International Financial Reporting Standards_guide.pdf

Chapter 15 Income Taxes (IAS 12) 179
b. Income tax expense 20X6 $’000 20X5 $’000
Accounting profi t before tax 400 300
Tax effect of items not deductible/taxable for tax purposes:
Nontaxable revenue (100) (80)
Depreciation on buildings (1,500/25) 60 60
360 280
Temporary differences – (90)
Depreciation: accounting 180 180
Depreciation: tax (180) (270)
Taxable profi t 360 190
Assessed loss brought forward (60) (250)
Taxable profi t/(tax loss) 300 (60)
Tax loss carried forward – (60)
Tax payable/(benefi t) @ 30% 90 (18)
EXAMPLE 15.2
Lipreaders Company has net taxable temporary differences of $90 million, resulting in a
deferred tax liability of $30.6 million. An increase in the tax rate would have the following
impact on deferred taxes and net income:
Deferred taxes
Net income
a. Increase No effect
b. Increase Decrease
c. No effect No effect
d. No effect Decrease
EXPLANATION
Choice b. is correct. Deferred tax is a liability that results when tax expense on the Statement
of Comprehensive Income exceeds taxes payable. The amount of deferred tax liability will
rise if tax rates are expected to rise. In effect, more taxes will be paid in the future as the timing
differences reverse. This increase in the deferred tax liability will flow through the
Statement of Comprehensive Income by raising income tax expense. Thus, net income will
decrease.
Choice a. is incorrect. When deferred taxes increase, net income will be lower.
Choice c. is incorrect. The above scenario affects both deferred taxes and net income.
Choice d. is incorrect. Although net income would decrease, deferred taxes would increase
because tax rates in the future will be higher.