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