ACCA Applied Skills · Financial Reporting

Taxation: formula sheet

Full chapter guide

Key formulas

Tax expense in profit or loss: Current year estimate + under-provision − over-provision (+ deferred tax movement, if any); Deferred tax is covered separately. Add it only if the question gives it.
Initial year-end entry: Dr Income tax expense; Cr Current tax payable (with the estimate); The credit is the liability in current liabilities.
Under-provision: Under-provision = final tax bill − prior year estimate (final bill higher); Increases this year's tax expense.
Over-provision: Over-provision = prior year estimate − final tax bill (final bill lower); Reduces this year's tax expense.
Closing current tax liability: Opening liability − tax paid + current year estimate + under-provision − over-provision; This is the T-account balance. It equals the current year estimate if the prior year was settled in full.
Temporary difference: Temporary difference = Carrying amount − Tax base; For assets, a positive result is a taxable difference (liability). A negative result is a deductible difference (asset).
Temporary difference for liabilities: Temporary difference = Tax base − Carrying amount; Use this for liabilities, so a carrying amount above the tax base gives a deductible difference. Check the sign by asking if future taxable profit rises or falls.
Deferred tax balance: Deferred tax = Temporary difference × Tax rate; Use the rate enacted or substantively enacted at the reporting date that is expected to apply when the difference reverses.
Charge for the year: Deferred tax charge/(credit) = Closing balance − Opening balance; Take it to profit or loss, unless it relates to an item recognised in OCI or equity.
Total tax expense: Income tax expense = Current tax + Deferred tax movement ± Prior-year under/over-provision; This is the figure shown in profit or loss.
Deferred tax asset recognition: Recognise a deferred tax asset to the extent it is probable that taxable profit will be available against which the deductible difference can be used; This is the IAS 12 test. Available taxable profit includes the reversal of existing taxable temporary differences. To the extent the test is not met, do not recognise the asset.
Temporary difference: Temporary difference = Carrying amount − Tax base; For assets, a positive result (carrying amount above tax base) is a taxable difference (liability). A negative result (carrying amount below tax base) is a deductible difference (asset). For liabilities, a positive result is a deductible difference (asset) and a negative result is a taxable difference (liability).
Deferred tax balance: Deferred tax = Temporary difference × tax rate; Use the rate enacted or substantively enacted at the reporting date. No discounting.
Tax base of a non-current asset: Tax base = Cost − capital allowances claimed to date; Equals the amount still available for tax relief in future.
Tax base of a provision: Tax base = Carrying amount − amount deductible in future; If relief comes only on payment, the tax base is nil.
Movement for the year: Charge or credit = Closing deferred tax − Opening deferred tax; Split between profit or loss and OCI according to where the related item was recognised. If the tax rate changes, restate the opening balance at the new rate first and split that adjustment in the same way.
Deferred tax asset recognition: Recognise only if it is probable that future taxable profit will be available to use the deductible difference; Review the asset at each reporting date.
Tax expense in profit or loss: Tax expense = Current tax for the year + Deferred tax charge (or − credit) in P/L ± Under/over provision for prior year; An under provision increases the charge. An over provision reduces it.
Deferred tax movement: Movement = Closing deferred tax liability − Opening deferred tax liability; Split it between P/L and OCI. Only the part linked to OCI items goes to OCI.
Deferred tax on revaluation: Deferred tax in OCI = Revaluation surplus × tax rate; Use the rate expected to apply when the temporary difference reverses, as enacted or substantively enacted.
Offset of current tax: Offset only if: legally enforceable right to set off AND intent to settle net or simultaneously; Both conditions are needed.
Offset of deferred tax: Offset only if: legal right to set off current tax assets against current tax liabilities AND the balances relate to income taxes levied by the same authority on the same taxable entity (or on different entities intending net or simultaneous settlement); Both conditions are needed. For different entities, the intention to settle net or simultaneously must also be present.
Average effective tax rate: Average effective rate = Tax expense ÷ Accounting profit before tax × 100%; Used in the rate reconciliation, which explains the gap from the applicable rate.

Quick revision

Current tax is tax payable on the year's taxable profit.
Under- or over-provision from last year is added to or deducted from this year's tax expense.
Deferred tax arises from temporary differences, not permanent differences.
Temporary difference = carrying amount minus tax base (for an asset).
Taxable temporary difference gives a deferred tax liability.
Deductible temporary difference gives a deferred tax asset, recognised only if future taxable profit is probable.
Deferred tax uses the tax rate expected to apply when the difference reverses, based on rates enacted or substantively enacted.
The charge or credit for the year is the movement in the deferred tax balance.
Tax on items recognised in OCI or equity is itself recognised in OCI or equity.
Deferred tax balances are not discounted.
Deferred tax assets and liabilities are shown as non-current, and may be offset only when the IAS 12 conditions are met.
Always state the tax charge in profit or loss as current tax plus deferred tax movement plus prior year adjustment.

Common mistakes

Putting the under- or over-provision in the statement of financial position liability. Fix: The prior year difference only affects the profit or loss charge. The liability is the current year estimate once last year is settled.
Adding an over-provision to the charge instead of deducting it. Fix: Over-provision means you charged too much last year. It is a credit that reduces this year's expense. Under-provision increases it.
Applying the tax rate to the accounting profit difference instead of the balance sheet difference. Fix: Always start from carrying amount and tax base at the reporting date, not from the year's depreciation figures.
Confusing the sign: treating a carrying amount above the tax base as an asset. Fix: Ask whether future taxable income will rise. If the carrying amount of an asset is higher than its tax base, you will pay more tax later, so it is a liability.
Applying the tax rate to depreciation or to the capital allowance rather than to the difference between carrying amount and tax base. Fix: Always compute carrying amount and tax base at the year end, then subtract.
Putting all deferred tax through profit or loss. Fix: Follow the item. Tax on a revaluation gain goes to OCI and reduces the revaluation surplus; tax on other items goes to profit or loss.
Charging all the deferred tax movement to profit or loss. Fix: Ask what caused each part. Tax on a revaluation surplus goes to OCI. Only the remainder goes to profit or loss.
Ignoring the under or over provision from last year. Fix: Compare the opening liability with the amount paid. The difference is the adjustment to this year's charge.

Exam tips

In Section C, show the T-account or a short working. Marks go to the under- or over-provision and the final charge even if one figure is wrong.
In objective questions, read whether the answer asked for is the profit or loss charge or the liability. They are usually different numbers.
Check the sign of the prior year difference twice. Final bill higher means add. Final bill lower means deduct.
Label statement lines exactly: 'Income tax expense' in profit or loss and 'Current tax payable' in current liabilities.
If the question mentions tax on a revaluation, split it out. That tax goes to OCI, not profit or loss.
Read the question for the tax base. It is often given as the tax written-down value, or you must compute it from allowances claimed.
In OT questions, decide liability or asset by asking whether future taxable profit goes up or down. Then calculate.
In Section C, show the table of carrying amount, tax base and difference. Marks are given for each step even if one figure is wrong.