Module 4_24IVALUE_elearning DEFERRED TAX

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Financial year-end closing of 2014
Module #4
„ DEFERRED TAX AND CORPORATION TAX”
Training on accounting and income tax aspects related to financial year-end closing of
2014. Common errors and fast remedies.

© 2014 EASYAUDIT Sp. z o.o. with its registered office in Gdynia. All rights reserved. December 2014 http://24ivalue.com/.
• Module 1: Estimates: provision for doubtful debt, inventory provisions, provisions for
liabilities
• Module 2: Fixed assets: impairment testing of fixed assets, depreciation, accounting for
financial leasing
• Module 3: Cash flow statement
• Module 4: Corporate income tax, recognition of income and expenses – Deferred tax
and Corporation tax
• 24EasyAudit: Information on the Web application supporting accounting at balance sheet
closing for 2014
Content of the training
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Module 4: Deferred tax and Corporation Tax
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Do you know that …?
It is easier to understand the nature of
deferred tax if you treat income tax as a cost
and you follow the matching concept of costs
and incomes.
Income tax is just a cost of 24% of gross
profit; however, in fact it is calculated on the
taxation base and therefore it is necessary to
calculate deferred tax in order to preserve
commensurability.
Click here to watch a tutorial video

Theory:
• due to temporary differences between the
book and tax value of assets and liabilities,
it is necessary to calculate deferred tax
(IAS 12 , par. 20),
• the deferred income tax asset is to be
updated subject to the probability of
applying negative temporary differences
on which the assets were calculated.
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Examples of errors
• deferred income tax is calculated with the
income statement approach instead of the
balance sheet approach and thus it is
calculated on timing differences and not on
temporary differences
• certain temporary differences are not
identified (e.g. financial leasing, provisions,
impairment provisions to fixed assets)
• deferred income tax asset is not analysed
for probability of application in the future
(e.g. possibility to apply tax losses)

Theory:
• deferred tax asset is recognised whenever
it is porbable that it will be recovered in the
future
• deferred tax asset should not be
recognised when it is not probable that in
the future at least some of the negative
temporary differences may be realised
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Examples of errors
• Overprudency (e.g. 100% of the asset
unrecognised)
• or conversely – despite major uncertainties
as to realization of negative temporary
differences, no derecognition of part of
deferred tax assets is done
• indicators of material uncertainty include
e.g. losses generated in the recent years
or anticipated losses in the future

Real life example:
• ABC anticipates gross losses for the next 3
years (2015-2017) of about GBP 1 million
• for 2018 and 2019 the projected gross
profit is GBP 0.3 million annually
• as at 31.12.2014 a deferred income tax
asset was recognised of TGBP 380 on the
tax losses for 2011 and 2012
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Solution – unrecognised deferred tax
asset?
• There is a major uncertainty of realisation
of the deferred income tax asset and
derecognition is required in respect of the
uncertain amount. Two options are
available:
• Option 1: provision of 100% of the asset
due to high uncertainty => unrecognised
amount of TGBP 380
• Option 2: if the profit for 2018 and 2019 is
probable, it is reasonable to make an
adjustment of the unrecognised deferred
tax assset => TGBP 300 x 2 x 24% =
TGBP 144 => unrecognised amount of
TGBP 236 (380 – 144)

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31 Dec 2012 Year 2012 31 Dec 2011
A - 500 000 -
B
- 15 000 -
- 5 000 -
C
400 000 150 000 250 000
80 000 (45 000) 125 000
D
(150 000) 25 000 (17 5 000)
E 330 000
650 000
200 000
Gross profit
Permanent differences
Deferred tax base /
T axation base
Positive temprorary differences
General inventory provision
Entertainment expenses
Penalties and fines paid
Negative temprorary differences
Retirement benefit obligation and similar benefits
Excess of net book value of fixed assets over their
written down value of capital allowance
Year 201431 Dec 2014 31 Dec 2013

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How to calculate Deferred Tax and Corporation Tax at the same time…?
• The above calculation shows how the calculation of Corporation Tax results from calculation
of deferred tax (and vice versa)
• In order to mitigate the risk of error it is worth combining both calculations.
Deferred tax
31 Dec 2012
Corporation
tax for 2012
Deferred tax
31 Dec 2011
E 330 000
650 000
200 000
F 24% (156 000)
G 24% 79 200 31 200 48 000
H (124 800)
Income tax charge in profit and loss
account
Corporation tax (current tax)
Deferred tax base /
T axation base
Deferred tax asset /
Change of deferred tax
tax for 201431 Dec 2014 31 Dec 2013

Quick check of reasonableness of the
income tax charge (at Main Rate of
corporation tax):
• Gross result from the profit and loss
account
• we adjust permanent differences for the
period (permanently non-tax deductible
expenses are added and non-taxable
income is deducted)
• thus we obtain the „nominal taxation base”
to be multiplied by „minus 24%”,
• which generates the tax at nominal rate If
the actual tax = tax at the nominal rate, the
risk of error is low
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Reasons for the difference
• If the actual tax ≠ tax at the nominal rate,
the risk of error is high unless the following
have been taken into account:
• valuation adjustments in the opening
balance or closing balance (e.g.
unrecognised deferred asset related to tax
losses)
• adjustment to Corporation Tax for previous
years recognised in the current financial
year
• a part of deferred tax directly in revaluation
reserve
• If none of the above and if not small profits
rate shall be applied, errors are probable in
the calculation in Corporation Tax or
deferred tax in the opening balance or
closing balance (some temporary
differences missing, incorrect sign of a
temporary difference, arithmetical errors)

Errors can arise when:
• we do not know how to calculate deferred
tax
• we do not often calculate deferred tax
• we want to calculate Corporation Tax tax
but we do not have much tax-related
knowledge
• we calculate Corporation Tax but there is
no one who could check the calculation
before we declare Corporation Tax liability
to the tax office
• we do not combine Corporation Tax
calculation with calculation of deferred tax
(or vice versa).
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How will 24iValue calculate deferred tax
or Corporation Tax …?
• With 24iValue and the embedded auditing
techniques you will make sure if the tax in
the profit and loss account is reasonable
and you will check or calculate the
deferred and current tax in a short time
• an easy way to check income tax will help
you calculate current and deferred income
tax correctly even several times faster than
so far
• Using 24iValue you minimise the risk error
in Corporation Tax and deferred tax.

24iValue helps to check and calculate
24iValue Expert System supports accounting,
auditing and consulting in specialized
calculations such as:
• Cash flow statement (in accordance with IFRS)
• Deferred tax and UK corporation tax
• Valuation and market value
• Valuation of financial instruments
• Testing for impairment of fixed assets
• Provisions for debtors
• Inventory provisions
• Provisions for liabilities, including provisions for
unused holiday accruals, retirement bonus,
warranty expenses
• Finance lease
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Click here to watch a video
Click here to watch a tutorial video

Intellectual property of 24iValue
• The 24iValue service, including the graphic and works marks of the Service names (logo),
software of the Service as well as all materials and content provided in the Service, graphic
solution and all other solutions are subject to copyright in accordance with international law.
• The appearance, operating principles and concept of the Service constitute a protected
industrial design and are subject to protection in compliance with the Act on industrial
property – both for 24iValue.

Contact with 24iValue/24EasyAudit
24EasyAudit Sp. z o.o.
ul. Mściwoja 9/10a
81-361 Gdynia
KRS 0000374259
NIP 586-226-29-76
REGON 221152658
Kontakt: https://24ivalue.com/pages/contact/
https://24ivalue.com/

Module 4_24IVALUE_elearning DEFERRED TAX

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