Example 3 - Deferred Tax Assets and Liabilities

The example deals with an enterprise over the two year period, X5 and X6. In X5 the enacted income tax rate was 40% of taxable profit. In X6 the enacted income tax rate was 35% of taxable profit.

Donations to unapproved institutions are recognised as an expense when they are paid and are not deductible for tax purposes.

In X5, the enterprise was notified by the relevant authorities that they intend to pursue an action against the enterprise with respect to sulphur emissions. Although as at December X6 the actions had not yet come to court the enterprise recognised a liability of RM700 in X5 being its best estimate of the fine arising from the action. Fines are not deductible for tax purposes.

In X2, the enterprise incurred RM1,250 of costs in relation to the development of a new product. These costs were deducted for tax purposes in X2. For accounting purposes, the enterprise capitalised this expenditure and amortised it on the straight-line basis over five years. At 31/12/X4, the unamortised balance of these product development costs was RM500.

In X5, the enterprise entered into an agreement with its existing employees to provide retirement benefits to retirees. The enterprise recognises as an expense the cost of this plan as employees provide service. No payments to retirees were made for such benefits in X5 or X6. Retirement benefit costs are deductible for tax purposes when payments are made to retirees. The enterprise has determined that it is probable that taxable profit will be available against which any resulting deferred tax asset can be utilised.

Buildings are depreciated for accounting purposes at 5% a year on a straight-line basis and at 10% a year on a straight line basis for tax purposes. Motor vehicles are depreciated for accounting purposes at 20% a year on a straight line basis and at 25% a year on a straight line basis for tax purposes. A full year's depreciation is charged for accounting purposes in the year that an asset is acquired.

At 1/1/X6, the building was revalued to RM65,000 and the enterprise estimated that the remaining useful life of the building was 20 years from the date of the revaluation. The revaluation did not affect taxable profit in X6 and the taxation authorities did not adjust the tax base of the building to reflect the revaluation. In X6, the enterprise transferred RM1,033 from revaluation reserve to retained earnings. This represents the difference of RM1,590 between the actual depreciation on the building (RM3,250) and equivalent depreciation based on the cost of the building (RM1,660, which is the book value at 1/1/X6 of RM33,200 divided by the remaining useful life of 20 years), less the related deferred tax of RM557 (see paragraph 57 of the Standard).

Current Tax Expense

		X5 RM		X6 RM
	Accounting profit Add	8,775		8,740
	Depreciation for accounting purposes	4,800		8,250
	Donations to unapproved institutions	500		350
	Fine for environmental pollution	700		-
	Product development costs	250		250
	Retirement benefits	2,000		1,000
		-------------- 17,025		-------------- 18,590
	Deduct
	Capital allowances	(8,100)		(11,850)
	Taxable Profit	-------------- 8,925 --------------		-------------- 6,740 --------------
	Current tax expense @ 40%	3,570 --------------
	Current tax expense @ 35%			2,359 --------------

Carrying Amounts of Property, Plant and Equipment

		Building RM		Motor Vehicles RM		Total RM
	Cost
	Balance at 31/12/X4	50,000		10,000		60,000
	Additions X5	6,000		-		6,000
	Balance at 31/12/X5	-------------- 56,000		-------------- 10,000		-------------- 66,000
	Elimination of accumulated depreciation on revaluation at 1/1/X6	(22,800)		-		(22,800)
	Revaluation at 1/1/X6	31,800		-		31,800
	Balance at 1/1/X6	-------------- 65,000		-------------- 10,000		-------------- 75,000
	Additions X6	-		15,000		15,000
		-------------- 65,000 --------------		-------------- 25,000 --------------		-------------- 90,000 --------------
		5%		20%
	Accumulated Depreciation
	Balance at 31/12/X4	20,000		4,000		24,000
	Depreciation X5	2,800		2,000		4,800
	Balance at 31/12/X5	-------------- 22,800		-------------- 6,000		-------------- 28,800
	Revaluation at 1/1/X6	(22,800)		-		(22,800)
	Balance at 1/1/X6	-------------- -		-------------- 6,000		-------------- 6,000
	Depreciation X6	3,250		5,000		8,250
	Balance at 31/12/X6	-------------- 3,250 --------------		-------------- 11,000 --------------		-------------- 14,250 --------------
	Carrying Amount
	31/12/X4	30,000 --------------		6,000 --------------		36,000 --------------
	31/12/X5	33,200 --------------		4,000 --------------		37,200 --------------
	31/12/X6	61,750 --------------		14,000 --------------		75,750 --------------

Tax Base of Property, Plant and Equipment

		Building RM		Motor Vehicles RM		Total RM
	Cost
	Balance at 31/12/X4	50,000		10,000		60,000
	Additions X5	6,000		-		6,000
	Balance at 31/12/X5	-------------- 56,000		-------------- 10,000		-------------- 66,000
	Additions X6	-		15,000		15,000
	Balance at 31/12/X6	-------------- 56,000 --------------		-------------- 25,000 --------------		-------------- 81,000 --------------
		10%		25%
	Cumulative Capital Allowances
	Balance at 31/12/X4	40,000		5,000		45,000
	Capital allowances X5	5,600		2,500		8,100
	Balance at 31/12/X5	-------------- 45,600		-------------- 7,500		-------------- 53,100
	Capital allowances X6	5,600		6,250		11,850
	Balance 31/12/X6	-------------- 51,200 --------------		-------------- 13,750 --------------		-------------- 64,950 --------------
	Tax Base
	31/12/X4	10,000 --------------		5,000 --------------		15,000 --------------
	31/12/X5	10,400 --------------		2,500 --------------		12,900 --------------
	31/12/X6	4,800 --------------		11,250 --------------		16,050 --------------

Deferred Tax Assets, Liabilities and Expense at 31/12/X4

		Carrying Amount RM		Tax Base RM		Temporary Differences RM
	Accounts receivable	500		500		-
	Inventory	2,000		2,000		-
	Product development costs	500		-		500
	Investments	33,000		33,000		-
	Property, plant and equipment	36,000		15,000		21,000
	TOTAL ASSETS	-------------- 72,000 --------------		-------------- 50,500 --------------		-------------- 21,500 --------------
	Current income taxes payable	3,000		3,000		-
	Accounts payable	500		500		-
	Fines payable	-		-		-
	Liability for retirement benefits	-		-		-
	Long term debt	20,000		20,000		-
	Deferred income taxes	8,600		8,600		-
	TOTAL LIABILITIES	-------------- 32,100		-------------- 32,100		-------------- -
	Share capital	5,000		5,000		-
	Revaluation surplus	-		-		-
	Retained earnings	34,900		13,400
	TOTAL LIABILITIES / EQUITY	-------------- 72,000		-------------- 50,500
	TEMPORARY DIFFERENCES	--------------		--------------		-------------- 21,500 --------------
	Deferred tax liability 21,500 at 40%					8,600
	Deferred tax asset	-		-		-
	Net deferred tax liability					-------------- 8,600 --------------

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