Register now or log in to join your professional community.
How does deferred taxation work?
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?
- 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.
