprehensive income 60 000

Tax Rate Reconciliation

Applicable Tax Rate 35%

Tax effects of:

Profit before tax (200 000 x 35%) 70 000

Rate change (10 000)

Tax expense charge per statement of comprehensive income

60 000

Effective Rate of Tax (60 000/ 200 000) 30%

The applicable rate of tax differs from that in the prior year because a change in the statutory tax rate was enacted on … (date).

4. Deferred tax liability 20X2 20X1

C C

The closing balance is constituted by the effects of:

• Property, plant and equipment 35 000 45 000

Example 11: rate changes

The closing balance of deferred tax at the end of 20X1 is C60 000.

Required:

Sow the journal entries relating to the rate change in 20X2 assuming that:

A. the balance in 20X1 is an asset and that the rate was 30% in 20X1 and 40% in 20X2;

B. the balance in 20X1 is a liability and that the rate was 30% in 20X1 and is 40% in 20X2;

C. the balance in 20X1 is an asset and that the rate was 40% in 20X1 and is 30% in 20X2;

D. the balance in 20X1 is a liability and that the rate was 40% in 20X1 and is 30% in 20X2.

Solution to example 11A: rate change (deferred tax asset increasing)

1 January 20X2 Debit Credit

Deferred tax: normal tax (A) 20 000

Tax expense: normal tax 20 000

Tax rate increased by 10%: 60 000 / 30 % x (40% – 30%)

Solution to example 11B: rate change (deferred tax liability increasing)

1 January 20X2 Debit Credit

Tax expense: normal tax 20 000

Deferred tax: normal tax (L) 20 000

Tax rate increased by 10%: 60 000 / 30 % x (40% – 30%)

Solution to example 11C: rate change (deferred tax asset decreasing)

1 January 20X2 Debit Credit

Tax expense: normal tax 15 000

Deferred tax: normal tax (A) 15 000

Tax rate decreased by 10%: 60 000 / 40 % x (40% – 30%)

Solution to example 11D: rate change (deferred tax liability decreasing)

1 January 20X2 Debit Credit

Deferred tax: normal tax (L) 15 000

Tax expense: normal tax 15 000

Tax rate decreased by 10%: 60 000 / 40 % x (40% – 30%)