Accounting to statement of
Accounting standard (SAS) 12 which accords substantially with the requirements
of the international Accounting standard (IAS) No 12-Accounting for Taxes on
income as they relate to deferred taxes and to any disclosure requirements of
the companies and allied matters Decree (No. 1) 1990 and any other relevant
laws and regulations, the following are the standards for standards for
accounting for deferred taxes.
Accounting standard (SAS) 12 which accords substantially with the requirements
of the international Accounting standard (IAS) No 12-Accounting for Taxes on
income as they relate to deferred taxes and to any disclosure requirements of
the companies and allied matters Decree (No. 1) 1990 and any other relevant
laws and regulations, the following are the standards for standards for
accounting for deferred taxes.
(a) Deferred tax, should be computed using the liability method
(b) The
tax effects of timing differences should be shown separately from the items or
transactions to which they relate.
tax effects of timing differences should be shown separately from the items or
transactions to which they relate.
(c) Provision
for deferred taxes should be made except where there is reasonable evidence
that the timing differences will not reverse for some considerable period (at
least three years) ahead. There should also be no indication that after this
period, these timing differences are likely to reserve.
for deferred taxes should be made except where there is reasonable evidence
that the timing differences will not reverse for some considerable period (at
least three years) ahead. There should also be no indication that after this
period, these timing differences are likely to reserve.
(d) The
provision for deferred tax liabilities should be reduced by any deferred tax
debit balances arising from separate categories of timing.
provision for deferred tax liabilities should be reduced by any deferred tax
debit balances arising from separate categories of timing.
A debit balance in deferred tax account should not be carried forward as
an asset unless there is a reasonable expectation of realization.
an asset unless there is a reasonable expectation of realization.
(e) Deferred
tax relating to extraordinary items should be shown separately as part of tax
on profit or loss resulting from ordinary activities
tax relating to extraordinary items should be shown separately as part of tax
on profit or loss resulting from ordinary activities
(f) The
potential tax saving from tax loss that is available for carry – forward to
future periods should not be included in the net income unless there is
reasonable certainty that there will be future taxable income against which the
be relieved within the limited period allowed by the tax laws.
potential tax saving from tax loss that is available for carry – forward to
future periods should not be included in the net income unless there is
reasonable certainty that there will be future taxable income against which the
be relieved within the limited period allowed by the tax laws.
Disclosure
Deferred tax balance should be presented in the
balance sheet separately from the shareholders interest. In case of a debit
balance, it should be shown as an asset.
balance sheet separately from the shareholders interest. In case of a debit
balance, it should be shown as an asset.
The disclosure required in paragraphs d and e
above may be shown either on the face of the income statement or as notes.
above may be shown either on the face of the income statement or as notes.
The total amounts of any deferred taxes, both
current and cumulative, not provided for should be disclosed by way of a note
and analyzed into their major component.
current and cumulative, not provided for should be disclosed by way of a note
and analyzed into their major component.
Example
Udoka company Ltd bought a machinery in 1993 for
N800,000. Profits were N400 FOR 1983, 1994, 1995 and 1996. We
shall use scheduled below to calculated reported profit etcetera.
shall use scheduled below to calculated reported profit etcetera.
1995 and similarly in 1996.
Many companies differ tax
almost permanently by continuous capital investments. However, the law does not
allow for this but for at least three years.
almost permanently by continuous capital investments. However, the law does not
allow for this but for at least three years.
The possible causes of the
permanently differences between the provisions made by the company and the
actual taxes paid including the following:
permanently differences between the provisions made by the company and the
actual taxes paid including the following:
(a) Some income is tax and
(b) Some
expenditure is not allowed for tax purpose. For example, these is a limit to
the taxing of directors expenses.
expenditure is not allowed for tax purpose. For example, these is a limit to
the taxing of directors expenses.
the differences are not
usually accounted for because they are regarded as something
established/permanent.
usually accounted for because they are regarded as something
established/permanent.
1. Some
items are dealt with for tax purpose in one period but may be dealt with for
purposes business, the other period.
items are dealt with for tax purpose in one period but may be dealt with for
purposes business, the other period.
2. Most
timing differences arises as a result of the differences between depreciation
and capital allowance.
timing differences arises as a result of the differences between depreciation
and capital allowance.
Some companies may report income on accrual basis but be taxed on
receipt and income basis.
receipt and income basis.
Short fall in profit
We shall use illustration below to demonstrate the taxation treatment of
short fall in company profit. Assume that Albino Company Ltd meets is tax
liability out current profits. Company tax rate is 50% while profits for the
year ended Dec. 31 1970, 1972, and 1973 are follows:
short fall in company profit. Assume that Albino Company Ltd meets is tax
liability out current profits. Company tax rate is 50% while profits for the
year ended Dec. 31 1970, 1972, and 1973 are follows:
Yr ended
Dec; 31 Profits
1970 N2000
1971 N3000
1972 N 400
1993 N2000
The computation of tax
liability and what remains for dividend after tax for the various years shown
below:
liability and what remains for dividend after tax for the various years shown
below:
Yr ended Profit Tax liability Available for Dividend
Dec 31
1970 N2000 NIL(1st year) N2000
1971 N3000 N1,000 N2000
1972
N4000 N1,500 N2,500
1973
N2000 N2,000 NIL
Note:
If the or company profit
fall, the profit will have to meet the demands of tax arising from the larger
profit of the previous year. In the above example, the profit and loss account
is debited with the account realized each year instead of the amount of profit
made in the year. In 1973, a new profit
ofN2,000 has to bear tax on N4,000 with the result that no profit is
available for dividend that same year.
fall, the profit will have to meet the demands of tax arising from the larger
profit of the previous year. In the above example, the profit and loss account
is debited with the account realized each year instead of the amount of profit
made in the year. In 1973, a new profit
of
available for dividend that same year.
Provision For Tax
The wisest thing for
prudent managers to do is to set aside certain amount of money for tax
liability for every year. To do this,
the management can set up a sinking fund.
prudent managers to do is to set aside certain amount of money for tax
liability for every year. To do this,
the management can set up a sinking fund.
Tax liability for previous
year, is paid at the current year. If the company does not know how much it is
supposed to pay for tax and fails to set some money aside for tax it may run
into difficulty.
year, is paid at the current year. If the company does not know how much it is
supposed to pay for tax and fails to set some money aside for tax it may run
into difficulty.
Any sum set aside to
prevent undue fluctuations in charges for taxation should not be treated as a
reserve unless the amount set aside exceed the amount which the directors
consider to be reasonably necessary.
prevent undue fluctuations in charges for taxation should not be treated as a
reserve unless the amount set aside exceed the amount which the directors
consider to be reasonably necessary.
Using the last
illustration, let assume that Albino Company Ltd decided to make a provision
for company tax out current profit at the rate of 50% show the profit and loss
account and company tax account for the year 1973,
illustration, let assume that Albino Company Ltd decided to make a provision
for company tax out current profit at the rate of 50% show the profit and loss
account and company tax account for the year 1973,
Example
Mekus Oil Company buys
Machine A in year one forN10,000. The
company tax is 50% and a first capital allowance of 80% is claimable although
depreciation is charged at 25% on cost.
Machine A in year one for
company tax is 50% and a first capital allowance of 80% is claimable although
depreciation is charged at 25% on cost.
In year 2, the company buys
Machine B forN20,000 and claims a
first year allowance of 100% for tax purposes. During this and subsequent years,
a writing down allowance is claimed on Machine A at 25% of written down value.
During the period, the company earnsN50,000
per annum operating profit before charging depreciation and tax.
Machine B for
first year allowance of 100% for tax purposes. During this and subsequent years,
a writing down allowance is claimed on Machine A at 25% of written down value.
During the period, the company earns
per annum operating profit before charging depreciation and tax.
Required (1) Calculate
reported earning, the actual tax payable and debit or credit to deferred in
each year.
reported earning, the actual tax payable and debit or credit to deferred in
each year.
2. Prepare the appropriate ledger accounts
Machine ‘B’ Account
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Yr.5
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Cash
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20,000
20,000 |
Yr.1
Yr.2
Yr.3
Yr.4
Yr.5
|
P&L Depreciation
P&L Depreciation
P&L Depreciation
P&L Depreciation
P&L Depreciation
|
5,000
5,000
5,000
5,000
5,000
20,000
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Deferred Taxation Account
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Yr.2
Yr.3
Yr.4
|
Bal. c/d
P&L
Bal. c/d
P&L
Bal. c/d
|
9,250
9,250
3,562
5,688
9,250
3610
2078
5688
|
Yr.1
Yr.2
Yr.3
Yr.4
|
P&L
P&L
Bal. b/d
Bal. b/d
|
2,750
6,500
9,250
9.250
9,250
5688
5688
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