AC506 lecture 18

1. AC506 lecture 18 • Deferred tax • Sources: • Elliott & Elliott, chapter 13 • Alexander & Britton, chapter 21

2. Background • Accounting profit v. taxable profit • Subjectivity in accounting e.g revenue recognition motivations • Policy choices e.g depreciation • Permanent differences • expenses that will never be deductible for tax purposes • Temporary differences • expenses that will be deductible for tax purposes but not in the same period that they will be deductible for accounting purposes

3. AC506 lecture 18 • New fixed asset acquired at beginning of year 1 for €15,000. Depreciation policy is 33.3% SL, no residual value • Capital allowances may be claimed for tax purposes - 15% per annum for six year and 10% in seventh year • Applicable corporation tax rate of 20%

4. Issues to consider • Deferred tax is not a legal liability until it accrues • Deferred tax is confusing - tax charge doesn’t reflect the expense incurred • Permanent differences undermine the deferred tax matching theory anyway! • Deferred tax accounting is an excellent example of accrual accounting • An environment in which substance over form is encouraged justifies accounting for deferred tax.