CASE STUDY - SOLUTION

Temporary differences, Deferred Tax Assets, Liabilities and Expense at 31/12/97

Carrying
amount / Tax
base / Temporary
differences
Product development costs / 500 / - / 500
Property, plant & equipment / 36,000 / 40,563 / (4,563 / )
TOTAL / 36,500 / 40,563 / (4,063 / )
Less:
Temporary difference arising on initial
acquisition of motor vehicle / (5,400 / )
Tax losses / (1,000 / )
DEDUCTIBLE TEMPORARY DIFFERNCES / (10,463 / )
Deferred tax asset at 32.5% / (3,400 / )
Handout 7

Temporary differences, Deferred Tax Assets, Liabilities and Expense at 31/12/98

Carrying
amount / Tax
base / Temporary
differences
Product development costs / 250 / - / 250
Property, plant and equipment / 37,200 / 41,512 / (4,312 / )
TOTAL / 37,450 / 41,512 / (4,062 / )
Liability for health care benefits / (2,000 / ) / - / (2,000 / )
TOTAL / (2,000 / ) / - / (2,000 / )
NET TEMPORARY DIFFERENCES / (6,062 / )
Less: temporary difference arising on initial
acquisition of motor vehicle / (3,600 / )
DEDUCTIBLE TEMPORARY DIFFERENCES / (9,662 / )
Deferred tax asset at 32.5% / (3,140 / )
Opening deferred tax asset / (3,400 / )
Deferred tax movement in P&L (expense) / 260


Temporary differences, Deferred Tax Assets, Liabilities and Expense at 31/12/99

Carrying
amount / Tax
base / Temporary
differences
Property, plant & equipment / 75,750 / 51,346 / 24,404
TOTAL / 75,750 / 51,346 / 24,404
Liability for healthcare benefits / (3,000 / ) / - / (3,000 / )
TOTAL / (3,000 / ) / - / (3,000 / )
NET TEMPORARY DIFFERENCES / 21,404
Less: temporary difference arising on
initial acquisition of motor vehicle / (1,800 / )
TAXABLE TEMPORARY DIFFERENCE / 19,604
Net deferred tax liability at 30% / 5,881
Opening deferred tax asset / 3,140
Deferred tax movement / 9,021
Of which, attributable to revaluation:
31,% / 10,335
Less: effect of reduction in tax rate / (755 / )
9,580
Deferred tax movement in P&L (income) / 559

Income tax expense for 98 and 99

The amounts disclosed in accordance with the Standard are as follows:

Major components of tax expense/(income) (paragraph 79)

98 / 99
Current tax expense / 3,567 / 4,363
Deferred tax expense relating to the origination
and reversal of temporary differences / 260 / (824 / )
Deferred tax expense resulting from reduction in tax rate / - / 265
Tax expense / 3,827 / 3,804

Aggregate current and deferred tax relating to items charged or credited to equity (paragraph 81(a))

Deferred tax relating to revaluation of building / (9,580 / )

In addition, deferred tax of 517 was transferred in 1999 from retained earnings to revaluation reserve. This relates to the difference between the actual depreciation on the building and equivalent depreciation based on the cost of the building.

Explanation of relationship between tax expense and accounting profit (paragraph 81(c))

The Standard permits two alternative methods of explaining the relationship between tax expense (income) and accounting profit. Both of these formats are illustrated on the next page.

(i)  a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate (s).

98 / 99
Accounting profit / 8,775 / 8,740
Tax at the applicable tax rate of 32.5% / 2,852 / 2,840
Tax effect of expenses that are not deductible in determining taxable profit:
Charitable donations / 162 / 114
Fines for environmental pollution / 228 / -
Depreciation of motor vehicle / 585 / 585
Reduction in opening deferred taxes resulting from reduction in tax rate / - / 265
TAX EXPENSE / 3,827 / 3,804

ii)  a numerical reconciliation between the average effective tax rate and the applicable tax rate.

98 / 99
% / %
Applicable tax rate / 32.5 / 32.5
Tax effect of expenses that are not deductible for tax purposes:
Charitable donations / 1.8 / 1.3
Fines for environmental pollution / 2.6 / -
Depreciation of motor vehicles / 6.7 / 6.7
Effect of reduction in tax rate / - / 3.0
Average effective tax rate (tax expense divided by profit before tax) / 43.6 / 43.5

An explanation of changes in the applicable tax rate (s) compared to the previous accounting period (paragraph 81(d)).

In 1999, the government enacted a change in the national income tax from 32.5% to 30%, effective 1 January 2000.

In respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits:

(i)  the amount of the deferred tax assets and liabilities recognised in the

balance sheet for each period presented;

(ii)  the amount of the deferred tax income or expense recognised in the

income statement for each period presented, if this is not apparent from the changes in the amounts recognised in the balance sheet (paragraph 81(g))

98 / 99
Accelerated depreciation for tax purposes / (2,571 / ) / (2,282 / )
Liabilities for health care benefits that are deducted for tax purposes only when paid / (650 / ) / (900 / )
Product development costs deducted from taxable profit in earlier years / 81 / -
Revaluation, net of related depreciation / - / 9,063
Deferred tax liability / 3,140 / 5,881

(note: the amount of the deferred tax income or expense recognised in the income statement for the current year is apparent from the changes in the amounts recognised in the balance sheet)

WORKINGS

Private motor vehicle

/ Qualifying / Non-
qualifying /
Total
Cost / 1,000 / 9,000 / 10,000
Depreciation
At 31/12/97 / 400 / 3,600 / 4,000
Charge for 1998 / 200 / 1,800 / 2,000
At 31/12/98 / 600 / 5,400 / 6,000
Charge for 1999 / 200 / 1,800 / 2,000
At 31/12/99 / 800 / 7,200 / 8,000
Net book amount
At 31/12/97 / 600 / 5,400 / 6,000
At 31/12/98 / 400 / 3,600 / 4,000
At 31/12/99 / 200 / 1,800 / 2,000

Effect of reduction in tax rate

Revaluation surplus / 31,800
Less: excess depreciation / 1,590
30,210
At 32.5% / 9,818
At 30.0% / 9,063
Difference / 755
Net temporary differences / 19,604
Less revaluation surplus, as above / 30,210
10,606
At 32.5% / 3,447
At 30.0% / 3,182
Difference / 265

(31)