Deferred Tax Liability/Asset

[SidTheDweeb]

Hello,

A bit confused about how to handle the above in financial accounting...
If tax capital allowances are higher in the first few years than the written down allowances (used by the company), will you have deferred tax asset in those and following years?

Conversely if the opposite is true is it a deferred tax liability?

 

[CCOVICH]

Written down allowances-is this not the same thing as a capital allowance?

Or is written down allowance another term for depreciation?

Deferred tax is purely an accounting convention-it has no basis in tax law.

If you recognise more in the financial statements that you pay in tax, you have an asset. E.g. where you make a loss in the current year that can only be relieved future years.

If you recognise less in the financial statements than you are paying in tax, you have a liability. E.g. where the book value of machinery is higher than the tax written down value, i.e. depreciation is lower than capital allowances.

This is a useful [broken link removed].

Another one from the [broken link removed].

Both illustrate better than I can at this stage.

There's loads of useful info on the web-especially the ACCA and Big 4 websites.

 

[bazermc]

If tax capital allowances are higher in the first few years than the written down allowances (used by the company), will you have deferred tax asset in those and following years?

Sid think that true capital allowances are deductible against case I income whereas depreciation is not. The asset will eventual generate the same deduction however if capital allowances are accelerated you will have lower taxable income in the current year therefore you must recognise a deferred tax liability being the future obligation to pay more tax at a later date it is called a timing difference and must be recognised in the accounts

see the asb's website for FRS 19 there is a new IFRS on deferred tax dont think there is much changes
http://www.asb.co.uk/asb/technical/standards/pub0210.html

becarefull not to mix up the term "writing down allowance" and depreciation as WDA's are capital allowances for industrial buildings.
Again as CCOVICH said deferred tax is purely an accounting convention there is no basis for it in tax law and as a result accountants and tax consultants usually clash over it