Deferred tax liabilities

Deferred tax liabilities shall be recognised when there is a taxable temporary difference between the tax base of an asset or liability and its corresponding carrying amount in the statement of financial position. This arises when the carrying amount of an asset exceeds its tax base. Consequently, the future recovery of the carrying amount will generate taxable profit; e.g:

  • accumulated depreciation of an asset in the financial statements is less than the cumulative depreciation allowed up to the reporting date for tax purposes, e.g. depreciation of an asset is accelerated for tax purposes;
  • development costs have been capitalised and will be amortised to the statement of comprehensive income but were deducted in calculating taxable amounts in the reporting period in which they were incurred.

A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from:Quality

  1. the initial recognition of goodwill; or
  2. the initial recognition of an asset or liability in a transaction which:
    1. is not a business combination; and
    2. at the time of the transaction, affects neither accounting
      profit nor taxable profit (tax loss).

An entity shall recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied:

  1. the parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and
  2. it is probable that the temporary difference will not reverse in the foreseeable future.

Temporary differencesTime

Temporary differences differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Temporary differences may be either:

  • taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled
  • deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
Something else -   Financial reporting in change

Example from a business combination

On January 01, 20xx, the company acquired 100% of Acquired Entity, a manufacturer of Hi-tech machinery used in the production micro-chips for a total consideration of CU13,500,000, net of cash acquired. In connection with this acquisition, the company recorded a customer relationships asset of CU3,400,000, an inventory write-up of CU640,000 and goodwill of CU8,530,000. No intangible assets relating to trade names or acquired technology (patented or unpatented) were recorded. The customer relationships asset is amortized over 10 years, the inventory write-up is expensed to profit or loss in the year after acquisition and goodwill is amortized over 5 years.

Goodwill and goodwill amortisation are permanent tax differences and as a result no deferred tax liability is accounted on this item. The customer relationships asset and inventory write-up are temporary tax differences for which a deferred tax liability has to be recorded. The deferred tax liability at acquisition is calculated as follows:

Something else -   Liabilities and assets for current tax

The customer relationships asset CU3,400,000 and the inventory write-up of CU640,000 sum up to CU4,040,000. The nominal tax rate in the country is 25%, hence the deferred tax liability at acquisition is: CU4,040,000 x 25% = CU1,010,000.

In period 1 goodwill is amortised CU8,530,000 / 5 years = CU1,706,000, the customer relationships asset is also amortised CU3,400,000 / 10 years = CU340,000 and the inventory write-up of CU640,000 is fully expensed. The realse of the deferred tax liability for year one consists of the tax effect on the customer relationships asset amortisation of CU340,000 and the inventory write-up of CU640,000, total CU1,010,00, resulting in a tax credit of CU245,000 (25% of CU1,010,000). The other years the tax effect is 25% of he customer relationships asset amortisation of CU340,000 is CU85,000.

The development of these assets causing the permanent and temporary differences and the deferred tax liability over these 10 years is as follows (amounts in CU’000):

DT (CR)

Acquisition

1

2

3

4

5

6

7

8

9

10

Goodwill

8,530

6,824

5,118

3,412

1,706

Intangible asset

3,400

3,060

2,720

2,380

2,040

1,700

1,360

1,020

680

340

Inventory write-up

640

Total

4,040

3,060

2,720

2,380

2,040

1,700

1,360

1,020

680

340

Deferred tax liability

-1,010

-765

-680

-595

-510

-425

-340

-255

-170

-85

Cost of sales

640

Amortisation goodwill

1,706

1,706

1,706

1,706

1,706

Amortisation intangible asset

340

340

340

340

340

340

340

340

340

340

P&L effect tax differences

2,686

2,046

2,046

2,046

2,046

340

340

340

340

340

Deferred tax credit

-245

-85

-85

-85

-85

-85

-85

-85

-85

-85

Net income effect – loss

2,441

1,961

1,961

1,961

1,961

255

255

255

255

255

Average tax rate

8.5

4.2%

4.2%

4.2%

4.2%

25.0%

25.0%

25.0%

25.0%

25.0%

Reconciliation to effective tax rate

P&L effect tax differences

2,686

2,046

2,046

2,046

2,046

340

340

340

340

340

Permanent differences

1,706

1,706

1,706

1,706

1,706

Temporary tax differences

980

340

340

340

340

340

340

340

340

340

Effective tax rate

25.0%

25.0%

25.0%

25.0%

25.0%

25.0%

25.0%

25.0%

25.0%

25.0%

Something else -   Most advantageous market

Deferred tax liabilities

Deferred tax liabilities

Deferred tax liabilities

Deferred tax liabilities Deferred tax liabilities Deferred tax liabilities Deferred tax liabilities Deferred tax liabilities

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Something else -   Deferred tax assets

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