How to Account for Future Income Tax (DTA/DTL) IAS 12 in CPA Canada PEP and CFE

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CPA Canada Knotia eBook explains income tax accounting in Chapter 23. However, student struggle understanding the steps in calculating and journalizing the deferred tax asset (DTA) and deferred tax liability (DTL) in cases. Here is a quick summary.

Explanation of future income taxes (FIT)

The idea behind future income taxes (FIT) is to book a liability for future payment of taxes (due to differences in accounting vs tax income). We have to do this because this is money we owe in the future to CRA, like accounts payable we owe to vendors, and GAAP says all obligations must be shown on F/S.

We have these differences for many reasons. A common one is the depreciation rate. We record depreciation at one rate while CCA is at another rate. There is a difference that is owed and we record this difference to FIT liab and FIT expenses.

Part A: Example

Step 1a: Calculate temporary differences 

To determine the temporary differences, deduct tax base from accounting base.

[Temporary difference = Accounting base – tax base]

Note: Both the Accounting base and Tax base are usually given in the case.

Step 1b: Determine if taxable or recoverable temp difference

Using the results from Step 1a:

  • If the total temp diff is negative => Deductible => DTA
  • If the total temp diff is positive => Taxable => DTL

Step 2: Calculate DTA/DTL

To calculate DTA/DTL, multiply the tax rate by the total temp differences from Step 1a.

[DTA/DTL = Tax rate % x total temp diff (from Step 1a)]

Step 3: Adjust DTA/DTL to actual

  • step i) Look at the balance of DTL/DTA from prior year in B/S (this should be given in the case)
  • step ii) Look at the balance for current year (calculated in Step 2)
  • step iii) post an AJE to adjust the balance from prior to current.

Example from the eBook

The following is the breakdown of the example seen in the CPA Canada eBook Chapter 23:

  • Step 1a: We found it’s -$10,000 (the eBook doesn’t show negative, but it is negative since accounting base is smaller than tax base)
  • Step 1b: It’s negative, so DTA.
  • Step 2: DTA: $10,000 × 45% = $4,500
  • Step 3: AJE
    Prior = $10,400 DTL
    Current = $4,500 DTA
    AJE:
    Dr DTL $10,400 (to remove prior from B/S)
    Dr DRA $4,500 (to add current to B/S)
    Cr Deferred tax recover $14,900 (plug to balance the entry)

Part B: Memo

IAS 12 Income Taxes

Calculations/quants are half of the marks. You won’t get C by simply following the above steps. It’s important to quote the technical from CPA Canada Handbook correctly. This is illustrated below.

Issue:

ZZZ Co. has provided information regarding the income taxes. The issue is what the deferred tax provision calculation for 20XX should be.

Analysis:

  • According to IAS 12, para 5, temporary differences are differences between the carrying amount of an asset/liability in the statement of financial position and its tax base.
    • As seen in App X, there is a total deductible temporary difference of $XXK (NOTE: calculate per above steps 1a, 1b, and 2)
  • Furthermore, according to IAS 12, para 5:
    • DTA are 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.
    • DTL are the amounts of income taxes payable in future periods in respect of taxable temporary differences
      • This means DTL rise from taxable temporary differences, while deferred tax assets (DTA) rise from deductible temporary differences. Given that the total $XXK is a deductible temporary difference, this amount is a DTA.
  • Furthermore, according to IAS 12, para 24, DTA shall be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized
    • MET: ZZZ Co. is growing rapidly with positive financial results. There are no indications that a taxable profit is not probable in the near future.

Recommendation:

Based on the above analysis, I recommend recognizing DTA of $XXK and Deferred tax recovery of $XX, per AJEs in App X. (NOTE: calculate per above Step 3 )

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