ACCA Applied Skills · Financial Reporting
Taxation Chapter for ACCA Financial Reporting (FR)
Taxation in FR covers how income tax appears in financial statements under IAS 12. You calculate current tax from taxable profit, then deferred tax from temporary differences between carrying amounts and tax bases. You then show both in profit or loss, other comprehensive income or equity, and the statement of financial position.
What this chapter covers
This chapter is about IAS 12 Income Taxes. It is not about computing tax the way the TX paper does. In FR you are given the tax rules in the question. Your job is to show their effect in the financial statements.
There are two parts. Current tax is the tax payable on this year's taxable profit, plus any under- or over-provision from last year. Deferred tax is the tax effect of temporary differences. It arises because accounting rules and tax rules recognise income, expenses, assets and liabilities at different times.
The chapter links to almost everything else in the paper. Tax appears in the statement of profit or loss, the statement of financial position and the statement of changes in equity. Deferred tax connects to property, plant and equipment, provisions, revaluations, leases and group accounts. It is often one adjustment inside a larger Section C question, and it also appears in objective test questions.
Tax is a small adjustment in a long question, but it is easy to get right once you have a routine. In Section C, the tax figure often feeds the profit after tax and the liabilities, so one slip can carry through several lines. In objective tests, questions on temporary differences and deferred tax balances are marked all or nothing, so you need the method to be automatic. Students who practise the same few steps each time lose far fewer marks here than in more judgement-heavy chapters.
Taxation: topics in the order to study them
- 1Current Tax and Tax AdjustmentsStart here because it is the simplest part and the journal entries and presentation are needed before you add deferred tax.
- 2Deferred Tax Basics and Temporary DifferencesNext you need the core idea: carrying amount versus tax base, and when a difference gives a liability or an asset.
- 3Deferred Tax on Non-Current Assets and ProvisionsApply the method to the most tested cases: accelerated tax depreciation, revaluations and provisions, once the basics are secure.
- 4Presentation and Disclosure of TaxFinish with where each figure goes in the primary statements and notes, which pulls the whole chapter together.
How to prepare Taxation
Aim to build one repeatable routine, then practise it on mixed questions until it is quick. Use short sessions, which suit phone study.
- Learn the current tax entries first: debit tax expense and credit tax payable for the year's estimate, and adjust for any difference from the prior year's estimate.
- Write the deferred tax method on one card: find the carrying amount, find the tax base, take the difference, multiply by the tax rate, then compare with the opening balance.
- Practise deciding whether a difference is taxable (liability) or deductible (asset). Do ten quick examples until you can do it without hesitation.
- Work through non-current asset cases: capital allowances versus depreciation, and revaluation gains. Note that the tax on a revaluation goes to other comprehensive income, not profit or loss.
- Do provision examples, where the tax base is the carrying amount less any amount deductible in future periods, and note when an asset is recognised.
- Practise the final presentation: the tax charge in profit or loss, tax in OCI, current and deferred tax in the statement of financial position, and the main notes.
- Finish with timed Section B objective cases and a Section C question that includes tax, and check each step of your method against the answer.
Common mistakes in Taxation
Posting the whole deferred tax balance to profit or loss instead of just the movement.
Fix: Always write opening balance, closing balance, then the difference. Post only the difference.
Putting tax on a revaluation gain into profit or loss.
Fix: Ask where the underlying item was recognised. If it was in OCI, the related deferred tax goes to OCI as well.
Getting the direction of the temporary difference wrong.
Fix: For an asset, carrying amount above tax base means a liability. For a liability, carrying amount above tax base means an asset. Check with a quick example.
Applying the wrong tax rate to deferred tax.
Fix: Read the question for rate changes and use the rate that will apply when the difference reverses.
Ignoring last year's under- or over-provision.
Fix: Underline any prior year tax figure and compare it with the amount actually paid or agreed. Include the difference in the current year's expense.
Treating permanent differences as if they create deferred tax.
Fix: Only temporary differences create deferred tax. Items never taxable or never deductible do not.
Last-day revision: Taxation
- 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.
Taxation practice questions
- At 31 December Year 1, Arden Co estimated its income tax for the year at $84,000. During Year 1 it paid no tax. In Year 2 the tax authority …
- Which of the following items gives rise to a taxable temporary difference?
- At 31 December 20X1 Marlow Co had a provision for warranty costs of $80,000 in its financial statements. Warranty costs are deductible for t…
- At 31 December 20X5, Arden Co has a machine with a carrying amount of $480,000 and a tax written-down value of $300,000. Arden also has a pr…
- Brelin Co has a tax rate of 25%. Its statement of financial position at 31 December Year 3 showed an income tax payable of $40,000 as the es…
- Under IAS 12 Income Taxes, deferred tax is accounted for using the statement of financial position liability method. Which of the following …
Taxation in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Taxation: frequently asked questions
Do I need to calculate tax from tax rules in FR?
No. FR gives you the tax rates and any relevant tax rules in the question. You apply them to produce the accounting entries. Computing tax from detailed legislation belongs to the Taxation (TX) paper.
Is deferred tax tested in objective questions or Section C?
It can appear in both. Section A and Section B objective questions often test a single deferred tax balance or the direction of a temporary difference. Section C may include it as one adjustment within a longer question.
What is the quickest way to find deferred tax on an asset?
Compare the asset's carrying amount with its tax base. Multiply the difference by the tax rate. Then compare the result with the opening balance and post the movement.
Where does deferred tax appear in the financial statements?
The balance sits in the statement of financial position as a non-current item. The movement usually goes to profit or loss, unless the related item was recognised in OCI or equity, in which case the tax follows it there.