Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
Once calculated the entry to record the current taxation will be:
Increase taxation liability in the balance sheet
Increase taxation expense in the income statement
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3.2.2 Deferred taxation
As we have seen above, there are differences between accounting profit as
determined by accounting standards on the one hand and taxable profit as
determined by the tax authorities on the other. These differences give rise to an
accounting concept known as deferred tax. We will use a simple example to
explain this (Exhibit 4.10).
Exhibit 4.10: Deferred tax example
(Figures in £)
Income statement
Year 1 Year 2
Profit before tax and royalty income 200,000 200,000
Royalty income 50,000 - ccc
Profit before taxation 250,000 200,000
Taxation
Current - 80,000 - 100,000
Deferred - 20,000 20,000
Profit after taxation 150,000 120,000
Tax computation
Accounting profit before taxation 200,000 200,000
Royalty income (cash basis) 50,000
Taxable profits 200,000 250,000
Taxed @ 40% 80,000 100,000
From this example we can see that royalty income is taxed on a cash receipts
basis but accounted for on an accruals basis. If the royalty is received in a
different period from when it is earned then there will be a timing difference; i.e.
an item has gone through both the income statement and the tax computation, but
in a different period. The income statement as presented pre-deferred taxation
does not reflect the economics of the business. In the year with the higher profit
we have a lower tax charge and vice versa. This means that the income statement
does not show the underlying profitability of the business. It distorts trends; year
1 is better than year 2 but the difference is exacerbated by taxation. In addition,
insufficient liabilities have been recognised in the first year. At that stage the
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