Hi, my name's Courtney
and here we're explaining question 4.6, parts A and B.
As a quick summary,
here are some differences you get between
the accounting and tax treatment.
Now, we've covered these in the regular webinars.
So, take a moment to scan that,
but if you don't understand these,
you're going to struggle with answering question 4.6.
So, for example, depreciating a fixed asset,
this normally happens slower for accounting purposes
and higher for tax purposes,
so we get a temporary difference.
And that's going to lead to a deferred tax liability,
because with a higher depreciation for tax purposes,
we're going to have a higher expense
and that's going to reduce our taxable income now,
but we will have to pay more later
when that temporary difference reverses.
So, take some time to look through all of these
and one that's relevant that causes a lot of questions
is the second from the bottom,
the foreign exchange receivable.
So, if you make gains or losses on foreign exchange,
you normally don't realise these immediately.
If you're holding foreign currency, it's unrealised.
So, for our accounting purposes,
we recognise the gain or loss immediately
for foreign currency movement,
but for tax purposes,
we only recognise it when realised.
So, if we make a gain,
we'll recognise that for accounting but not for tax.
So, there's no tax paid on that now,
but we will pay more tax later,
that'll give us a DTL.
And if we make a foreign exchange loss,
that's ignored for tax purposes,
so our tax profits will be higher
and so we'll pay more tax now.
But when that loss is realised,
we will pay less tax later and that's a DTA.
So, let's look at the questions,
there's six key components.
Firstly, revenue received in advance is recognised
in the statement of financial position of low sales
and will be recognised in the statement of P/L and OCI
in a later reporting period.
So, revenue is being received in advance.
And we're going to call that a balance sheet item.
It's going to be an unearned revenue
and we'll only call it income or revenue in the future.
However, there's a temporary difference,
because for tax purposes,
it's included in taxable profits now.
So, what we've got is a carrying amount of a liability,
$18,000, but for tax purposes, there is no liability.
We've recognised the income immediately.
And so, this is our temporary difference
of 18,000 multiplied by 30% gives us the deferred tax.
So the question is,
is this a DTL or a DTA?
Well, what's happening is we have more taxable income now.
So, we are going to pay more tax on that income now,
but in the future,
we won't be paying that tax
when the temporary difference reverses.
So, we'll pay less tax later.
If we're going to pay less tax later,
that's a future benefit and therefore DTA.
So, the second item is employee benefits liability.
Now, what normally happens is
for tax purposes, you are not allowed to recognise
this expense until it's actually paid as cash,
but for accounting purposes,
we want to recognise it when the expense is incurred.
So, we get a clear picture of what our true expenses are.
So, we're going to get a temporary difference here
and we can see that the carrying amount
of this employee benefits is $65,000 as a liability.
Now, there is no tax base because for tax purposes,
no liability is recognised.
So, it's a significant size temporary difference of 65,000
and the deferred tax on that is 19,500.
So, is this a DTL or DTA?
Well, in this case,
it's not deductible as an expense for now,
because the tax office will not allow you
to recognise this expense until it's paid out as cash.
So, therefore we will have a higher taxable profit now,
but when this reverses in the future,
we will pay less tax.
So, it's a DTA.
Next, we have accounts receivable
and this is linked to the concept of bad debts.
For accounting purposes,
we recognise doubtful debts every single year
and we want to do this to get a clear picture
of what's really going on,
but from a tax perspective,
you only get it to acknowledge the expense
when the debt is written off.
And that's normally maybe 12 months later
or two years later.
So here, we're going to get a temporary difference as well.
Now, this part of the question causes people confusion,
because it says in the case facts,
doubtful debts expense was 5,000 for the year.
So, you might be thinking,
do I need to deal with the 5,000
and the answer is not at the moment?
This question is looking at the total amount
of temporary difference that has accumulated over the years.
So, it's quite simple to calculate,
but the 5,000 is a distraction.
So, the carrying amount in the balance sheet is 234,000,
but our tax base is $245,000.
And we know this because the allowance
for doubtful debts was 11,000
and we are not allowed
to write that off for tax purposes.
So, we it is added back on.
This gives us a temporary difference of $11,000.
So, we need to adjust for this amount here,
the allowance for doubtful debts,
which is included in this amount for accounting purposes,
but is added back on to work out the tax base.
So, our temporary difference of 11,000 multiplied by 30%,
gives us 3,300.
Is it a DTL or DTA?
So, what's going to happen here is
for tax purposes you cannot recognise this expense now.
So, our taxable profits will be higher.
And in the future when this reverses,
when we are allowed to write it off for tax purposes,
we will get the tax benefit then.
So, it's a deferred tax asset.
Now this amount,
sometimes in a normal question would be relevant,
but the key for question 4.6
is to work out the total amounts of deferred tax.
And this goes over many years,
not just a single year.
So, to summarise our situation for the DTAs
that we've created,
we've got revenue in advance
with a carrying amount of 18,000 tax base of zero,
employee benefits carrying amount, 65,000 tax base of zero.
And accounts receivable with 234,000
and a tax base of zero.
So, each of these items creates
a total deductible temporary difference of 94,000,
multiplied by 30% it gives us a 28,200 total DTA.
So, this DTA is what has arisen over all of the years.
We don't know when these employee benefits
or accounts receivable or revenues events have happened.
That is the total amount.
Now, we are also given in the case facts,
the opening deferred tax assets of 16,200.
So, if we take our total of 28,200,
which is here and we subtract our opening balance,
we can work out how much of the DTA relates to this year.
And so we can say, well there's a $12,000 difference.
So, that is the movement in this year.
So, we can work out the total amount
and the amount related to this year in that manner.
Now, let's look at the other three components.
There was equipment purchased four years ago for 80,000.
The equipment is depreciated
for tax purposes over eight years, but for
accounting over 10.
So, on a year by year basis,
we can see at the very start,
they had the same opening balances,
by each year,
there's going to be a $2,000 temporary difference.
So, for accounting purposes,
depreciation is 8,000 a year,
for tax it's 10,000 a year.
So, this $2,000 temporary difference per year,
it works out to $600 worth of deferred tax.
Now, it's going to be a deferred tax liability,
because if we have higher tax depreciation,
we will have a lower taxable profit.
And therefore we pay less tax now,
but when this reverses in the 5th year
or the 9th or the 10th year actually,
what we will see is you will pay more tax later,
but this isn't the correct number for question 4.6.
Question 4.6 is looking at the total amount
of temporary difference and the total deferred tax.
So, we have to take four years worth of depreciation
and four years worth of,
compare it to the tax base.
So, we can see that there's actually $8,000,
temporary difference over all of the years,
which is a 2,400 deferred tax component.
So, in a similar way, when we looked at bad debts,
we had to look at the total of 11,000 difference,
not 5,000 for the current year.
Here, we look at the 8000 difference.
This one causes a lot of trouble.
The FX loan payable.
So, we have a loan and it's in foreign currency.
And originally we had to pay out $33,000.
However, we now only have to pay $32,000,
because of foreign exchange movements.
So, we have made a gain of $1,000.
Now, that gain is not going to be recognised
for tax purposes until it's actually realised.
So, for accounting purposes,
we've recognised the thousand dollar gain
by reducing our liability by a thousand dollars.
But for tax purposes, it is unchanged until realised.
So, we have a $1,000 temporary difference worth 300.
Now, what's going to happen here
is right now we haven't recognised the gain yet
for tax purposes.
So, if you don't have the gain,
you won't pay tax on it now,
but you will pay tax on it later when it's realised.
So, that will give you a deferred tax liability.
The final item is prepaid rent
and this is another one that goes over multiple years.
It says prepaid rent has increased by 2000 during the year.
But if we see our total here is 4,000.
This additional outlay
is claimed as a tax deduction when paid.
So, for accounting purposes,
we have an asset called prepaid rent,
but for tax purposes there is no asset.
There is a zero tax base,
because it's immediately expensed or deductible.
So, the key here is don't just look at the 2000
for this year.
You need to look at the total of 4,000.
The temporary difference is 4,000,
worth deferred tax of 1,200.
So, it's going to be a DTL,
because you get to write off the deduction immediately
for tax purposes.
So, that's going to reduce our taxable profits now.
So, we'll pay less tax now,
but when it reverses we will pay more tax later.
So, the summary of the DTLs,
we've got our equipment and the movement of $8,000.
And then we have our FX loan, the $1,000 difference,
because we can't recognise that gain for tax purposes
and our 4,000 difference for prepaid rent.
So, our total taxable temporary differences
of 13,000, give us a DTL of 3,900.
Now, we're given our opening balance
of deferred tax liabilities of 2,400.
So, we can work out how much of that DTL relates
to this year.
We start with our 3,900 total,
subtract what the opening balance was.
And we now know that there's a $1,500 DTL movement
in this situation.
So, the final summary shows
that there were 28,200 in DTAs in total,
16,200 related to the previous year,
the remainder this year.
DTL's opening of 2,400.
And the total amount is 3,900.
So, this year there must've been $1500.
So, it tells us the total amount for all of this entity,
as well as what has happened this year.
So, I hope that helps summarise it for you
and help you understand the question 4.6.