Hey Guys, I’m having difficulties understanding the following formula: An asset’s tax base is: Carrying amount - Taxable amount arising from recovery of the asset + Deductible amount arising from use of the asset = Tax base Carrying Amount= Historic Cost - Accumulated depreciation However what is: a)Taxable amount arising from recovery of the asset b)Deductible amount arising from use of the asset Is it correct to use this formula when working out Taxable temporary differences IE knowing that the asset’s carrying amount is greater than its tax base; Thanks
Reineir, There are totally two different concepts of calculating the carrying amount for deferred tax purposes: 1. Carrying amount(Accounting measure) = Historical Cost- Accumulated Depreciation 2. Carrying amount(Tax Base)= Historical Cost- ( Amount that will be taxable in future periods- Amount that will be deducted for tax purposes in future periods) TTD=Carrying amount (Accounting measure) -Tax base= +ve DTD=Carrying amount (Accounting measure) -Tax base=-ve a)Taxable amount arising from recovery of the asset : As I mentioned about the machinery in my earlier post today, 15000 will be recovered in future years and that will be taxable. (Taxable temporarydifference: This is the amount that will be taxable in the future period,. For example , a machinery with a cost of 20000 with a useful life of 4 years will be depreciated at 5000 per annum. Therefore the company has generated revenue for the 5000 depreciation in year 1 by way of using the machinery. Company will generate further 15000 in three years time and will be paying tax on it. Remember depreciation is only an accounting measure. If there were capital allowances then that would be deductible for tax purposes. Anything that is not deductible will be charged in future years and therefore a temporary difference arises. ) b))Deductible amount arising from use of the asset: Rent prepayment will be deductible in future years as the asset will be used. (Deductible temporary difference: This is the amount that will be deductible in the future period. For example rent received in advance for future period. Rent received in advance is included in computing the taxation of the current period(cash basis) but not in the accounting profit (as it relates to future period). So the company will be paying less tax in future period and therefore a deductible temporary difference arises. ) Read my PS in the earlier post as welll. Cheers Sumo
Hey Sumo, Thanks for the reply, i’ve been going through some examples and have used the rules you provided, ie TTD: Always gives rise to a deferred tax liability (pre-tax income>taxable income) DTD: Always gives rise to a deferred tax asset (pre-tax income