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Deferred TAx Reserve(URGENT)

V AGARWAL (Director) (177 Points)

27 July 2010

What are the disclusre and Presentation requirement of Deffered Tax Reserve?

URGENT!

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2 Replies

Dharmendra Jha (Asst. Manager Finance) (100 Points)
Replied 29 July 2010

Deferred tax is an accounting concept (also known as future income taxes), meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.

For Example:

The basic principle of accounting for deferred tax under a temporary difference approach can be illustrated using a common example in which a company has fixed assets which qualify for tax depreciation.

The following example assumes that a company purchases an asset for $1,000 which is depreciated for accounting purposes on a straight-line basis of five years. The company claims tax depreciation of 25% per year on a declining balance basis. The applicable rate of corporate income tax is assumed to be 35%. And then subtract the net value.

	Purchase	Year 1	Year 2	Year 3	Year 4
Accounting value	$1000	$800	$600	$400	$200
Tax value	$1,000	$750	$563	$422	$316
Taxable/(deductible) temporary difference	$0	$50	$38	$(22)	$(116)
Deferred tax liability/(asset) at 35%	$0	$18	$13	$(8)	$(41)

As the tax value, or tax base, is lower than the accounting value, or book value, in years 1 and 2, the company should recognise a deferred tax liability. This also reflects the fact that the company has claimed tax depreciation in excess of the expense for accounting depreciation recorded in its accounts, whereas in the future the company should claim less tax depreciation in total than accounting depreciation in its accounts.

In years 3 and 4, the tax value exceeds the accounting value, therefore the company should recognise a deferred tax asset (subject to it having sufficient forecast profits so that it is able to utilise future tax deductions). This reflects the fact that the company expects to be able to claim tax depreciation in the future in excess of accounting depreciation.

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