This is a lecture from Open Tuition. To benefit from the lecture, you should download the free lecture notes from opentuition.com. There are only two things that are certain in life.
One, sadly, that's death. And two, maybe even more sadly, is tax. Okay, they will both happen at some point in your lifetime.
There is no accounting standard dealing with death. But there is an accounting standard dealing with taxes. and it's IS-12. So we're looking at IS-12 income taxes and how to account for the tax on a company's profits. There are two areas to the standard.
The first one that we'll look at is the world of current tax, which is effectively just looking at the amount of tax that you have payable to revenue and customs and what you should then recognise with... in your financial statements with regards to a tax expense in relation to the tax that is owed. But then there is also secondly to look at this complex accounting area of deferred tax.
It's a pure accounting entry. If you mention it to any tax advisor or anybody who works in the tax department, they'll look at you as if you're crazy. It's just an adjustment that we make.
to the numbers in the accounts to take account of the matching concept it doesn't actually go through there and have any impact on the tax balance that we owe to revenue and customs so what we've got if you drop back into the notes in the earlier chapter was it there on your published company accounts if we just look at what we had from the statement of financial position The balances that we're looking at are your tax payable balance within current liabilities and then your deferred tax balance within your non-current liabilities on the statement of financial position. OK, we will need to be able to go through and calculate those figures. Also, as well, if you go to look at the statement of profit or loss, you've got there your operating costs.
down to your profit before tax and then we need to be able to calculate that income tax expense figure okay and that income tax expense figure will be made up partly of current tax expense and a deferred tax expense as well whilst on the statement of financial position uh you have two separate account balances one to identify the deferred tax liability and one to identify the tax payable if you're looking for easy marks within the exam so if you've got a published company accounts question working out the tax payable is one of the most straightforward marks that you will go through there and get the tax payable that you have at the end of the year is just your year end estimates so you do your tax computation at the end of the year you pay your tax advisor to do it for you they will give you an estimate of that tax bill and that i'll just sneeze uh no i mean bless me okay uh and that year-end estimate is what you then provide for within your financial statement it doesn't need any adjustments whatsoever so there's a nice simple mark to copy from the additional information into your financial statements. So if we go through there and have a look at the rest of your current tax, you know, we've just said that you've got there within your financial statements, the tax payable is the year end estimates. Okay.
So there you have it. That's what you see there in the statements of financial position. Just be careful that then also gets expensed. through profit or loss, but you need to adjust for any under or over provision from the previous year.
So, yeah, going back into the world of IS8, you're not going back and retrospectively correcting any under or over provision in the prior year's accounts. If you didn't pay enough or you paid too much, you make the adjustment this year. OK, it is an accounting estimate and accounting estimates are dealt with prospectively, aren't they? in the current year.
So the way in which we need to go through and look at it and make sure that we're happy with it is just to work the example that you've got there within the notes to do with current tax. Because what you've got there is it wants us to prepare the extracts from the statement of profit or loss, the statement of financial position at our 31st of March 2015 date. It's very typical of what you see within a published company accounts question.
is that you have the trial balance and you can see there that you have the debit column on the left and the credit column on the right. So you have a credit balance on your current tax account. It then goes through to say within the additional information at the end of the year, a provision of $3.5 million is required. OK, so that's quite simple.
That will be the figure for our year end estimate that goes on the SFP. There will also be an expense recognised for the three point five million dollars, but that will need to be adjusted for the under or over provision of the tax liability. Where is that under or over provision? It is there.
OK. Don't start trying to remember what we do with regards to under provisions and over provisions and whether we add them or subtract them to the tax charge. Let's just draw it up as a T account.
OK, so what we've got is if we're preparing the published company accounts, we want the statement of financial position balance. We want the statement of profit or loss on the SFP. you have your tax payable balance within your liabilities and the statement of profit or loss you have the income tax expense okay remember your tax payable should be easy mark to get if we're working there in thousands of dollars here the tax payable is just that estimate at the end of the year is that the 3.5 million so 3 500 000 in terms of the income tax we're just going to do a small working we can do the working immediately underneath so what you've got there is i would draw up a t account that is going to be my tax t account you and then all i do is just insert the brought forward figure on the correct side so that figure is from the tb it is on the credit side and then i just follow my normal accounting treatments so we've estimated the year end balance to be 3 500 so that's carry forward on the debit side ready to be brought forward on the credit side in the subsequent year and then paid but it doesn't balance up does it so you've got 3 500 on the left you have 3 500 on the right your balancing figure the difference is there at 3 100. that figure that you have on the t account is whereby you have recorded the expense in profit or loss okay so your income tax expense when you clear out the account you're crediting that tax t account debiting your statement of profit or loss with the 3100 so you have the expense in the statement of profit or loss The carry forward is on the statement of financial position. And I'm not even thinking about whether it's an under or an over provision.
OK, there we go. If you like, if you want to be technical, I wouldn't recommend it. But there we go.
Is it an under or is it an over provision? Well, as that tax charge is being reduced from three five hundred. Is it there to three? 100. then we must have over-provided in the previous year.
So because we provided too much last year, that extra provision that we made last year will then be offset against this reporting period's profits. So any over-provision you will deduct from your estimated tax expense. Therefore, any under-provision will be added on. to the estimated tax expense and that would then be on the debit side of your trial balance but i think that's just a little bit too much i think the key bits are to go through there and ensure that you can get the easy marks with regards to the tax payable and then with the tax expense make sure there that you draw yourself up a t account and if you do that you will not go too far wrong within any exam question