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The banks create deferred taxation. What are the basis to create deferred taxation?

How does deferred taxation work?

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تم إضافة السؤال من قبل Muhammad Idrees Butt , Manager - Credit Risk Management , Bankers Equity Limited
تاريخ النشر: 2015/03/25
Muhammad Idrees Butt
من قبل Muhammad Idrees Butt , Manager - Credit Risk Management , Bankers Equity Limited

Thanks  Charya Peiris for explaining this concept. 

Does it mean the deferred taxation is always an assets item or could it be a liability as well in some situation?

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- Basis for the deferred taxation is the differences arisig between the accounting depreciation and tax depreciation  (a.k.a capital allowances ).

 

- Accounting depreciation is based on the accounting standards and the company policy which could vary from one company to another.

 

- Tax depreciation is  the rate set by the tax regulator for taxation purpose which is a deductible expense when arriving at the taxable profit.

 

-When computing the annual tax expense, the accounting depreciation is added back and the tax depreciation is deducted from the accounting profit to arrive at the taxable profit.

 

- Since, there is a difference between the two bases, the temporary differences arising from the assets and liabilities on the bases used is considered as derdeferred tax.

 

- When there is a taxable temporary difference arising from assets and liabilities a deferred tax liability arise and when there is a deductible temporary difference arising from assets and liabilities a deferred tax asset arise. These are accounted in accordance with the applicable financial reporting/accounting standards relevant to a particular country. 

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