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  • 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