Name: Income Tax Accounting (IFRS) | Calculating Deferred Tax Expense - Part 3 of 4
Uploaded: 2017-06-23T14:11:41.000Z
Duration: 17 min 56 s
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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

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

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

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

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,

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

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