Question

Hardax Limited (Ltd) is a company operating in the hardware industry. The following information has been presented to you:

Hardax Ltd Extracts from Balance Sheet as at 31 December 2018

                                                                                                        2018                   2017

Property plant and equipment                                                        320 000           355 000

Expenses prepaid (allowable deduction for 2018)                          10 000              0

Income received in advance (taxable in the year of receipt)          28 000             15 000   

Additional information:    

1. During 2018 depreciation was R35 000 and wear and tear allowed was R25 000.
2. There was no other movement of property, plant and equipment during 2018.
3. Profit before tax is R300 000.
4. Dividend income of R5 000 was earned during 2018.
5. There are no other temporary or permanent differences other than those evident from the information provided.       
6. The normal income tax rate is 30%.
   
   Required:  
   3.1 Calculate the current normal income tax and deferred taxation for the year ended 31 December 2018. (15)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
   3.2 Disclose the Taxation note to the balance sheet as at 31 December 2018 in accordance with International Financial Reporting Standards (IFRS). (10)

Answer 1

Answer 3.1:

Note: it is assumed that income received in advance in year 2017 was related to 2018 and adjusted accordingly.

Current normal tax:

	Profit Before tax	300000
Add:	Income received in advance but taxable In current year	28000
Less:	Income considered this year but already taxed in last year	15000
Less:	Expenses prepaid but allowed in current year	10000
	Taxable Income	303000
	Tax @ 30% on taxable income	90,900

Deferred taxation:

Particulars	Amount	Tax impact	Impact on deferred tax asset/liability
Expenses prepaid	10000	3000	Deferred tax liability – since tax liability will increase in future due to this adjustment
Income received in advance – current year	28000	8400	Deferred tax asset – Since tax liability will decrease in future due to this adjustment
Income received in advance – previous year	15000	4500	Deferred tax asset – Reversal – Since last year tax asset would be created due to the adjustment and now the same has been reversed due to cessation of timing difference.

Since there is no opening balance of deferred tax is given we would say that net deferred tax asset will increase/ net deferred tax liability will decrease by 900 (3000-8400+4500).

Note: no information given about tax difference of deprecation and wear and tear, so the same is ignored.

Answer 3.2:

IAS 12.80 requires the following disclosures:

Major components of tax expense (tax income) [IAS 12.79] Examples include:

• Current tax expense (income)
• Amount of deferred tax expense (income) relating to the origination and reversal of temporary differences

So taxation note as per IFRS (IAS):

Major components of tax expense (income) (paragraph 79)

	Current year
Current tax expense	90,900
Deferred tax expense relating to the origination and reversal of temporary differences:	(900)
Tax expense	90,000