LOS A requires us to:
describe the differences between accounting profit and taxable income and define key terms, including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense.
Taxable Income.
Taxable income is the amount of income for the period, determined in accordance with the tax laws, based upon which the income tax payable is determined.
Tax Payable.
It is the liability as seen on the balance sheet caused by the tax expense. Tax payable is sometimes also called tax current tax expense. It is the amount of income tax determined to be payable in respect of the taxable income for the period.
Taxable Expense.
It is the aggregate amount of current tax and the deferred tax charged.
Income Tax Paid.
It is the actual net cash flow for income taxes. These include the tax payments as reduced by the refunds if any for current as well as other years.
Tax Loss Carry Forwards.
These are the losses of current or past years that are allowed to be carried forward, to be set off against the taxable incomes of the future years. These are also considered as timing differences and result in deferred tax assets.
Tax Base.
It is the net amount of assets and liabilities (i.e. net worth) reported for the tax purpose, prepared as per the applicable tax laws.
Accounting Profit.
Accounting income is the net profit or loss for the period, before deducting income tax expense. These are the profits prepared on the basis of financial reporting standards (such as IFRS or GAAP).
Deferred Tax Assets / Liabilities.
Deferred tax is the tax effect of the timing difference. When there is an excess of income tax expense over the current tax expense or the tax payable it results in deferred tax asset. And, when there is an excess of current tax expense over the income tax expense, it results in deferred tax liability.
Valuation Reserve.
When there is an expectation that the deferred tax assets may not realize due to certain future expected events or changes in tax laws prohibiting the use of such assets; then a reserve called valuation reserve is created to reduce the existence of such assets.
Permanent Differences.
These are the differences between reportable accounting income and taxable income which originate in one period and can’t be expected to be reversed in a future period.
Temporary Differences.
These are those differences between the taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods. These result in the creation of deferred tax assets or liabilities.