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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