Accounting profit, taxable profit, current tax and deferred tax

Learning objectives

• Distinguish accounting profit from taxable profit, current tax from deferred tax, and tax expense from tax paid.L1
• Explain why tax expense comprises current tax and deferred tax.L1, L2
• Calculate total tax expense from current tax and the movement in deferred tax recognised in profit or loss.L2

Normative references

• IAS 12 §5Definitions: accounting profit (profit or loss for the period before deducting tax expense); taxable profit (tax loss), determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable; tax expense (tax income), the aggregate amount included in profit or loss for the period in respect of current tax and deferred tax; current tax, the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for the period; deferred tax liabilities, the amounts of income taxes payable in future periods in respect of taxable temporary differences; deferred tax assets, the amounts of income taxes recoverable in future periods in respect of deductible temporary differences, the carryforward of unused tax losses and the carryforward of unused tax credits; temporary differences, differences between the carrying amount of an asset or liability in the statement of financial position and its tax base.
• IAS 12 §6Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

33 questions

• The tax expense for a period is, by definition, equal to the amount of tax paid during that period.L1
• Taxable profit is determined under the rules of the taxation authority; it may therefore differ from accounting profit for the same period.L1
• Brumelot has recognised as an expense a fine of 40,000, still unpaid at the reporting date; tax law (case data) will never allow it to be deducted. This fine gives rise to a temporary difference.L1
• The tax expense for the period may be lower than the current tax for that same period when the entity recognises deferred tax income in profit or loss.L2
• Under IAS 12, what does accounting profit mean?L1
• What is the current tax for a period?L1
• Why is the tax expense for a period not limited to current tax?L1
• Which description corresponds to a deferred tax liability?L1
• In respect of which items do income taxes recoverable in future periods constitute deferred tax assets?L1
• Which statements about the definitions in IAS 12 are correct?L1
• For Fendral, current tax for the year is 150,000; during the year, a deferred tax liability increased by 20,000 and a deferred tax asset by 5,000, both changes being recognised in profit or loss. Fendral paid instalments of 138,000. Which statements are correct?L2
• Paltière's manager is surprised: tax expense for the year is 345,000, whereas Paltière paid only 280,000 in instalments. Current tax for the year is 300,000 and a deferred tax liability increased by 45,000 in profit or loss. Write a short, reasoned explanation.L2
• An intern at Ervalis writes in a memo: 'accounting profit, taxable profit, current tax and tax expense are four ways of saying the same thing'. Correct this memo in a few lines.L1
• Grenaval has determined current tax of {current_tax} for the year. Its deferred tax liability, arising from accelerated tax depreciation, increased by {dtl_increase}, a change recognised in profit or loss. Compute tax expense for the year.L2
• At the publisher Solmaris, current tax for the year amounts to {current_tax}. A warranty provision, deductible only when payments are made, increased the deferred tax asset by {dta_increase}, recognised in profit or loss. What is tax expense for the year?L2
• Cassevin has current tax of {current_tax}. Its deferred tax liability increased by {dtl_increase_total} in total, of which {dtl_increase_oci} relates to a land revaluation recognised in other comprehensive income (case data); the rest arises from depreciation differences recognised in profit or loss. Compute deferred tax expense in profit or loss and tax expense in profit or loss.L2
• Myrtelle reports accounting profit of {accounting_profit}. Under tax law (case data), the fines recognised, i.e. {non_deductible_fines}, are not deductible, and tax depreciation for the year exceeds accounting depreciation by {excess_tax_depreciation}. Compute taxable profit.L1
• On what amount is the current tax for a period computed?L1
• Tavernol makes an accounting profit of {accounting_profit}. Tax law (case data) requires {add_backs} of non-deductible expenses to be added back and allows {deductions} of exempt income to be deducted. The rate enacted at the reporting date is {tax_rate}%. Compute taxable profit and current tax.L1
• The hotel group Clairmonde (an entity taxed on its own) reports accounting profit of {accounting_profit}. It recognised {non_deductible_expenses} of non-deductible entertainment costs and {exempt_dividends} of exempt dividends received (case data). With an enacted rate of {tax_rate}%, what are its taxable profit and current tax?L2
• Dorvignac reports accounting profit of 500,000. Under tax law (case data), 40,000 of expenses are not deductible. With an enacted rate of 25%, the accountant recognises current tax of 125,000. Where is the error?L2
• The tax expense presented in profit or loss is limited to the current tax of the period.L1
• For the year, Belvize recognises current tax of 300,000, deferred tax expense of 40,000 arising from items in profit or loss and a deferred tax liability of 25,000 on a revaluation recognised in other comprehensive income. What tax expense does it present in profit or loss?L2
• Gavrance has taxable profit of {taxable_profit}, taxed at the enacted rate of {rate}%. During the year, its deferred tax liability increases by {dtl_increase} and its deferred tax asset by {dta_increase}, both movements arising from items recognised in profit or loss. Compute current tax and the total tax expense in profit or loss.L2
• Mazelvane owes {current_tax} of current tax, not yet paid. Its deferred tax movements, all arising from items in profit or loss, are an increase in the liability of {dtl_increase} and a decrease in the asset of {dta_decrease}. Record the tax entries at the reporting date.L2
• The Lumbrac group has two subsidiaries, each with an identical share option plan. Country A (case data): the expense recognised is deductible in the same period in which it is recognised, for the same amount. Country B: the deduction arises only when the options are exercised, for their intrinsic value. Which subsidiary recognises a deferred tax asset for the plan (future profits probable)?L4
• The tax expense presented in profit or loss is the aggregate amount included in profit or loss in respect of current tax and deferred tax.L1
• Dorvenne's 20X5 data: current tax 500,000; deferred tax expense in profit or loss 80,000; deferred tax on a revaluation recognised in other comprehensive income 40,000. What tax expense does Dorvenne present in profit or loss?L2
• Gernasse prepares its 20X5 income tax note: current tax for the year {current_tax}; additional current tax due for 20X4, identified in 20X5 (case data) {prior_year_current_tax}; deferred tax expense {deferred_tax_expense}. Compute the tax expense for the year.L3
• Kervadin's 20X5 income tax note: current tax before use of losses {current_tax_before_losses}; benefit from prior losses never recognised, used to reduce current tax {loss_benefit}; release of excess current tax for 20X4 {prior_year_release}; deferred tax expense on temporary differences originating in the year {origination_expense}; deferred tax income from a rate cut {rate_change_income}; write-down of a deferred tax asset {write_down}. Compute tax expense.L3
• For its numerical reconciliation, to what amount does Morliandre apply the applicable tax rate?L2
• Pruvenza's profit before tax expense amounts to {accounting_profit}. It uses as applicable rate the domestic rate of {applicable_rate}% (case data). What expected tax does it show at the top of its reconciliation?L2
• Valquessa (profit before tax 2,000,000, tax expense 500,000, applicable rate 25%) opens its reconciliation with 'expected tax: 1,500,000 × 25% = 375,000' and presents an 'other' item of 125,000. Where is the error?L3