Last update 06/08/2019
Temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
Deferred taxes
See Convertible debt option reserve to obtain an understanding of the amounts mentioned in the below table.
In most jurisdictions, only the coupon cash payment (10% in this example) and transaction costs would be tax deductible and it is unlikely that a tax deduction will be received for the interest expense (16.41% in this example) recorded under additional the effective interest method. Therefore, a deferred tax arises from the temporary difference between the carrying value of the liability component and the tax base of the liability for tax purposes. If the Entity A is subject to a 30% tax rate and assuming that transaction costs are also deductible over the life of the loan (that is, the element of the interest expense in profit or loss that represents transaction costs is tax deductible rather than the transaction costs being deductible in full when they are incurred), then a deferred tax liability of CU 13 ((CU 900 – CU 857) x 30%) should be recognised on initial recognition with a corresponding entry to equity. The effect of deferred tax is recognised in equity because IAS 12 Income Taxes requires that the recognition of deferred tax must follow the underlying transaction it relates to, and the temporary difference relates to the amount attributed to the equity conversion option.
The carrying amounts of the liability component, and the associated tax effects over the life of the note, are summarised below:
|
Initial recognition |
Year 1 |
Year 2 |
Year 3 |
|
| Carrying value of the liability |
CU 847 |
CU 891 |
CU 942 |
CU 1,000 |
| Tax base of the liability |
CU 900 |
CU 932 |
CU 965 |
CU 1,000 |
| Temporary difference |
CU 47 |
CU 41 |
CU 23 |
0 |
| Deferred tax liability (at 30% (effective) tax rate) |
CU 14 |
CU 12 |
CU 7 |
0 |
|
|
|
|
|
|
| Deferred tax expense (income) |
CU (2) |
CU (5) |
CU (7) |
|
| Temporary part of the current tax expense (income)1 |
CU 2 |
CU 5 |
CU 7 |
|
| Net effect in Profit or loss |
Nil |
Nil |
Nil |
The above perfectly illustrates the purpose of a deferred tax asset or liability. The change in the deferred tax liability that is charged or credited to profit or loss always has an opposing effect included in the current tax expense or charge as recorded in the income tax return, the net effect is always Nil.
Deductible temporary tax differences
Deductible temporary tax differences
Deductible temporary tax differences Deductible temporary tax differences Deductible temporary tax differences Deductible temporary tax differences