ACC2100 · Financial Accounting
Accounting for Income Tax: Deferred Tax (AASB 112)
Deferred Tax (Week 6, AASB 112) recognises the future tax consequences of today's temporary differences. The engine is the comparison of an item's carrying amount with its tax base: an asset carried above its tax base creates a taxable temporary difference and a deferred tax liability; carried below, a deductible temporary difference and a deferred tax asset (the rule flips for liabilities).
This is a Part-2 written-answer stake worth 25 marks — the single biggest standards question. Expect a full four-step worksheet across several items, plus a rate-change adjustment. The marks reward correct CA-vs-TB classification, the right DTA/DTL totals, and journalising the movement.
What this chapter covers
- 01Tax base (TB) = the amount attributed to an asset/liability for tax purposes (the cash-basis 'tax balance sheet')
- 02Tax base rules: deductible asset TB = future deductible amount; liability TB = CA − future deductible amount; revenue in advance TB = CA − amount not taxable in future
- 03The four-step worksheet: determine CA → determine TB → compute and classify the temporary difference → DTA/DTL movement
- 04Asset CA > TB → TTD → DTL; Asset CA < TB → DTD → DTA
- 05Liability CA < TB → TTD → DTL; Liability CA > TB → DTD → DTA
- 06Special tax bases: prepaid insurance TB = 0, interest receivable TB = 0, gross (not net) receivables, provisions TB = 0, revenue in advance TB = 0
- 07Closing DTL = ΣTTD × rate; closing DTA = ΣDTD × rate; book the movement from opening balances
- 08Change in tax rate: adjust existing DTA/DTL by |Old − New| / Old × balance, net to income tax expense
Change in tax rate: restate the deferred tax balances
- 2 marksCompute the adjustment factor: |Old − New| / Old = |40 − 30| / 40 = 10/40 = 0.25. Every existing balance shrinks by 25%.
- 1 markRestate the DTA: 24,000 × 0.25 = $6,000 reduction → DTA falls from 24,000 to $18,000.
- 1 markRestate the DTL: 60,000 × 0.25 = $15,000 reduction → DTL falls from 60,000 to $45,000.
- 2 marksJournalise the net effect through income tax expense: Dr DTL 15,000 / Cr DTA 6,000 / Cr Income tax expense 9,000 (the net $9,000 credit reduces the tax expense).
Key terms
- Tax base (TB)
- The amount attributed to an asset or liability for tax purposes — effectively its value on a cash-basis tax balance sheet. Comparing it with the accounting carrying amount produces the temporary difference.
- Taxable temporary difference (TTD)
- A temporary difference that will result in taxable amounts in future periods (pay more tax later). It arises when an asset's CA exceeds its TB, or a liability's CA is below its TB, and creates a deferred tax liability.
- Deductible temporary difference (DTD)
- A temporary difference that will result in deductible amounts in future periods (pay less tax later). It arises when an asset's CA is below its TB, or a liability's CA exceeds its TB, and creates a deferred tax asset.
- Deferred tax liability (DTL)
- The income tax payable in future periods on taxable temporary differences: closing DTL = ΣTTD × tax rate. Recorded by booking the movement from opening to closing, with the other side to income tax expense (or to equity/BCVR where the item arose there).
- Deferred tax asset (DTA)
- The income tax recoverable in future periods on deductible temporary differences (and tax losses): closing DTA = ΣDTD × tax rate. Recognised to the extent future taxable profit is expected.
Accounting for Income Tax: Deferred Tax (AASB 112) FAQ
How do I remember which way creates a DTA versus a DTL?
Use the four-line rule. For an ASSET: CA > TB means a taxable temporary difference → DTL; CA < TB means a deductible temporary difference → DTA. For a LIABILITY the directions flip: CA < TB → DTL; CA > TB → DTA. A quick sense check is the economic story — a DTL means you'll pay more tax later, a DTA means you'll pay less.
What is the tax base of a provision or revenue received in advance?
For a typical provision (e.g. warranty or annual leave) the tax base is $0, because the deduction is only available when the amount is actually paid — so the carrying amount exceeds the $0 tax base and you get a DTD → DTA. Revenue received in advance also has a tax base of $0 (it has already been taxed on receipt), giving a DTD → DTA. Knowing these standard tax bases saves time in the exam.
Do I journalise the closing balance or the movement?
The movement. Compute the closing DTA (ΣDTD × rate) and closing DTL (ΣTTD × rate), then compare them with the opening balances and book only the change. Recording the full closing balance instead of the movement double-counts the deferred tax already on the books and is a frequent exam error.
How does a change in the tax rate affect existing balances?
You restate the existing DTA and DTL to the new rate. The shortcut is to multiply each balance by |Old rate − New rate| / Old rate; that gives the adjustment, and the net effect goes to income tax expense (or, for items that arose in equity, back to equity). A rate cut reduces both balances; the larger balance drives the sign of the net P&L effect.
Exam move
This is the 25-mark machine, so make the four-step worksheet automatic: CA → TB → temporary difference (classified TTD or DTD) → DTA/DTL movement. Write the four-line classification rule at the top of every attempt and apply it line by line before touching the rate. Memorise the standard tax bases (provisions and revenue in advance = $0, gross not net receivables, prepaid insurance and interest receivable = $0) because the exam buries them in a list of items. Total the TTDs and DTDs separately, multiply by 30%, and always book the MOVEMENT from opening balances, not the closing figure. Drill the rate-change adjustment as its own mini-procedure (factor = |Old − New| / Old, apply to both balances, net to income tax expense). Layout discipline wins here — a tidy four-column worksheet makes a stray sign easy to catch and earns method marks even when one number slips.
