ACT3127 Advanced Financial Accounting II

ACT3127 Advanced Financial Accounting II FRS 112: Income Tax (Deferred Tax) Part 2

Contents • Illustration discussion • Revaluation of PPE • Presentation and disclosure

Part 1 • Machine at cost RM20,000 Annual depreciation RM4,000 Capital allowances Initial RM4,000 Annual RM4,000 RM8000 • R&D Expenditure RM12,000 (deductible) • Allowance for bad debts RM5,000 • Provision for warranty RM8,000 (deductible only when occur)

Part 1 • Current income tax expense PBT 50,000 Add: Depreciation 4,000 Allowance for BD 5,000 Provision for warranty 8,000 Less: Capital allowances (8,000) Development cost incur. (12,000) Taxable profit 47,000 Current income tax expense (28%) 13,160

Part 1 • Income Statement Profit before tax 50,000 Less: Taxation expense Current tax expense (13,160) Deferred tax expense (840) (50k – 47k) X 28% (14,000) Profit after tax 36,000

Part 2 • Not deductible Depreciation RM4,000 Amortization DCC RM6,000 • Deductible Bad debt written off RM1,000 Warranty paid RM4,000

Part 2 • Current income tax expense PBT 40,000 Add: Depreciation 4,000 Amortization of dev. cost 6,000 Less: Capital allowances (4,000) Bad debt (1,000) Warranty costs (4,000) Taxable profit 41,000 Current income tax expense (28%) 12,300

Part 2 • Income Statement Profit before tax 50,000 Less: Taxation expense Current tax expense (12,300) Deferred tax from reversal of temporary difference 300 Deferred tax from increase in tax rate (60) (12,060) Profit after tax 27,940

Eg: Change in income tax rate • From 28% to 25% Tax’ble income RM100K for y/e 31 Dec 20x5 Tax’ble Temporary Diff increased from 50K at 31/12/x4 to 60K at 31/12/x5

Continue • Current tax pay’ble 100K x 28% = 28K • Deferred Tax Liab 31/12/x5 60K x 25% = 15K • Def tax liab 31/12/x4 50K x 28K = 14K Journal entry Dr Tax Expense 29K Cr Tax Pay’ble 28K Cr Deferred Tax Liab 1K

Continue • Tax expense charged to the P&L for y/e 31/12/x5 will be RM29K • In bal sheet as at 31/12/x5 the current tax payable carried at RM28K (assuming no c/f current tax asset or lib from previous period) and deferred tax liab carried at RM15K

Revaluation of PPE • Revaluation of asset • does not affect tax base taxable temporary difference (DT Liability) (CA will always greater than tax base) • Non-qualifying assets’ tax implication • Commitment to sell: expected Real Property Gains Tax (RPGT) rate • No commitment to sell: 5% on surplus (min RPGT) (rate used to determine DT Liability on surplus)

Revaluation of PPE: Illustration Book Revalued Value Amount RM’000 RM’000 Factory (10 yrs) (sale:20K) 10,000 25,000 Freehold land (indefinite) (13K) 12,000 30,000 Leasehold land (80 yrs) (25k) 15,000 23,000 Buildings (40 yrs) (39k) 20,000 40,000 No intention to dispose. S-L basis. Tax rate 25% Revaluation of asset 1 October 09.docx

Presentation “The tax expense (income) related to profit or loss from ordinary activities should be presented on the face of the income statement.” 112:75

Disclosure “The major components of tax expense (income) shall be disclosed separately” 112:77 112:78 (c) amount of DT …. origination and reversal..; (d) amount of DT …. changes in tax rates or imposition of new taxes;

ACT3127 Advanced Financial Accounting II