Accounting For Income Taxes >> IAS 14 >> Determining income tax paid: The determination of income tax paid can be complex because in addition to current tax payable, the application of tax effect accounting can generate deferred tax assets and deferred tax liabilities. Again, some of the movements in the current and deferred tax accounts may not be reflected in the income tax expense recognized in profit or loss.
Certain gains and losses and associated tax effects are recognized in other comprehensive income (OCI) and accumulated in equity accounts. For example, deferred tax may arise from a revaluation of property, plant and equipment (PPE) that origins a difference between the book value and tax base of those assets, in so doing resulting in a charge for income tax being made to the Revaluation Surplus Account. The determination of income tax paid can be complex because in addition to current tax payable.
Therefore, it is often simpler to reconstruct the Deferred Tax Liability account to determine the allocation of income tax expense. We can use this reconstruction to determine the deferred component of income tax expense recognized in profit or loss, if this is not already identified in the statement of profit or loss and other comprehensive income.
The income tax expense shown in the reconstruction of the Deferred Tax Liability account is the deferred component of income tax expense, that is, the amount of income tax expense pertaining to the movement in deferred tax balances.
The movement in the Deferred Tax Liability account for XYZ Limited can be summarized as follows:
Opening balance CU 5000
+ Tax recognized directly in OCI CU 600
+ Income tax expense-deferred portion CU 3000
Closing balance CU 8600
The current portion of income tax expense can then be calculated by deducting the deferred portion of income tax expense from the total income tax expense recognized in profit or loss. The current portion of income tax expense for XYZ Limited can be calculated as follows:
Income tax expense CU 30000
Deferred component of income tax expense CU (3000)
Current component of income tax expense CU 27000
The beginning balance of Current Tax Payable of CU 14000 is increased by the current portion of income tax expense, CU 27000. If no payments were made, the ending balance would be CU 41000. However, as the ending balance is only CU 16000, we can conclude that the amount of income tax paid must have been CU 25000. To illustrate, the movement in XYZ Limited Current Tax Payable account may be summarized as follows:
Opening balance CU 14000
+ Income tax expense CU 27000
– Income tax paid CU 25000
Closing balance CU 16 000
For XYZ Limited, the amount of income tax paid consists of the final balance in respect of the previous year’s current tax payable, and installments in respect of the current year. The income tax expense may include an adjustment for any under/over accrual for current tax payable at the beginning of the period.
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