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Deferred Taxation in Accounting Lecture Notes

Deferred taxation arises from temporary differences between the carrying amounts of assets and liabilities and their tax bases, leading to deferred tax liabilities or assets. These differences can stem from various factors such as depreciation methods, revenue recognition, and expense recognition. Proper recognition, measurement, and disclosure of deferred taxes are essential for accurate financial reporting and tax planning.

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9 views

Deferred Taxation in Accounting Lecture Notes

Deferred taxation arises from temporary differences between the carrying amounts of assets and liabilities and their tax bases, leading to deferred tax liabilities or assets. These differences can stem from various factors such as depreciation methods, revenue recognition, and expense recognition. Proper recognition, measurement, and disclosure of deferred taxes are essential for accurate financial reporting and tax planning.

Uploaded by

roacedric456
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Deferred Taxation in Accounting

1. Introduction to Deferred Taxation


Deferred taxation arises due to temporary differences between the carrying
amounts of assets and liabilities in financial statements and their corresponding tax
bases. These differences lead to taxable or deductible amounts in future periods,
necessitating the recognition of deferred tax liabilities or assets.
2. Causes of Temporary Differences
Temporary differences can result from:
 Depreciation Methods: Using different depreciation methods for
accounting (e.g., straight-line) and tax purposes (e.g., accelerated
depreciation) can create timing differences.
 Revenue Recognition: Situations where revenue is recognized in the
financial statements before or after it is taxable.
 Expense Recognition: Expenses that are recognized in the financial
statements but are not deductible for tax purposes until a later period, or vice
versa.
3. Recognition of Deferred Tax Liabilities and Assets
 Deferred Tax Liabilities (DTLs): Arise when taxable temporary differences
will result in taxable amounts in future periods. For example, if an asset's
carrying amount exceeds its tax base due to accelerated tax depreciation, a
DTL is recognized.
 Deferred Tax Assets (DTAs): Arise when deductible temporary differences
will result in deductible amounts in future periods. For instance, if a company
has incurred expenses that are not yet deductible for tax purposes, a DTA is
recognized.
4. Measurement of Deferred Taxes
Deferred tax assets and liabilities are measured using the tax rates expected to
apply in the periods when the temporary differences reverse, based on laws that
have been enacted or substantively enacted by the reporting date.
5. Recognition Criteria for Deferred Tax Assets
A deferred tax asset is recognized only to the extent that it is probable that future
taxable profit will be available against which the deductible temporary differences
can be utilized. This involves assessing:
 The availability of sufficient taxable temporary differences.
 Projected future taxable profits.
 Tax planning opportunities.
6. Presentation in Financial Statements
Deferred tax assets and liabilities are presented as non-current items in the balance
sheet. They should not be discounted and are offset only if the entity has a legally
enforceable right to set off current tax assets against current tax liabilities.
7. Disclosure Requirements
Entities must disclose:
 The components of deferred tax assets and liabilities.
 The amount of deferred tax income or expense recognized in profit or loss.
 The nature of the evidence supporting the recognition of deferred tax assets
when their realization is uncertain.
8. Practical Examples
 Accelerated Depreciation: A company uses straight-line depreciation for
accounting purposes but accelerated depreciation for tax purposes, leading
to a higher carrying amount than the tax base, resulting in a deferred tax
liability.
 Warranty Provisions: A company recognizes a provision for warranties in
its financial statements but can only deduct the actual warranty costs for tax
purposes when incurred, leading to a deferred tax asset.
9. Conclusion
Understanding deferred taxation is crucial for accurate financial reporting and tax
planning. It ensures that the financial statements reflect the future tax
consequences of current transactions and events, providing a more accurate
picture of an entity's financial position.

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