TOPIC 5

DEFERRED TAX
MFRS 112

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Learning Objectives:
1. Identify differences between accounting profit and
taxable profit
2. Describe a temporary difference that results in future
taxable amounts and future deductible amounts
3. Explain the computation of deferred tax
4. Explain the determination of deferred tax assets and
deferred tax liability
5. Explain the effect of various tax rates and tax rate
changes on deferred income taxes.
6. Describe the presentation and disclosure of income tax
expense

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INTRODUCTION
What is tax? Why tax is important in economy?
In Malaysia, all companies are required to
compute their tax payable and pay income tax to
Lembaga Hasil Dalam Negeri (LHDN).
Income tax has been an accounting issue due to
difference in accounting rule and tax rule in
determining the taxable income.

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INTRODUCTION …cont
Corporations calculate income tax payable based
upon tax regulations
But calculate income tax expense based upon
accounting rules of IFRS/MFRS.
 Differences between tax rules and accounting rules,
tax expense often differs from taxes payable to the
taxing authority

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 Examples of differences
Examples: Tax rule Accounting rule

Capital allowance/ Based on rules set by Inland Based on GAAP, i.e MFRS 116
Depreciation rate Revenue Board PPE

Leasehold property Not qualified for allowance Must be depreciated

(depreciable)

Revenue / Expenses Cash basis Accrual basis

Entertainment Exp. Not allowed as deductible Recorded as an expense and

expenses from taxable income deducted from profit

RESULTING IN… Income Tax payable Income tax expense

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Temporary differences vs. Permanent differences
Two types of differences:
Temporary differences and Permanent Differences.
Temporary differences cause by
in computing tax payable:
 certain expenses may not be allowable deductions and,
 certain incomes are not taxable in the current period but
may be deductible/taxable in the next or following
period(s).

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EXAMPLES OF TEMPORARY ITEMS
Main items that cause temporary differences are:
a) Tax rule only allows expenses that have been paid, but the accounting
principle allows accruals expense. For example, interest expense is
recognized on accrual basis, but for tax purpose only interest that is paid
will be allowable as an expense.
b) Tax rule taxes receipts when cash is received, but accounting principle
is to recognize it as income when it is earned.
c) Writing off expense or capitalizing it as an asset. For example, for tax
purpose, R&D are allowed as deductible expenses in the year they are
incurred vs. the accounting treatments, research expenses will be write off
immediately and development costs may be capitalized.
d) Different quantum of expense. Depreciation is charged as expense based
on the economic life and other factors vs. tax rules have a uniform rate of
tax depreciation which will be different from the entity`s depreciation rate.

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Temporary differences vs. Permanent differences

 Permanent differences: Items that are not allowable for tax

purpose such as:
a) Donations to unapproved charities
b) Entertainment expenses
c) Penalties and fines
d) Dismantling and decommissioning costs
e) Interest revenue from government bond
The company will deduct/add these items to arrive at the
accounting profit but the tax authorities will disallow them.
Permanent differences are ignored for deferred tax
accounting.
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Temporary
Temporary Differences
Differences
A Temporary Difference:
The difference between the tax basis (tax base) of an asset or liability
and its carrying or book value amount in the financial statements that
will result in taxable amounts or deductible amounts in future years.

Future Taxable Amounts/ Future Deductible Amounts/

Taxable Temporary Deductible Temporary
Difference Difference
Deferred Tax Liability represents Deferred Tax Asset represents the
the increase in taxes payable in increase in taxes refundable (or
future years, as a result of taxable saved) in future years, as a result of
temporary differences existing at deductible temporary differences
the end of the current year. existing at the end of the current year.

Illustration 19-22: Examples of Temporary Differences

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 Deferred tax
Deferred tax: Arises due to the difference between income tax
expense (Accounting) and income tax payable calculated for tax
purpose.

The following example illustrates how a difference in tax payable

and tax expense arises:

In year 2018, XYZ Company recorded an impairment of accounts

receivables of RM10,000 which was not considered a deductible
expense. According to the tax laws this impairment can be considered
a deductible expense in year 2019. The profit before tax for 2008 is
RM500,000. Income tax rate is 25%.

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 Tax expense:
Illustration
Item 2008
RM
Profit before tax 500,000
Tax 25% 125,000

 Tax payable will be as follows:

Item 2008
Differenc
RM es of
RM2,500
Profit before tax 500,000
Add an impairment of A/R 10,000
Taxable profit 510,000
Tax 25% 127,500

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 Illustration
 Is that difference accounted for in the financial
statements?...YES.
The difference between income tax expense and
income tax payable (RM2500) is referred to as a
deferred tax amount.
In this case, it is a deferred tax asset (where taxes
will be lower in the future).
In cases where taxes will be higher in the future, a
company records a deferred tax liability.
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 :
A company makes the following entry at the end of 2018 to
record income taxes:
Income Tax Expense (E) 125,000
Deferred Tax Asset (A) 2,500
Income Tax Payable (L) 127,500

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 Illustration
 In 2018, An entity has recognized interest receivable on a fixed deposit of
RM2,500. interest income is taxed when received. Assume pretax financial
profit is RM300,000. Tax rate is 25%.
 Tax expense= 300,000*25%=RM75,000.
 Tax payable will be as follows:

Item 2018
RM
Profit before tax 300,000

Deduct interest income (2,500)

Taxable profit 297,500

Tax payable 25% 74,375

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 Illustration..cont
 The RM625 difference between income tax expense and income tax
payable in 2018 reflects taxes that it will pay in future periods. In this
case, this difference is a deferred tax liability.
 A company makes the following entry at the end of 2018 to record
income taxes:
Income Tax Expense 75,000
Income Tax Payable 74,375
Deferred Tax Liability 625

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 Computation of deferred tax
MFRS112 (Income Taxes) requires entities to compute
deferred taxes based on financial position (generally referred to
as the liability method or balance sheet liability method).
Under this method, temporary differences are differences
between the carrying amounts of assets and liabilities in the
statement of financial position and the tax base.
Tax base is the carrying amount an asset or liability according
to/for tax rules/purpose.

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Difference btw Carrying Value & Tax Base
Carrying Tax Deferred
Value Base Tax
Assets More Less Deferred Future Taxable Amounts Pay tax in
(A) Tax / Taxable Temporary future
CAA > TBA Liability – Difference
Cr
Profit + Profit -

Assets Less More Deferred Future Deductible Deductible tax

(C) Tax Asset Amounts/ Deductible amount in
CAA < TBA – Dr Temporary Difference future
Profit - Profit +

Liability More Less Deferred Future Deductible Deductible tax

(B) Tax Asset - Amounts/ Deductible amount in
CAL > TBL Dr Temporary Difference future

Profit - Profit +
Liability Less More Deferred Future Taxable Amounts Pay tax in
(D) Tax / Taxable Temporary future
CAL < TBL Liability – Difference
Cr
Profit + Profit -

(A) & (D) where Accounting Profit more than Tax Payable (Tax Profit), 17
(B) & (C) where Tax Profit more than Accounting Profit
Steps to calculate deferred tax
Step 1: Identify any temporary difference.

Step 2: Determine whether the temporary difference is a

taxable temporary difference (TTD) or
deductible temporary difference (DTD).

Step 3: Calculate deferred tax liability (DTL) or

deferred tax asset (DTA).

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 Step 1: Identify temporary difference
A) An entity has a plant costing RM100,000 on which RM20,000 depreciation has been
charged. Capital allowance (tax depreciation) claimed is 50%.
Required:
Find the carrying amount and tax base of the asset (i.e. the plant). Determine the
temporary difference.

Answer: The carrying amount will be RM80,000 (RM100,000-20,000) and the tax
base will be RM50,000 (RM100,000-50,000).
The difference between the carrying amount of RM80,000 and tax base of RM50,000
gives rise to temporary difference of RM30,000.

B) An entity has development cost with carrying amount of RM14,200. Tax rule allows
all development costs to be expensed when incurred.
Required: Find the carrying amount and tax base of the asset (i.e. Development
Cost), and determine the temporary difference.
Answer: The carrying amount is RM14,200.The tax base will be nil as the
development expenditure is deductible when incurred. Temporary difference is
RM14,200.

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 Step 1: Identify temporary difference
C) An entity took out a 10% RM4 million loan on 1 January 2011. Interest on the loan
is paid every 12 months in arrears.
Required:
Find the carrying amount and tax base of liabilities (i.e. Loan and Interest Accrued).
Determine the temporary difference.
Answer:
The carrying amount of the loan will be RM4 million and the accrued interest will be
RM400,000. The tax base of the loan will be RM4 million but the tax base of the
accrued interest will be nil. Therefore, there will be temporary difference on the accrued
interest of RM400,000.
D) An entity has recognized interest receivable on a fixed deposit of RM2,500.
Required:
Find the tax base of the interest receivable. Determine the temporary difference.

Answer:
As interest received is taxed on cash basis the tax base will be nil. This gives rise to a
temporary difference of RM2,500.

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 Taxable temporary difference vs.
Deductible temporary difference
Taxable temporary difference (TTD) will result in
taxable amounts in determining taxable profit (loss) of
future periods when the carrying amounts of assets or
liabilities are recovered or settled.
Deductible temporary difference (DTD) will result
in amounts that will be deductible in determining
taxable profit (or loss) of future periods when the
carrying amounts of assets or liabilities are recovered
or settled.

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Step 2: Taxable temporary difference and
deductible temporary difference
Taxable Deductible
temporary temporary
difference (TTD) difference
(DTD)

Assets:

Carrying amount more than tax base Yes CA > TB

A A

Carrying amount less than tax base Yes CA < TB

A A

Liabilities:

Carrying amount more than tax base Yes CA > TB

L L
Carrying amount less than tax base
Yes CAL < TB
L

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 Step 2: Determine TTD or DTD
A) An entity has a plant costing RM100,000 on which RM20,000 depreciation has
been charged. Capital allowance (tax depreciation) claimed is 50%.

Answer: The carrying amount will be RM80,000 (RM100,000-20,000) and the tax
base will be RM50,000 (RM100,000-50,000).
The difference between the carrying amount of RM80,000 and tax base of RM50,000
gives rise to temporary difference of RM30,000.
CAA > TBA: Taxable temporary difference (TTD) of RM30,000

B) An entity has development cost with carrying amount of RM14,200. Tax rule
allows all development costs to be expensed when incurred.
Required: Find the carrying amount and tax base of the asset (i.e. Development
Cost), and determine the temporary difference.
Answer: The carrying amount is RM14,200.The tax base will be nil as the
development expenditure is deductible when incurred. Temporary difference is
RM14,200.

CAA > TBA: Taxable temporary difference (TTD) of RM14,200

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 Step 2: Determine TTD or DTD
C) An entity took out a 10% RM4 million loan on 1 April 2011. Interest on the loan is
paid every 12 months in arrears.
Answer:
The carrying amount of the loan will be RM4 million and the accrued interest will be
RM400,000. The tax base of the loan will be RM4 million but the tax base of the
accrued interest will be nil. Therefore, there will be temporary difference on the accrued
interest of RM400,000.

CAL > TBL: Deductible temporary difference (DTD) of RM400,000

D) An entity has recognized interest receivable on a fixed deposit of RM2,500.

Required:
Find the tax base of the interest receivable. Determine the temporary difference.
Answer:
As interest received is taxed on cash basis the tax base will be nil. This gives rise to a
temporary difference of RM2,500.

CAA > TBA: Taxable temporary difference (TTD) of RM2,500

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 Deferred tax liability
A deferred tax liability represents the increase in taxes
payable in future years as a result of taxable temporary
differences existing at the end of the current year.
MFRS112 requires a deferred tax liability to be recognized for
all taxable temporary differences, except to the extent that the
deferred tax liability arises from:
(a) initial recognition of goodwill; or
(b) 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.

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 Deferred tax liability

A deferred tax liability is calculated by multiplying taxable

temporary difference in the tax rate.

DTL = TTD x Tax rate (%)

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 Deferred tax asset

A deferred tax asset represents the increase in taxes

refundable (or saved) in future years as a result of deductible
temporary differences existing at the end of the current year.

According to MFRS112, deferred tax asset can be recognized

on deductible temporary differences such as when the carrying
amount of the asset is less than its tax base or when the
carrying amount of the liability is more than its tax base.

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 Deferred tax asset

A deferred tax asset is calculated by multiplying

deductible temporary difference in the tax rate.

DTA = DTD x Tax rate (%)

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 Step 3: Calculate DTL @ DTA
A) An entity has a plant costing RM100,000 on which RM20,000 depreciation has
been charged. Capital allowance (tax depreciation) claimed is 50%.

Answer: The carrying amount will be RM80,000 (RM100,000-20,000) and the tax
base will be RM50,000 (RM100,000-50,000).
The difference between the carrying amount of RM80,000 and tax base of RM50,000
gives rise to temporary difference of RM30,000.
CAA > TBA: Taxable temporary difference (TTD) of RM30,000

DTL = RM30,000 x 25% = RM7,500

B) An entity has development cost with carrying amount of RM14,200. Tax rule
allows all development costs to be expensed when incurred.
Required: Find the carrying amount and tax base of the asset (i.e. Development
Cost), and determine the temporary difference.

Answer: The carrying amount is RM14,200.The tax base will be nil as the
development expenditure is deductible when incurred. Temporary difference is
RM14,200.
CAA > TBA: Taxable temporary difference (TTD) of RM14,200

DTL = RM14,200 x 25% = RM3,550 29

 Step 3: Calculate DTL @ DTA
C) An entity took out a 10% RM4 million loan on 1 April 2011. Interest on the loan is
paid every 12 months in arrears.
Answer:
The carrying amount of the loan will be RM4 million and the accrued interest will be
RM400,000. The tax base of the loan will be RM4 million but the tax base of the
accrued interest will be nil. Therefore, there will be temporary difference on the accrued
interest of RM400,000.
CAL > TBL: Deductible temporary difference (DTD) of RM400,000

DTA = RM400,000 x 25% = RM100,000

D) An entity has recognized interest receivable on a fixed deposit of RM2,500.
Required:
Find the tax base of the interest receivable. Determine the temporary difference.
Answer:
As interest received is taxed on cash basis the tax base will be nil. This gives rise to a
temporary difference of RM2,500.

CAA > TBA: Taxable temporary difference (TTD) of RM2,500

DTL = RM2,500 x 25% = RM625

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Formula to Compute Income Tax Expense
Income tax expense= income tax payable+ change in deferred
income tax

For example, a company adds an increase in deferred tax

liability to income tax payable. On the other hand, it subtracts
an increase in a deferred tax asset from income tax payable.
Income tax expense = Income tax payable + Increase in DTL (v.v.)

Income tax expense = Income tax payable - Increase in DTA (v.v.)

In the income statement or in the notes to the financial

statements, a company should disclose the significant
components of income tax expense attributable to continuing
operations.
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Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Liability

Illustration: Because it is the first year of operations for Chelsea,
there is no deferred tax liability at the beginning of the year.
Chelsea computes the income tax expense for 2011 as follows:

Illustration 19-9

LO 2 Describe a temporary difference that results in future taxable amounts.

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Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Liability

Illustration: Chelsea makes the following entry at the end of 2011
to record income taxes.

Income Tax Expense 28,000

Income Tax Payable 16,000
Deferred Tax Liability 12,000

LO 2 Describe a temporary difference that results in future taxable amounts.

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 Income
Income Statement
Statement Presentation
Presentation

Given the previous information related to Chelsea Inc.,

Chelsea reports its income statement as follows.
Illustration 19-21

LO 5 Describe the presentation of income tax expense in the income statement.

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Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Liability

Illustration: Computation of Income Tax Expense for 2012.

Illustration 19-10

LO 2 Describe a temporary difference that results in future taxable amounts.

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Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Liability

Illustration: Chelsea makes the following entry at the end of 2012
to record income taxes.

Income Tax Expense 28,000

Deferred Tax Liability 8,000
Income Tax Payable 36,000

Illustration 19-11

LO 2 Describe a temporary difference that results in future taxable amounts.

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Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Asset

Illustration: Hunt Co. accrues a loss and a related liability of
$50,000 in 2011 for financial reporting purposes because of pending
litigation. Hunt cannot deduct this amount for tax purposes until the
period it pays the liability, expected in 2012.
Illustration 19-14

LO 3 Describe a temporary difference that results in future deductible amounts.

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Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Asset

Illustration: Assuming that 2011 is Hunt’s first year of operations,
and income tax payable is $100,000, Hunt computes its income tax
expense as follows.
Illustration 19-16

LO 3 Describe a temporary difference that results in future deductible amounts.

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Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Asset

Illustration: Hunt makes the following entry at the end of 2011 to
record income taxes.

Income Tax Expense 80,000

Deferred Tax Asset 20,000
Income Tax Payable 100,000

LO 3 Describe a temporary difference that results in future deductible amounts.

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Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes

Deferred Tax Asset

Illustration: Computation of Income Tax Expense for 2012.

Illustration 19-17

LO 3 Describe a temporary difference that results in future deductible amounts.

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Tax
Tax Rate
Rate Considerations
Considerations

Future tax Rates

A company must consider presently enacted changes in the tax
rate that become effective for a particular future year(s) when
determining the tax rate to apply to existing temporary
differences.

Revision of Future Tax Rates

When a change in the tax rate is enacted, companies should
record its effect on the existing deferred income tax accounts
immediately.

LO 4 Explain the effect of various tax rates and tax rate changes on deferred income
taxes. 41
 Illustration
 An entity had recognized a deferred tax liability of RM40,000 as at 31
December 2010. the tax rate was 40% in year 2010. In year 2011, the tax rate
was changed to 35%.
 Required:
Discuss how the deferred tax liability brought forward will be affected by the
change in the tax rate.

Answer:
The deferred tax recognized in 2011 to be disclosed in the statement of
financial position will be based on 35%. The amount brought forward will be
adjusted for 35% which would be RM40,000*(40-35)/40=RM5,000. This
reduction of RM5,000 is credited to the income statement of year 2011. It is a
change in accounting estimate and the R.E is not adjusted.

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Tax on profits is paid in the years profits are earned. Tax
losses can be carried forward and offset against future
profits indefinitely but not against prior periods profits.

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On 31 January 2011, Homer had a plant with amount of RM100,000 and a
remaining useful life of five years. The fair value of this plant was RM120,000
and the fair value was incorporated in the books. The surplus of RM20,000
will be credited to revaluation surplus (reserve). The tax base of the plant was
RM70,000 and the tax rate is 30%. Income tax payable amount is RM20,000.

Required :
Discuss the accounting treatment of any deferred tax liability for year 2011.

Answer:
At the end of year 2011, there would be taxable temporary difference of
RM50,000 (RM120,000 –RM70,000) and deferred tax provided would be
RM50,000 x 30% =RM15,000 of which (RM20,000 x 30%) RM6,000 relate to
the revaluation reserve. Therefore, the revaluation reserve would be reduced
by RM6,000, leaving a balance of RM14,000, as RM6,000 is transferred to
Deferred tax account.

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THE END

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