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Income Tax Accounting (IFRS) | Calculating Deferred Tax Expense - Part 3 of 4 - YouTube
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Catherine Duffy: Okay, so welcome back to
the next video that will take you through
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the deferred tax calculation for 2016.
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We've finished step one which I call step
one, the calculation of the current taxes
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payable or the current tax expense for 2016.
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Now we'll move on to step 2 or I call it step
2 which is the calculation of the deferred
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tax
expense or if it's a credit balance that we
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calculate, then it will be a benefit.
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Okay.
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We're going to calculate that.
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Before we do the calculation of the deferred
tax expense or benefit for the year, we need
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to understand where we ended last year.
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Based on the facts that we are given in this
situation, I didn't actually give you the
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deferred tax asset or liability balance that
we had at the end of 2015.
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We need to know that figure in order to finish
the 2016 calculation of the deferred tax expense.
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Let's calculate our 2015 deferred tax asset
or liability balance based on the facts we
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are given and then we'll use that information
to move on and do the step 2 calculation for
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this year.
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The end of last year, so in 2015, we have
to take a note of what were all the timing
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differences that we had.
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What we're all the timing differences that
we had at the end of last year and in the
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facts the question that I gave you at the
beginning of this video, there was some property,
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plant, and equipment assets.
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They're depreciable assets so we call them
and those had a timing difference.
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We knew they had a timing difference because
of the balance sheet value.
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The balance sheet or the statement of financial
position values, we call NBV or you could
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call this carrying value.
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You can call it whatever you want to call
it, but it's whatever the value that is on
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the balance sheet, that's the value we want
to take note of here.
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The value that I gave you at the beginning
of this question was $40,000 was the net book
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value of the property, plant, and equipment.
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For tax purposes, the value was at $25,000.
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These 2 values are different and the difference
is what has created a timing difference.
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In prior years, we've depreciated this asset
down to $40,000 for accounting purposes.
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For tax purposes, we've managed to depreciate
it down to $25,000.
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In effect, we've taken an extra $15,000 of
tax 0depreciation versus accounting appreciations.
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We've got more tax depreciation because we
brought the asset down to the $25,000 value.
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The difference between the tax base, usually
base or basis is usually the comment there.
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The balance sheet base or accounting value
is what we'll call the timing difference.
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Okay.
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I usually set this chart up again.
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This is just rough works.
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You can set it up in any way you want to.
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I usually set it up though that if the balance
sheet value is a debit, then I'll show it
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as a positive number.
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If the balance sheet value is a credit, I'll
put brackets around it.
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Obviously a property, plant, and equipment
net book value is a debit balance.
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I've got here as a positive number.
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For tax purposes, it's $25,000.
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For accounting purposes, it's 40, so 25,000
- 40,000 gives us a credit figure of $15,000.
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What does that mean?
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Well, that $15,000 is saying that we have
created timing differences over the years.
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It could have taken us 10 years.
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It could taken us one year.
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Over the many years that we've owned this
asset, we've created differences between the
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accounting depreciation and the tax depreciation.
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A couple of things I want to say about this
though.
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Just a few things to take note.
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This $25,000 here, this is the UCC at the
end of the year that we're doing the 2015
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calculations.
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That's the under appreciated capital costs
at the end of the year.
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This $40,000 is the net book value of the
property, plant, and equipment at the end
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of 2015.
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When you're looking for your total differences
that have accumulated over the year, you can
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get it by just finding those 2 values and
subtract the 2 of them and you get your total
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time difference.
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We're here with a $15,000 timing difference
between tax and accounting for the property,
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plant, and equipment assets and that's because
for tax purposes, we've taken greater deductions
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than we have 4 accounting.
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That means that in future years, we're not
going to have as much left with the tax to
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take deductions on because we'll eventually
run out of it.
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We're already down to $25,000.
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In future years, we can expect our current
tax expense to be higher.
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This figure here of negative $15,000 is saying
that in future years, we're going to have
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to pay additional current income tax because
we won't have anymore CCA to take because
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we've already depreciated everything here.
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This difference is saying to us that in the
future, we are going to have a higher tax
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liability because we were able to take a quick
accelerated depreciation for tax purposes
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here.
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Anyways, when you get a brackets around the
figure when you do this 25,000 minus this
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asset of 40,000, you got a $15,000.
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This timing difference is going to give rise
to a liability.
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If you see the brackets, it's going to give
rise to a liability.
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If you have no brackets, then it's going to
give rise to an asset, a deferred tax assets.
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We've got timing differences $15,000 negative
that's going to create a liability, multiply
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that by the tax rate but not this year's tax
rate.
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We want to multiply it by future tax rates
because this difference is going to go away
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when the CCA and the depreciation eventually
have brought both assets down to a zero value.
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It's going to go away in future years.
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It doesn't matter what this year's tax rate
is, what the current your tax rate is.
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What matters is future years, so 2016 and
beyond.
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We're looking at the 2015 timing differences.
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We got to put ourselves back in time last
year at December 31st, 2015.
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At that point in time, all we knew at that
point time was that the tax rate was still
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20%.
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The future tax rate back then was 20%, so
15,000 times 20% is going to give us our deferred
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tax.
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It's going to give us either an asset value
or a liability value.
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In this case because it's brackets, it's going
to be a liability value.
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At the end of last year, there would have
been a deferred tax liability for that $3000
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and they would created the liability by debiting
deferred tax expense and crediting deferred
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tax liability.
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That wasn't the only timing difference.
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There was another timing difference last year,
at the end of last year and that was the warranty
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liability.
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Notice, so I'm not writing the income statement
values.
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I'm writing the balance sheet accounts.
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I've got the warranty liability.
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Now so at the end of last year, you said as
we showed, there was an $18,000 warranty liability
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on our books.
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We'll put brackets around it because it's
a credit balance.
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For tax purposes, there isn't any kind of
such a thing as an accrual of a liability.
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There's no tax base, so it's not applicable.
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You say not applicable or just put a 0 there.
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To calculate what's our timing difference
between tax and accounting.
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For tax, you weren't allowed to expense anything.
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For accounting, we expense the entire thing.
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Zero minus a negative means we had a positive
timing difference, so that timing difference
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is going to create a deferred tax assets.
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It's going to mean that we weren't allowed
to expense anything for accounting or for
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tax purposes last year, but eventually we're
going to be able to expense the entire $18,000
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when we actually spend the money to repair
some warranties.
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We haven't deducted anything yet but in the
future, we'll be able to detect the entire
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amount and that will make our taxes smaller
so it creates an asset.
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Eighteen thousand times the future tax rate
of 20% is an asset value of $3600.
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At the end of last year following IFRS, the
difference between this credit and this debit
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is we needed a deferred tax asset last year
of $600.
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If there was nothing in the deferred tax asset
or liability of the council, let's just pretend
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maybe this was the first year of the difference.
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Then the journal entry when they recorded
that, it would have been simply debit deferred
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tax asset, $600 credit deferred tax benefit.
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The income statement account of $600.
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What I want you to take note of is the $600
deferred tax assets would be sitting on the
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balance sheet at the beginning of this fiscal
year 2015.
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We need to know our starting point for the
deferred tax.
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We know our starting point for the step 2
calculation for deferred tax for 2015.
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We know what's in our accounts at the end
of last year or the beginning of this year
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which is a $600 deferred tax asset.
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Now we can start doing this year's calculation,
the deferred tax.
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We've got to identify all of our timing differences
and these were 2 differences that we had identified
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from last year, property plant, equipment
and warranty.
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We know those are differences and we actually
have a couple more new ones that we created
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this year when we did our step one calculation
or calculation of taxable income.
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Let's start with the property, plant and equipment
line.
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As we talked about before, the tax base number
is going to be the undepreciated capital cost
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allowance value at the end of 2016.
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The accounting base balance is going to be
the net book value at the end of 2016.
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These 2 figures, we picked those up.
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This one is we talked about before is the
UCC at the end of 2016.
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We get to that figure by going the beginning
UCC balance was $25,000, so that was the number
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at the end of last year.
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Then we had CCA that we took for 2016 of $3000.
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We've got an ending UCC balance of $22,000
this year.
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For accounting purposes, we had a net book
value at the end of 2015 of $40,000 and then
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the depreciation expense for 2016 was $2000.
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We ended up with a net book value at the end
of 2016 of $36,000.
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That's where those 2 figures are coming from.
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To finish off the deferred tax effect calculation
on property, plant, and equipment, we've got
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$22,000 of tax base minus the net book value
of $38,000 leaves us with a timing difference
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of $16,000 at the end of 2016 times the future
tax rate.
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Now in the original facts I gave you for this
question, we said that the tax rates for 2017
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and beyond are known to be 15%.
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I'll use the future tax rate of 15%.
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Even though the current year's tax rate is
20%, we want to use the future year's tax
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rate to figure out the deferred tax piece,
because it's only going to be relevant to
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future years.
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Sixteen thousand times 15% is a deferred tax
liability is needed related to the property,
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plant, and equipment of $2400.
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Next one which was a carryover from last year.
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I was the warranty liability.
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Now we've got a warranty liability of only
$9500.
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We have no warranty liability for tax because
that doesn't make any sense.
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You would never accrue a liability for tax
purposes.
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How do we get this value?
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Well, we just get it off the general ledger
account if we had access to it, but just how
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did we get to that point?
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Well, we had a warranty liability at the end
of 2015 if you remember of $18,000.
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We spent in 2016 $8500, so the remaining warranty
liability balance at the end of 2016 is only
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$9500.
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The warranty liability timing difference is
zero minus a negative number, creates a positive
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number of $9500.
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This timing difference is going to give rise
to a deferred tax asset.
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Times the future tax rate means we need a
deferred tax asset for this remaining $9500
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timing difference of 1425.
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Okay, so that's the 2 timing differences that
we also had last year, but we created 2 more
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timing differences this year.
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We have a restructuring liability.
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If you look back to the temporary differences
in the step one, current tax calculation,
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we had a restructuring liability that we were
not allowed to deduct for tax purposes.
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For accounting purposes, the value is a $10,000
liability.
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For tax purposes, there's nothing recorded.
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You're going to find that most things in the
timing difference tax base column are going
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to be zero for anything that's related to
an accrual.
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An accrual of an expense or an accrual of
a revenue, there's no such thing as accruals
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for most tax situations.
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Most of the tax law is based on cash accounting,
so that's why there'd be nothing really accrued,
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no receivables and no liabilities.
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If you've got an asset, there certainly would
be tangible assets have a tax base and investments
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have a tax base.
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When we're talking about liabilities and receivables,
they usually don't have a tax base.
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The restructuring liability is zero minus
the negative number creates a positive number.
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We need a deferred tax asset for related to
this restructuring liability that was not
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deductible this year.
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In the future years, we can deduct it for
tax purposes.
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We'll make our taxes smaller, so that's why
this is going to create a deferred tax asset.
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Ten thousand times the future tax rate equals
a deferred tax asset is needed of $1500 on
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this item.
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Then the 4th and the last timing difference
we've got at the end of 2016 is a rent receivable.
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We had accrued rent of $6000.
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We had a receivable sitting there on our balance
sheet.
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Nothing accrued for tax purposes, so there's
no tax base value.
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Zero minus an asset is going to create a negative
$600 timing difference times a future tax
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rate.
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Says that we need a deferred tax liability
of $900, and that would make sense because
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in future years, we're going to have to pay
tax on the $600.
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Remember, we didn't have to pay tax in 2016
because we didn't collect the money yet.
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Next year when we get the money from our tenant,
we will have to pay tax on it so that's going
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to make our taxes higher next year and the
amount that is going to make it higher by
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is this differed tax liability of $900.
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Adding up all these deferred tax assets and
liabilities that we've got here under IFRS,
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we can just calculate the the net value.
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We've got a net 375 deferred tax liability
for 2016.
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Okay, that's the number we want to see on
our balance sheet.
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In order to do the journal entries to get
to that number, we've got to figure out what
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we've got in our account, so we did that already.
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Our 2015 balance was a deferred tax asset
of $600.
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We actually need a journal entry to reverse
that deferred tax asset and set up a deferred
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tax liability.
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The effect of our journal entry is going to
be a $975 deferred tax expense.
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Okay, thanks for watching.
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We've just concluded the deferred tax calculation
step 2 as O like to call it.
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When you're ready, you can move on to the
next video which will wrap up the journal
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entries in the income statement and balance
sheet presentation.
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