FRS112

FRS112.1
FRS 112 Income Taxes
Introduction:
• This chapter deals with the computation of tax
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expense that is deferred and not with the
computation of tax payable according to the tax
rules
The differences in taxable profit and accounting
profits are either permanent items or temporary
items
FRS112.2
1.Malaysian Tax System
• Companies are allowed to deduct tax on dividends
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paid provided they have sufficient tax credit
Tax credit = gross - net dividend
Refer example on ABC on page 210 where there is
a tax credit on investment income
FRS112.3
2.Introduction to Deferred Tax (“DT”)
• The difference in the tax payable (based on
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taxable income) and tax expense (based on
accounting profit) is due to timing differences
Timing / temporary differences (“TD”) = certain
expenses may not be allowable deductions and
certain income are not taxable in the current
period but may be deductible / taxable in the next
period
Permanent difference are ignored in the
computation of DT
Refer example on TD (pg 212 to 213) and
illustration (pg 213)
FRS112.4
• Before FRS 112 was formulated, there were
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alternate methods of treating DT as follow:- Flow through (nil provision)
where tax payable = tax expense
- Limited or partial provision
where DTL does not crystallise,no provision is
required
provide to the extant of the liability will probable
become payable
- Full provision
Recommended by FRS 112
FRS112.5
3 Accounting for DT
1. 3.1 Underlying Principles
2. DTL - if the recovery of the carrying amount of the
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asset or liability gives rise to a higher tax payment
in future
DTA - if the recovery of the carrying amount of the
asset or liability gives rise to a lesser tax payment in
future
Recognition:- income statement (if due to CA and depreciation)
- revaluation reserve (if due to revaluation surplus)
- Goodwill (if arising on business combination)
FRS112.6
• 3.2 Taxable TD (“TTD”) and Deductible TD
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(“DTD”)
TD are differences between the carrying value
(“CV”) of assets and liabilities in the balance sheet
and the tax base (“TB”)
DT is calculated based on “balance sheet liability
method” on all TD. PD are ignored
TTD = CV of assets > TB or
TTD = CV of liabilities < TB, give rise to DTL
DTD = CV of assets < TB or
DTD = CV of liabilities > TB, give rise to DTA
Refer example on pg 217 and example 1
FRS112.7
4 Recognition of DTL
• DTL = Tax rate X TTD
• DTL is not recognised on PD
• Some depreciable assets may not qualify for CA
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because on initial recognition of an asset or
liabilities, the tax rule do not recognise them as
asset or liability. As such, TB=0 and no DTL [S14(b)
exemption]
Para 14, The following TTD do not give rise to DTL:
-Goodwill for which amortisation or impairment is
not deductible for tax purpose
FRS112.8
• -The initial recognition of an asset or liability in a
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transaction which:
-- is not a business combination, and
-- at the time of the transaction, affects neither
accounting profit nor taxable profit
4.1 Assets Carried at FV
• The surplus on revaluation is not subjected to tax
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and the TB is not adjusted, CV>TB (para 19)
For non-depreciable property, the surplus is subject
to RPGT only. If not intend to dispose, provide at
the minimum rate of 5%. Example: Freehold land,
CV>TB (para 20)
Para 21, For a building which no not enjoy CA
FRS112.9
• -The TB on initial recognition is nil and NO DTL is
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recognised [Para 14 (b) exemption]
- However, if the building was revalued, the surplus
will give rise to TTD
-If not commitment to sale , DTL at current income
tax rate
- If there is a commitment to sale , DTL at current
income tax rate (based on the additional
depreciation arising from the surplus in the
intervening periods prior to the date of the
disposal) plus RPGT
Refer example 2
FRS112.10
4.2 Business combination
• The cost of the business combination is allocated to
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the FV of the identifiable net assets plus
contingent liabilities, that may be different from
the carrying value and TB.
This will give rise to TD and affect the goodwill on
consolidation
TB for goodwill = 0, but DTL is NOT recognised
[Para 14 (a) exemption]
FRS112.11
4.3 Compound Instrument
• The interest charged in the income statement and
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the amount paid will differ
Only the amount of interest paid will qualify for tax
deduction
On initial recognition of the liability, there will be a
difference between CV and TB
Refer example 3
FRS112.12
5. Recognition of DTA
• DTA is recognised only IF it is probable that taxable
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profits will be available against which the DTD can
be utilised
The following DTD do not give rise to DTA:
-Negative goodwill
-The initial recognition of an asset or liability in a
transaction which:
-- is not a business combination, and
-- at the time of the transaction, affects neither
accounting profit nor taxable profit
Refer example of DTD on page 224 to 225
FRS112.13
6.Measurement
• DT is calculated at the current tax rate
• 6.1 Change in tax rate
• Where there is a change if tax rate, the DTL b/f is
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adjusted for the change through income statement
It is a change in accounting estimate and so the
retained profit is not adjusted
The carrying amount of the DTA is to be reviewed
at each balance sheet date
6.2 Discounting
DTA / DTL are not discounted
FRS112.14
• 6.3 Items credited or charged directly to
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equity
If DT related to equity items, then the DT is
accounted for in the reserve and not the income
statement
Refer example on page 226
Refer example 4 & 5
FRS112.15
7 DT arising from a business
combination
• TD may arise especially where the FV of assets is
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different from the CV and TB.
The acquirer will generally recognise the DTA and
DTL as identifiable assets and liabilities, thus affect
the goodwill
Refer example 6
FRS112.16
• 7.1 DTA on Losses of Acquirer
• Acquirer having trade losses
• Find it probable to recover the tax losses against
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future taxable profits of the acquiree
DTA recognised by acquirer will affect the
computation of goodwill
7.2 DTA on Losses of Acquiree
Acquiree having trade losses
The gross amount of goodwill is adjusted for DTA
However, the acquirer cannot recognise a negative
goodwill nor increase negative goodwill by the
subsequent adjustment for the DTA
Refer illustration
FRS112.17
8 Presentation and Disclosure
• Pls read page 231
• Pls refer notes to financial statements