TOPIC 5

DEFERRED TAX
MFRS 112

1
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, deferred tax assets and deferred tax liabilities
2
 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.
 Corporations must file income tax returns following the guidelines developed
by the Inland Revenue Board (IRB), thus they:
 calculate income tax payable based upon tax regulations,
 calculate income tax expense based upon accounting rules of
IFRS/MFRS.
 Differencesbetween tax rules and accounting rules make amount reported
as tax expense often differs from the amount of taxes payable to the
taxing authority
3
Accounting for Income Taxes

Illustration: Chelsea, Inc. reported revenues of $130,000 and

expenses of $60,000 in each of its first three years of
operations. For tax purposes, Chelsea reported the same
expenses to the tax authority in each of the years. Chelsea
reported taxable revenues of $100,000 in 2019, $150,000 in
2020, and $140,000 in 2021. What is the effect on the
accounts of reporting different amounts of revenue for IFRS
versus tax?

Kieso et al. (2018)

 Financial vs. Taxable Differences ILLUSTRATION 19.2
Financial Reporting
Income

IFRS Reporting 2019 2020 2021 Total

Revenues $130,000 $130,000 $130,000 $390,000

Expenses 60,000 60,000 60,000 180,000
Pretax financial income $70,000 $70,000 $70,000 $210,000

Income tax expense (40%) $28,000 $28,000 $28,000 $84,000

Tax Reporting 2019 2020 2021 Total

Revenues $100,000 $150,000 $140,000 $390,000

Expenses 60,000 60,000 60,000 180,000
Taxable income $40,000 $90,000 $80,000 $210,000

Income taxes payable (40%) $16,000 $36,000 $32,000 $84,000

ILLUSTRATION 19.3
Tax Reporting Income Kieso et al. (2018)
LO 1
 Book vs. Tax Differences ILLUSTRATION 19.4
Comparison of Income
Tax Expense to Income
Taxes Payable

Comparison 2019 2020 2021 Total

Income tax expense (IFRS) $28,000 $28,000 $28,000 $84,000

Income tax payable (TA) 16,000 36,000 32,000 84,000
Difference $12,000 $(8,000) $(4,000) $0

Are the differences accounted for in the financial statements? Yes

Year Reporting Requirement

2019 Deferred tax liability account increased to $12,000
2020 Deferred tax liability account reduced by $8,000
2021 Deferred tax liability account reduced by $4,000
Kieso et al. (2018)
LO 1
 Financial Reporting for 2019

Statement of Financial Position Income Statement

2019 2019
Assets:
Revenues:

Expenses:
Liabilities:
Deferred taxes liability
12,000
Income taxes payable 16,000
Income tax expense 28,000
Equity:
Net income (loss)

Where does the “deferred tax liability” get reported in the financial
statements?
Kieso et al. (2018)
LO 1
 Examples of differences
Examples: Tax rule Accounting rule
Capital allowance/ Based on rules set by Based on MFRS 116 PPE
Depreciation rate Inland Revenue Board

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 deducted from profit
income

RESULTING IN… Income Tax payable Income tax expense

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Temporary differences vs. Permanent differences
Numerous items create differences between pretax financial income
and taxable income.
These differences are of two types:
1. Temporary differences
2. Permanent Differences.

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 Temporary Differences

 A Temporary Difference is the difference between the tax basis (tax

base) of an asset or liability and its reported amount (carrying or
book value) in the financial statements that will result in taxable
amounts or deductible amounts in future years.
 in computing the 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).

10
 Temporary Differences…cont

 taxable amounts (taxable temporary differences)

 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.
 deductible amounts (deductible temporary differences)
 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.

11
 Temporary differences …cont
The 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 accrued on time basis, but
for tax purpose the 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.

12
 Temporary differences …cont
The main items that cause temporary differences are: (cont)

c) Writing off expense and capitalizing it as an asset.

 For example, research and development costs are allowed
as deductible expenses in the year they are incurred for tax
purpose whereas an entity will write off research expenses
immediately and may capitalize development costs
d) Different quantum of expense.
 Depreciation is charged as expense based on the economic
life and other factors. Tax rules have a uniform rate of tax
depreciation (ie. Capital Allowance) which will be different
from the entity`s depreciation rate.
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 Capital Allowance
Types and rate of Capital Allowance
Two type of capital allowance
stated by IRB: initial TYPES OF TYPES OF ASSESTS RATE
allowance (IA) and annual ALLOWANCES
allowance (AA).
Initial Allowance All types of assets 20 %
Initial allowance is fixed at the
rate of 20% based on the
Annual Allowance Motor Vehicles and Heavy Machinery 20 %
original cost of the asset at the
time when the capital
expenditure is incurred Plant and Machinery 14 %

Annual allowance is a flat rate

Office Equipment , Furniture and Fittings 10 %
given every year based on the
original cost of the asset.
Computer 20%

Source: Inland Revenue Board of Malaysia 14

 ILLUSTRATION 19.29
Examples of Temporary
Temporary Differences…cont Differences

Revenues or gains are taxable after they are recognized in

financial income
An asset (e.g., accounts receivable or investment) may be recognized for
revenues or gains that will result in taxable amounts in future years when
the asset is recovered. Examples:
1.Sales accounted for on the accrual basis for financial reporting purposes
and on the installment (cash) basis for tax purposes.
2.Contracts accounted for under the percentage-of-completion method for
financial reporting purposes and the cost-recovery method (zero-profit
method) for tax purposes.

Kieso et al. (2018)

LO 2
 Temporary Differences…cont
ILLUSTRATION 19.29
Examples of Temporary
Differences

Examples: (cont)
3. Investments accounted for under the equity method for financial
reporting purposes and under the cost method for tax purposes.
4. Gain on involuntary conversion of non-monetary asset which is
recognized for financial reporting purposes but deferred for tax
purposes.
5. Unrealized holding gains for financial reporting purposes (including
use of the fair value option) but deferred for tax purposes.

Kieso et al. (2018)

LO 2
 ILLUSTRATION 19.29

Temporary Differences…cont Examples of Temporary

Differences

Expenses or losses are deductible after they are recognized

in financial income
A liability (or contra asset) may be recognized for expenses or losses that will
result in deductible amounts in future years when the liability is settled.
Examples:
1. Product warranty liabilities.
2. Estimated liabilities related to discontinued operations or restructurings.
3. Litigation accruals.
4. Bad debt expense recognized using the allowance method for financial
reporting purposes; direct write-off method used for tax purposes.
5. Share-based compensation expense.
6. Unrealized holding losses for financial reporting purposes (including use of
the fair value option), but deferred for tax purposes.
Kieso et al. (2018)
LO 2
 ILLUSTRATION 19.29
Temporary Differences…cont Examples of Temporary
Differences

Revenues or gains are taxable before they are recognized

in financial income
A liability may be recognized for an advance payment for goods or services
to be provided in future years. For tax purposes, the advance payment is
included in taxable income upon the receipt of cash. Future sacrifices to
provide goods or services (or future refunds to those who cancel their
orders) that settle the liability will result in deductible amounts in future
years. Examples:
1. Subscriptions received in advance.
2. Advance rental receipts.
3. Sales and leasebacks for financial reporting purposes (income deferral)
but reported as sales for tax purposes.
4. Prepaid contracts and royalties received in advance.
Kieso et al. (2018)
LO 2
 ILLUSTRATION 19.29
Temporary Differences…cont Examples of Temporary
Differences

Expenses or losses are deductible before they are

recognized in financial income
The cost of an asset may have been deducted for tax purposes faster than
it was expensed for financial reporting purposes. Amounts received upon
future recovery of the amount of the asset for financial reporting (through
use or sale) will exceed the remaining tax basis of the asset and thereby
result in taxable amounts in future years. Examples:
1. Depreciable property, depletable resources, and intangibles.
2. Deductible pension funding exceeding expense.
3. Prepaid expenses that are deducted on the tax return in the period
paid.
4. Development costs that are deducted on the tax return in the period
paid.
Kieso et al. (2018)
LO 2
 Permanent differences
 Permanent differences: there could be items that are not allowable for tax
purpose but will be incurred by the entity.
Examples of permanent items are:
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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 Permanent Differences…cont
ILLUSTRATION 19.31
Examples of Permanent
Differences

Items are recognized for financial reporting purposes but not for tax
purposes
Examples:
1. Interest received on certain types of government obligations.
2. Expenses incurred in obtaining tax-exempt income.
3. Fines and expenses resulting from a violation of law.
4. Charitable donations recognized as expense but sometimes not deductible
for tax purposes.
Items are recognized for tax purposes but not for financial reporting
purposes
Examples:
1. “Percentage depletion” of natural resources in excess of their cost.
2. The deduction for dividends received from other corporations, sometimes
considered tax-exempt. Kieso et al. (2018)
LO 2
 Deferred tax
Arises due to the difference between income tax expense
calculated by an enterprise and income tax payable calculated
by Inland Revenue Board.

Illustration 1:
In year 2015, 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 2016. The
profit before tax for 2015 is RM500,000. Income tax rate is
25%.
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 Illustration 1…cont
 Tax expense:
Item 2015
RM
Profit before tax 500,000
Tax expense (25%) 125,000

 Tax payable:

Item 2015
RM Differences
Profit before tax 500,000 of RM2,500

Add an impairment of A/R 10,000

Taxable profit 510,000
Tax payable (25%) 127,500

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 Illustration 1… cont
 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.
Journal entry at the end of 2015 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 2
In 2015, 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 2015
RM
Profit before tax 300,000
Deduct interest income (2,500)
Taxable profit 297,500
Tax payable 25% 74,375
25
 Illustration 2..cont
 The RM625 difference between income tax expense and income tax
payable in 2015 reflects taxes that it will pay in future periods. In this
case, this difference is a deferred tax liability.
 Journal entry at the end of 2015 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.
Deferred tax is calculated based on balance sheet liability
method on all temporary differences.
Under liability 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 according to tax rules.
Tax base of an asset or liability is the amount attributed to that
asset or liability for tax purpose.
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 Difference btw Carrying Value & Tax Base
Carrying Tax Base Profit Temporary Deferred Tax
Value Difference
Assets More Less
CAA > TBA Acctg Profit Taxable
Deferred Tax Pay tax in
> Temporary
Liability Less More Liability (Cr) future
Taxable Profit Difference
CAL < TBL

Assets Less More

CAA < TBA Acctg Profit
Deductible Deferred Tax Deductible
<
Temporary Asset (Dr) tax amount
Liability More Less Taxable Profit
Difference in future
CAL > TBL

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 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).
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.

Step 3: Calculate deferred tax liability (DTL) or deferred tax asset (DTA)

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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.
• Deferred Tax Lliability = 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.
A deferred tax asset is calculated by multiplying deductible
temporary difference in the tax rate.

Deferred Tax Asset = DTD x Tax rate (%)

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 Illustration
An entity has a plant costing RM100,000 on which RM20,000 depreciation has
been charged. Capital allowance (tax depreciation) claimed is 50%.

Step 1:
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.
Step 2:
CAA > TBA: Taxable temporary difference (TTD) of RM30,000

Step 3:
Deferred tax liability = RM30,000 x 25% = RM7,500
32
 Illustration
An entity has development cost with carrying amount of RM14,200. Tax rule
allows all development costs to be expensed when incurred.

Step 1:
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.

Step 2:
CAA > TBA: Taxable temporary difference (TTD) of RM14,200

Step 3:
Deferred tax liability = RM14,200 x 25% = RM3,550

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 Illustration
An entity took out a 10% RM4 million loan on 1 January 2011. Interest on the
loan is paid every 12 months in arrears.
Step 1:
• 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
Step 2:
CAL > TBL: Deductible temporary difference (DTD) of RM400,000

Step 3:
Deferred tax asset = RM400,000 x 25% = RM100,000
34
 Illustration
An entity has recognized interest receivable on a fixed deposit of RM2,500.

Step 1:
As interest received is taxed on cash basis the tax base will be nil. This gives
rise to a temporary difference of RM2,500

Step 2:
CAA > TBA: Taxable temporary difference (DTD) of RM2,500

Step 3:
Deferred tax liability = 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
adds an increase in deferred tax liability to income tax payable.
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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 Exercise 1
Sufi Bhd (Sufi) is a technology startup company, incorporated in Malaysia since year 2014.
The company involves in providing information technology (IT) solutions and services.
Sufi reported profit of RM42,000 for the financial year 2016. The following information are
extracted from the financial accounting record of Sufi for the year ended 31 December 2016.
 
1. An IT equipment was bought in January 2014 for RM280,000. The company charged
depreciation at a rate of 20% per annum.
2. A research and development cost amounted to RM25,000 incurred during year 2016
and qualified to be treated as intangible asset.
3. An interest revenue from investment in bond amounted to RM12,500 was earned
during the year, but the amount is receivable in year 2017.
4. An entertainment expense of RM18,000 was paid to entertain new clients.
5. An interest expense amounted to RM29,200 was incurred due to borrowing from bank.
Half of the amount is payable in year 2017.
6. A donation of RM5,000 was made to IRB approved charity fund organized by the local
community during the year.
37
 Exercise 1…cont
It is required by Malaysian law that each corporations must file in their income tax return
form and compute tax payable to Inland Revenue Board (IRB) every year. Under tax rule,
the equipment entitled capital allowance at a rate of 30% in the first year of operation and
10% in the remaining years. Given that tax rate applicable for year assessment 2016 is 25%.
 
REQUIRED:
a) Identify whether there is any difference between accounting rule and tax rule in each of
the above situation. If the difference exists, state whether the difference is temporary or
permanent.
b) Compute deferred tax asset and deferred tax liability (if any) for each of the above
situation.
c) Determine the amount of tax payable to IRB for year assessment 2016. Prepare the
necessary journal entry.

38
 Solution:
(a)  
An IT equipment was bought in January 2014 for RM280,000. Temporary difference
The company charged depreciation at a rate of 20% per
annum.
A research and development cost amounted to RM25,000 Temporary difference
incurred during year 2016 and qualified to be treated as
intangible asset.
An interest revenue from investment in bond amounted to Temporary difference
RM12,500 was earned during the year, but the amount is
receivable in year 2017.
An entertainment expense of RM18,000 was paid to entertain Permanent difference
new clients.
An interest expense amounted to RM29,200 was incurred due Temporary difference
to borrowing from bank. Half of the amount is payable in year
2017.
A donation of RM5,000 was made to IRB approved charity No difference
fund organized by the local community during the year.

39
 Solution:
(b)   1. Equipment (ASSET):
Carrying Amount = 280,000 – (20%x280,000 x 3 years) = 112,000
Tax base = 280,000 – [(30%x280,000) + (10%x280,000x2years)] = 140,000
CA < TB
Deductible temporary difference = 140,000 – 112,000 = 28,000
Deferred tax assets = 28,000 x 25% = 7,000

2. Capitalized R&D (ASSET)

Carrying Amount = 25,000
Tax base = 0
CA > TB
Taxable temporary difference = 25,000 – 0 = 25,000
Deferred tax liability = 25,000 x 25% = 6,250

40
 Solution:
(b)   3. Interest receivable (ASSET)
Carrying Amount = 12,500
Tax base = 0
CA > TB
Taxable temporary difference = 12,500 – 0 = 12,500
Deferred tax liability = 12,500x 25% = 3,125

5. Interest payable (LIABILITY)

Carrying Amount = 14,600
Tax base = 0
CA > TB
Deductible temporary difference = 14,600 – 0 = 14,600
Deferred tax assets = 14,600 x 25% = 3,650

41
 Solution:
(c)   Deferred tax assets = 7,000 + 3,650 = 10,650
Deferred tax liability = 6,250 + 3,125 = 9,375
Net Deferred tax assets = 10,650 - 9,375 = 1,275
 
Income tax expense = 25% x 42,000 profit = 10,500
 
Income tax payable = Income tax expense + Deferred tax assets
= 10,500 + 1,275
= 11,775

Journal entry:
31 Dec 2016 Dr. Income tax expense 10,500
Dr. Deferred tax assets 1,275
Cr. Income tax payable 11,775

42
 Tax Rate 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 Kieso et al. (2018)
taxes. 43
 Illustration - Revision of Future Tax Rates
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.

44
Temporary difference arising from revaluation
Illustration:
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.

45
Temporary difference arising from revaluation
Illustration:
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.

46
 Temporary difference arising from revaluation
Illustration (cont…):
Answer:
Journal entries:
Dr. Revaluation reserve 6,000
Cr. Deferred tax liability 6,000

Dr. Tax expense 29,000

Cr. Tax payable 20,000
Cr. Deferred tax liability 9,000

Statement of Financial Position (extract):

Revaluation reserve 14,000

Deferred tax liability 15,000 47

 Loss Carryforward
Losses in one period can be carried forward and offset against future
profits indefinitely but not against prior periods profits.
There is no limit to the time period for which the losses can be carried
forward
Deferred tax asset should be recognized for loss carry forward to the
extent that it is probable that future taxable profit will be available
against which the loss carry forward can be utilized (para 34)

48
 LEARNING OBJECTIVE 4
Financial Statement Describe the presentation of
deferred income taxes in
Presentation financial statements.

Statement of Financial Position

• current tax assets and liabilities are separately recognised and
measured, but they are offset in the statement of financial position
subject to criteria in para 71
 Deferred tax assets and deferred tax liabilities are also separately
recognized and measured, but can be offset in the statement of financial
position subject tp criteria in para 74

 The net deferred tax asset or net deferred tax liability is reported in the
non-current section of the statement of financial position.

LO 4
Financial Statement Presentation

Income Statement
Companies allocate income tax expense (or benefit) to
 continuing operations,
 discontinued operations,
 other comprehensive income, and
 prior period adjustments.

Kieso et al. (2018)

LO 4 50
Financial Statement Presentation

ILLUSTRATION 19.24
Income Statement Presentation,
Deferred Tax Asset

ILLUSTRATION 19.15
Income Statement Presentation,
Deferred tax liability

Kieso et al. (2018)

LO 4 51
 Disclosure

Components of income tax expense (income) may include: (Para

80)
a) Current tax expense (benefit).
b) Any adjustments recognized in the period for current tax of prior
periods.
c) Amount of deferred tax expense (benefit) relating to the origination
and reversal of temporary differences.
d) Amount of deferred tax expense (benefit) relating to changes in tax
rates or the imposition of new taxes.
e) Amount of the benefit arising from a previously unrecognized tax
loss, tax credit, or temporary difference of a prior period that is
used to reduce current .
LO
LO44 52
 Disclosure

(f) the amount of the benefit from a previously unrecognised tax

loss, tax credit or temporary difference of a prior period that is
used to reduce deferred tax expense;
(g) deferred tax expense arising from the write-down, or reversal
of a previous write-down, of a deferred tax asset in
accordance with paragraph 56; and
(h) the amount of tax expense (income) relating to those changes
in accounting policies and errors that are included in profit or
loss in accordance with MFRS 108, because they cannot be
accounted for retrospectively.

53
 Disclosure

Para 81 : The following shall also be disclosed separately:

(a) the aggregate current and deferred tax relating to items that are charged or
credited directly to equity (see paragraph 62A);
(ab) the amount of income tax relating to each component of other comprehensive
income (see paragraph 62 and MFRS 101 (IAS 1 as revised by IASB in 2007));
(b) [deleted by IASB]
(c) an explanation of the relationship between tax expense (income) and accounting
profit in either or both of the following forms:
(i) a numerical reconciliation between tax expense (income) and the product
of accounting profit multiplied by the applicable tax rate(s), disclosing also
the basis on which the applicable tax rate(s) is (are) computed; or
(ii) a numerical reconciliation between the average effective tax rate and the
applicable tax rate, disclosing also the basis on which the applicable tax
rate is computed;
LO
LO44 54
 Disclosure

Para 81 : The following shall also be disclosed separately:

(d) an explanation of changes in the applicable tax rate(s) compared to the previous
accounting period;
(e) the amount (and expiry date, if any) of deductible temporary differences, unused
tax losses, and unused tax credits for which no deferred tax asset is recognised
in the statement of financial position;
(f) the aggregate amount of temporary differences associated with investments in
subsidiaries, branches and associates and interests in joint arrangements, for
which deferred tax liabilities have not been recognised (see paragraph 39);
(g) – (k)

LO
LO44 55
Statement of Profit or Loss

56
Statement of Financial Position
Deferred tax assets Deferred tax liabilities

57
 Exercise 2

Suci Bhd has the following information as at 31 December 2017 in relation to the
deferred tax calculation:

  Carrying amount
RM
Property, plant and equipment 750,000
Account receivables 280,000
Account payables 230,000
Capitalized development costs 42,000
Provision for warranties 51,500
Provision for retirement benefits 27,000
 Exercise 2…cont
Additional information:
• Given that tax base for Property, plant and equipment was RM300,000 (due to capital
allowance allowed under tax rule). The tax base for account receivable and account
payable were RM350,000 and RM175,000 respectively. Additionally, it was determined
that tax base for provisions for warranties and retirement benefits were nil.
• Under tax rule, all research and development cost are allowed to be deducted from
taxable income.
• As at 1 January 2017, the balance of deferred tax liability was RM23,900.
• The current tax rate is 25%. Assume the tax rate has not changed since the last few
years.
• The tax payable for the year was calculated at RM120,000.

REQUIRED:
a) Calculate tax expense for the year ended 31 December 2017.
b) Prepare journal entry to record tax expense
 Solution:
  Carrying Tax Base Temporary Diff.
Amount
  RM RM  
Property, plant and equipment 750,000 300,000 450,000(TTD)
(750,000 – 300,000)
Account receivables 280,000 350,000 70,000 (DTD)
(350,000 – 280,000)
Capitalized development costs 42,000 0 42,000 (TTD)
(42,000-0)
Account payable 230,000 175,000 55,000 (DTD)
(230,000 – 175,000)
Provision for warranties 51,500 0 51,500 (DTD)
Provision for retirement benefits 27,000 0 27,000 (DTD)
 Solution:

Taxable Temporary Difference (TTD) 492,000

Deductible Taxable Difference (DTD) (203,500)
Net TTD 288,500
Tax rate 25%
Ending balance of Deferred Tax Liability (DTL) 72,125
(-) Beginning balance of DTL (23,900)
Net deferred tax expense 48,225

Dr. Income tax expense 168,225

Cr. Income tax payable 120,000
Deferred tax liability 48,225