Decommissioning, restoration and environmental funds

Chapter 15 – Taxation Page 189 This is where the carrying amount of an asset liability for accounting purposes is greater less than its tax base; or b deductible temporary differences, which result in amounts that are deductible in future periods as the carrying amount of the asset or liability is recovered or settled. This is where the carrying amount of an asset liability for accounting purposes is less greater than its tax base. Illustration 4 The temporary differences in illustrations 2 and 3 are: Illustration 2: Carrying amount of the interest receivable is CU500 less its tax base of nil – temporary difference is CU500. Illustration 3: Carrying amount of the liability is CU1,000 less its tax base of nil – temporary difference is CU1,000. The temporary differences in Illustration 2 is a taxable temporary difference and in Illustration 3 is a deductible temporary difference.

6.3 Determining deferred tax

Deferred tax liabilities represent income taxes payable in future periods in respect of taxable temporary differences. A taxable temporary difference therefore creates a deferred tax liability. [IAS 12.5] Deferred tax assets are “amounts of income taxes recoverable in future periods in respect of deductible temporary differences”. [IAS 12.5] Deferred tax assets may also arise as a result of tax losses and tax credits that can be used to reduce an entity’s future tax liability. An entity should only recognise a deferred tax asset in respect of tax losses and recoverables where it is probable that it will gain benefit from them, i.e. taxable profits will be made in future periods that they can be offset against. A deductible temporary difference therefore creates a potential deferred tax asset. [IAS 12.34] A deferred tax asset or liability is calculated by multiplying the temporary difference by the relevant tax rate. The tax rate to be used in the calculation for determining a deferred tax asset or liability is the rate that is expected to apply when the asset is realised, or the liability is settled. These rates should be based on tax laws that have already been enacted or substantively enacted by the end of the reporting period. [IAS 12.47] Illustration 5 An entity operates in Muldovia, and enters into a long-term contract to build a motorway in that country. During the year ended 31 December 2007, the entity recognises CU4million of income on this contract in profit or loss for the period, although it does not expect to receive the related cash until the year ending 31 December 2009. Under the tax rules of Muldovia tax is charged on a cash receipts basis. The tax rate for businesses in Muldovia was 30 in the year to 31 December 2007, but the government has voted in favour of a reduction to 29 for 2008. There is currently a rumour that the rate will drop to 28 in 2009, but no announcement has been made. Chapter 15 – Taxation Page 190 The rate of tax that should be used to determine the deferred tax balance is 29. This is the rate is that expected to apply when the asset is realised. The rate of 30 in 2007, when the temporary difference originated, is not relevant. The 28 would be used if it had been enacted, but currently it is only under discussion. The best estimate of the rate applying in 2009, based upon laws already enacted or substantively enacted, is the rate for 2008 of 29. Illustration 6 A machine cost CU50,000. For tax purposes, allowances of CU30,000 have already been deducted in the current and previous periods with the remaining CU20,000 deductible in future periods. Revenue generated by the entity from using the machine is taxable and any gain or loss made on its disposal will have tax implications. The carrying amount of the machine for accounting purposes is CU35,000. The tax rate is currently 30 and is not expected to change in the foreseeable future. The tax base of the machine is CU20,000 CU50,000 less CU30,000. There is a taxable temporary difference of CU15,000 i.e. accounting carrying amount CU35,000 – tax base CU20,000. This generates a deferred tax liability of CU4,500 i.e. CU15,000 x 30. The steps so far for an asset can be summarised in the following diagram.