Deferred Tax Project Team 7
Marcus Wong | Randy Lennard Cheong Adwyna Yeong | Choo Zi Lin | Kumari Sonam
Overall net accounting loss
before tax of $1,200,000
Net taxable loss of $3,000,000
Net taxable temporary
differences of $1,000,000
Tax rate of 20% and adoption of FRS 12
Part 1
Prepare J/E for TL’s current tax effects
FRS 12.12: Current tax for current and prior periods should, to the
extent unpaid, be recognised as a liability. If the amount already
paid in respect of current and prior periods exceeds the amount due for those periods, the excess should be
recognised as an asset.
› Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period
› Since TL has incurred a taxable loss, there is no current tax payable
Part 1(a)
Date Particulars Debit Credit
31/12/20x1 Tax Receivable (20%*3,000,000)
600,000
Tax Income 600,000
To record current tax receivable
Part 1(a)
Prepare J/E for TL’s current tax effects
› As per FRS 12, since tax losses are allowed to be carried forward to subsequent years, TL would have tax savings upon utilisation of the losses c/f
It is probable that there will be future taxable profits. Explain how TL should
account for its unused tax loss
› Recognition Probable flow of future taxable profits
No indication of history of losses (cannot apply FRS 12.35)
A DTL to be recognised immediately on the TTD of $1,000,000
A DTA must be recognised
But to what extent?
Part 1(b)
FRS 12.34: A deferred tax asset should be recognised for the carryforward of unused tax losses … to the extent that it is probable that future taxable profit will be available against which the unused tax losses … can be utilised.
DTL recognised on the TTD FRS 12.15: A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill; or (b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)
Date Particulars Debit Credit
31/12/20x1 Deferred tax expense (20%*1,000,000 TTD)
200,000
Deferred tax liability 200,000
To record deferred tax liability
Part 1(b)
Recognition of DTA
Part 1(b)
Recognise DTA on all DTD to the extent that there will be probable future taxable
profit (FRS 12.24)
It is probable that taxable profit will be available
against which a DTD can be utilised when there are sufficient TTD (FRS 12.28)
In such circumstances, the DTA is recognised in the period in which the DTD
arise (FRS 12.28)
However, when there are insufficient TTD, a DTA is
recognised to the extent that it is probable that the
enterprise will have sufficient taxable profit or
tax opportunities are available (FRS 12.29)
If either one of the condition is satisfied, the company will
recognise DTA fully (as applied in FRS 12.24).
However, if it is not satisfied, a DTA is recognise to the extent
of the TTD
Recognition of DTA FRS 12.35: The criteria for recognising deferred tax assets arising from the carryforward of unused tax losses and tax credits are the same as the criteria for recognising deferred tax assets arising from deductible temporary differences.
Part 1(b)
FRS 12.24: A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that: (a) is not a business combination; and (b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
Tax loss (Deductible TD) = $3,000,000 Taxable TD = $1,000,000
Insufficient taxable TD Apply FRS 12.29
Measurement of DTA
› It is assumed that TL would have probable future taxable profits to fully utilise the DTA arising from the taxable loss of $3,000,000
Part 1(b)
FRS 12.29: When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognised to the extent that: (a) it is probable that the enterprise will have sufficient taxable profits relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried back or forward) …. or (b) …
Satisfied Recognise DTA fully
Measurement of DTA
› Measurement Since TL would have sufficient future taxable profits, the DTA shall be recognised fully as if FRS 12.24 would have been applied
Part 1(b)
Date Particulars Debit Credit
31/12/20x1 Deferred tax asset (20%*3,000,000 DTD)
600,000
Tax receivable 600,000
To record deferred tax asset
It is NOT probable that there will be future taxable profits. Explain how TL should account for its unused tax loss
› Recognition No probable flow of future taxable profits
To recognise a DTL immediately on the TTD of $1,000,000
DTA shall be recognised to the extent of the TTD
Part 1(c)
FRS 12.34: A deferred tax asset should be recognised for the carryforward of unused tax losses … to the extent that it is probable that future taxable profit will be available against which the unused tax losses … can be utilised.
Deductible TD = $3,000,000 Taxable TD = $1,000,000 Insufficient taxable TD Apply FRS 12.29
DTL recognised on the TTD FRS 12.15: A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill; or (b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)
Date Particulars Debit Credit
31/12/20x1 Deferred tax expense (20%*1,000,000 TTD)
200,000
Deferred tax liability 200,000
To record deferred tax liability
Part 1(c)
Measurement of DTA
› NO probable future taxable profits to fully utilise the DTA arising from taxable loss of $3,000,000
› Recognise DTA to the extent of TTD of $1,000,000
Part 1(c)
FRS 12.29: When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognised to the extent that: (a) it is probable that the enterprise will have sufficient taxable profits relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried back or forward) …. or (b) … Not Satisfied Hence, recognise
to the extent of TTD
DTA recognised to the extent of the TTD
Date Particulars Debit Credit
31/12/20x1 Deferred tax asset (20% x 1,000,000, restricted)*
200,000
Tax receivable 200,000
To record deferred tax asset
*The net effect of recognising DTA to the extent of the TTD is nil
Part 1(c)
› TTD of $1,000,000 < DTD (taxable loss) of $3,000,000
› As at 31 December 20x1, there is an unrecognised DTA of $400,000 [20%*(3,000,000-1,000,000)] To be disclosed separately under FRS 12.81(e)
Re-assessment of Unrecognised DTA
› Despite not recognising a DTA of $400,000 in 20x1, – TL has to re-assess the unrecognised DTA at subsequent
B/S dates
– In the event that there is a probable flow of future taxable profits, the previously unrecognised DTA may be recognised
FRS 12.37: At each balance sheet date, an enterprise re-assesses unrecognised deferred tax assets. The enterprise recognises a previously unrecognised deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Part 1(c)
Indicators to assess probable future profits
FRS 12.36: An enterprise considers the following criteria in assessing the probability that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised:
whether the enterprise has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses or unused tax credits can be utilised before they expire;
a.
whether it is probable that the enterprise will have taxable profits before the unused tax losses or unused tax credits expire;
b.
Part 1(d)
E.g. Company is in its first year of operations. However, losses can be carried
forward indefinitely in Singapore.
Indicators to assess probable future profits
FRS 12.36: An enterprise considers the following criteria in assessing the probability that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised:
whether the unused tax losses result from identifiable causes which are unlikely to recur; and
c.
whether tax planning opportunities are available to the enterprise that will create taxable profit in the period in which the unused tax losses or unused tax credits can be utilised.
d.
Part 1(d)
E.g. Acquisition of fixed assets which gives rise to TD through accelerated capital allowance claims
E.g. Financial crisis, natural disasters
Tax planning opportunities
Part 1(d)
e.g.
FRS 12.30: Tax planning opportunities are actions that the enterprise would take in order to create or increase taxable
income in a particular period before the expiry of a tax loss or tax credit carry forward.
Electing to have interest income
on either a received or
receivable basis,
Deferring the claim for certain deductions from taxable profits,
Selling or leasing back assets which have appreciated but the tax base
has not been adjusted to reflect the appreciation,
Selling of an asset that generates non-taxable
income in order to purchase
another investment that
generates taxable income
Sustained a DTA of $300,000 from a DTD of $2,000,000 in 20x1
Taxable temporary differences of
$666,667
No probable future taxable profits
determined on 31 December 20x1
No other temporary differences in 20x2
and adoption of FRS 12
Given current developments, future taxable
profits expected from 20x2 onwards
Part 2
DTL recognised on TTD of $666,667
FRS 12.15: A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill; or (b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)
Date Particulars Debit Credit
20x1 Deferred tax expense (15%*666,667 TTD)
100,000
Deferred tax liability 100,000
To record deferred tax liability
Part 2(a)
Tax rate can be found to be 15%, measured by (DTA of $300,000 divided by DTD of $2,000,000)
HL sustained a DTA of $300,000
FRS 12.24: A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that: (a) is not a business combination; and (b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
› No probable future taxable profits ascertained as at 31 December 20x1
› Assuming no J/E has been made, a DTA of $300,000 cannot be recognised fully on the DTD of $2,000,000 as at 31 December 20x1
Part 2(a)
DTD = $2,000,000 Taxable TD = $666,667
Insufficient taxable TD Apply FRS 12.29
DTA recognised to the extent of the TTD
Date Particulars Debit Credit
20x1 Deferred tax asset (restricted) 100,000
Deferred tax income 100,000
To recognise DTA to the extent of TTD (instead of recognising fully the DTA of $300,000)
Part 2(a)
FRS 12.29: When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognised to the extent that: (a) it is probable that the enterprise will have sufficient taxable profits relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried back or forward) …. or (b) … Not Satisfied Hence,
recognise to the extent of TTD
Relevant disclosures required under FRS 12 for 31 December 20x1
Part 2(a)
FRS 12.81(e): the amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognised in the balance sheet;
FRS 12.81(g): in respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits: (i) the amount of the deferred tax assets and liabilities recognised in the balance sheet for each period presented; …
FRS 12.80(c): the amount of deferred tax expense (income) relating to the origination and reversal of temporary differences;
DTD = 2,000,000 – 666,667 = 1,333,333
Deferred tax asset of $100,000 & Deferred tax liability of $100,000 recognised
Deferred tax income/expense
Relevant disclosures required under FRS 12 for 31 December 20x1
Part 2(a)
FRS 12.80 (c) – Disclosure
Sembcorp Industries Ltd
Relevant disclosures required under FRS 12 for 31 December 20x1
Part 2(a)
Sembcorp Industries Ltd
FRS 12.81(e) Disclosure – DTD of $1,333,333
Relevant disclosures required under FRS 12 for 31 December 20x1
Part 2(a)
Disclosure for DTA of $100,000 DTL of $100,000
Sembcorp Industries Ltd
Relevant disclosures required under FRS 12 for 31 December 20x1
Part 2(a)
FRS 12.74(a): An enterprise should offset deferred tax assets and deferred tax liabilities if, and only if: (a) the enterprise has a legally enforceable right to set off current tax
assets against current tax liabilities; and (b) the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either: (i) the same taxable entity; or (ii) different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
If further information was given, it is possible to offset the DTA and
DTL
Relevant disclosures required under FRS 12 for 31 December 20x1
Part 2(a)
Sembcorp Industries Ltd FRS 12.74(a) Disclosure – Offset
Discuss implications of current development on HL’s DTA. Suggest any
relevant J/E to effect the implication, if any
› In the previous FY ending 31 Dec 20x1, only $100,000 of DTA was recognised
› DTA of $200,000 was not recognized since there were no probable future taxable profits
› In 20x2, the following events would occur:-
Re-assessment of Unrecognised DTA as at 31
December 20x2
New production
process
Future taxable
profits from 20x2
Previously unrecognised DTA
of $200,000 to be recognised in 20x2
Part 2(b)
› DTA of $200,000 not recognised in 20x1, – HL has to re-assess the unrecognised DTA at subsequent B/S
dates
– Since there is probable future taxable profits from 20x2, the previously unrecognised DTA of $200,000 is now recognised
FRS 12.37: At each balance sheet date, an enterprise re-assesses unrecognised deferred tax assets. The enterprise recognises a previously unrecognised deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Part 2(b)
Re-assessment of Unrecognised DTA
Relevant J/E to effect the implication
› For the year ending 31 December 20x2, – With the current development on HL's deferred tax asset,
the DTA of $300,000 should be recognised
– Increase the carrying amount of DTA by $200,000 ($300,000 - $100,000)
Date Particulars Debit Credit
31/12/x2 Deferred Tax Asset 200,000
Deferred Tax income 200,000
To record the amount of DTD
Part 2(b)
Increase in tax rate from 15% to 20% for year ending 31 December 20x2
FRS 12.47: Deferred tax assets and liabilities should be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date.
Part 2(c)
› Given that there is no other TD,
› Increase in tax rate by 5% will affect carrying amounts of the existing DTA and DTL
Relevant J/E to reflect changes in tax rate
› Assuming the J/E in part (b) was not passed, record changes separately
› For the year ending 31 December 20x2, increase carrying amount of DTA from $100,000 to $400,000 (20%*$2,000,000)
Part 2(c)
Date Particulars Debit Credit
31/12/x2 Deferred Tax Asset 200,000
Deferred Tax income 200,000
To reflect increase in DTA arising from probable future taxable profits
Date Particulars Debit Credit
31/12/x2 Deferred Tax Asset 100,000
Deferred Tax income 100,000
To reflect increase in tax rate
Relevant J/E to reflect changes in tax rate
› For the year ending 31 December 20x2, assuming no other TD, the DTL has to be measured based on 20%
› Increase carrying amount of DTL from $100,000 to $133,333 (20%*$666,667)
Part 2(c)
Date Particulars Debit Credit
31/12/20x2 Deferred tax expense [(20 – 15%)*666,667 TTD]
33,333
Deferred tax liability 33,333
To reflect increase in tax rate
On 1/1/20x1, acquired a freehold
land at $105m
On 31/12/20x1, the land was revalued
to $95m
Profit on sale taxed at 17% and other income taxed at
20%
Land is under FRS 16 PPE Revaluation
Model and adoption of FRS 12
Part 3
At the point of acquisition on 1/1/20x1,
In $’m CA TB CA – TB TTD/(DTD) TR DTL(A)
Land 105 105 0 0 0 0
Date Particulars Debit Credit
1/1/20x1 Land 105,000,000
Cash / Payable 105,000,000
To record the acquisition of freehold land
FRS 16.31: After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
Part 3 Recording acquisition of land
Part 3
105m 95m
Land 1/1/20x1
Revalued Land 31/12/20x1
(10m) - Deficit on Revaluation (P/L)
On 31 December 20x1,
FRS 16.40: If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be debited directly to equity under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
› Land was revalued downwards:-
› After revaluation, a DTD of 10m arose
› How to account for the DTD arising from land?
Date Particulars Debit Credit
31/12/20x1 Deficit on revaluation (P/L) 10,000,000
Land 10,000,000
To record the revaluation deficit on freehold land
Part 3
In $’m CA TB CA – TB TTD/(DTD) TR DTL(A)
Land 95 105 95 – 105 (10) ?? ??
Recording revaluation of land
Recognizing a deferred tax asset
FRS 12.24: A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that: (a) is not a business combination; and (b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
› As stated, assume that there is a probable flow of future taxable profits for utilisation of any deferred tax assets
› Thus, a DTA has to be recognised on the DTD of 10m
› But how should the DTA be measured?
Part 3
Applying the first principle, FRS 12
requires such TD to be recognised as a DTA
Basis of tax rate to be used
FRS 12.51A: In some jurisdictions, the manner in which an enterprise recovers (settles) the carrying amount of an asset (liability) may affect either or both of: (a) the tax rate applicable when the enterprise recovers (settles) the carrying amount of the asset (liability); and (b) the tax base of the asset (liability). In such cases, an enterprise measures deferred tax liabilities and deferred tax assets using the tax rate and the tax base that are consistent with the expected manner of recovery or settlement.
FRS 12.51:The measurement of deferred tax liabilities and deferred tax assets should reflect the tax consequences that would follow from the manner in which the enterprise expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities.
Part 3
› CL will measure the deferred tax asset using the tax rate and the tax base that reflects the tax consequences of recovering the CA of the land through sale at 20%
FRS 12.51B: If a deferred tax asset/liability arises from a non-depreciable asset measured using the revaluation model in FRS 16, the measurement of the deferred tax asset/liability shall reflect the tax consequences of recovering the carrying amount of the non-depreciable asset through sale, regardless of the basis of measuring the carrying amount of that asset, i.e. if the tax law specifies a tax rate applicable to the taxable amount derived from the sale of an asset differs from the tax rate applicable to the taxable amount derived from using the asset, the former rate is used.
Part 3 Basis of tax rate to be used
17%
20%
In $’m CA TB CA – TB TTD/(DTD) TR DTL(A)
Land 95 105 95 – 105 (10) 20% (2)
- Journal entry required:-
Date Particulars Debit Credit
31/12/20x1 Deferred tax asset
(20%*10,000,000)
2,000,000
Deferred tax income (P/L) 2,000,000
To recognise a deferred tax asset on the deductible temporary
difference of $10,000,000
Recording deferred tax effects Part 3
Applying the second principle, since revaluation deficit is accounted for directly
in P/L, the deferred tax effect thereof should also be accounted for directly in P/L
Part 3
125m
95m
CL’s books
(20m) – Taxable Profit
Assume that the land was sold for 125m in 20x2, attracting a tax rate of 20%
105m
IRAS’s books
(30m) – Acc Profit
Tax expense = 600,000 (20%*30,000,000)
Tax payable = 400,000 (20%*20,000,000)
Cash on sale
Date Particulars Debit Credit
1/1/20x2 Cash 125,000,000
Gain on sale of land 30,000,000
Land 95,000,000
To record the sale of land
Date Particulars Debit Credit
1/1/20x2 Tax expense 6,000,000
Tax payable 4,000,000
Deferred tax asset 2,000,000
To record tax effects on gain on sale of land
Assume that the land was sold for $125m in 20x2
Part 3
Part 4
General recognition criteria
1) It must meet the definition of a financial statement element;
2) Probable inflow/outflow of future economic benefits
3) Cost or value can be reliably measured
Conceptual Framework
Part 4 FRS Framework: An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
Definition of Operating Lease: An agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time whereby risk
and reward of ownership are not transferred to lessee.
o Lessee has the right to use the asset = Controlled by lessee o However, asset remains in the B/S of lessor but the asset is
physically present in the lessee’s premises o Inconsistent with the definition of an asset in the FRS framework
FRS 17 Leases
Part 4 FRS 39 Financial Instruments
When observable prices are not available, either income/market
approach could be used.
Income approach – Present valuation technique which considers
future cash flows
Market approach – Using quoted prices for similar liabilities or
equity instruments held by other parties as assets.
Upon acquisition, all classes of financial instruments are measured at fair value Fair value measurement according to FRS 113
o Level 2 & 3 inputs require inherent and various estimates
o Inconsistent with reliable measurement of cost
Fair Value Hierarchy Level 1 inputs: Unadjusted quoted prices in active markets for identical assets/liabilities Level 2 inputs: Inputs other than level 1 that are directly/indirectly observable Level 3 inputs: Unobservable inputs
FRS Framework: Information has the quality of reliability when it is free from material error and bias and can be depended upon by
users to represent faithfully that which it either purports to represent or could reasonably be expected to represent.
FRS 113 Fair Value Measurement Part 4
FRS Framework: An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
o Financial assets recognised when entity becomes party to the contractual provisions of the instrument
o Control still lies with the issuer instead of the entity o Entity unable to control future cash flows/benefits o Eg. Lowering of coupon payment for bonds.
Part 4 FRS 39 Financial Instruments
Part 4
Definition: Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.
o There is no legal obligation to pay the deferred tax expense
o Deferred tax liabilities are still recognized for accounting purposes
o Inconsistent with definition in framework
FRS Framework: A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
FRS 12 Deferred Tax
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