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AC506 lecture 18

AC506 lecture 18. Deferred tax Sources: Elliott & Elliott, chapter 13 Alexander & Britton, chapter 21. Background. Accounting profit v. taxable profit Subjectivity in accounting e.g revenue recognition motivations Policy choices e.g depreciation Permanent differences

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AC506 lecture 18

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  1. AC506 lecture 18 • Deferred tax • Sources: • Elliott & Elliott, chapter 13 • Alexander & Britton, chapter 21

  2. Background • Accounting profit v. taxable profit • Subjectivity in accounting e.g revenue recognition motivations • Policy choices e.g depreciation • Permanent differences • expenses that will never be deductible for tax purposes • Temporary differences • expenses that will be deductible for tax purposes but not in the same period that they will be deductible for accounting purposes

  3. AC506 lecture 18 • New fixed asset acquired at beginning of year 1 for €15,000. Depreciation policy is 33.3% SL, no residual value • Capital allowances may be claimed for tax purposes - 15% per annum for six year and 10% in seventh year • Applicable corporation tax rate of 20%

  4. Issues to consider • Deferred tax is not a legal liability until it accrues • Deferred tax is confusing - tax charge doesn’t reflect the expense incurred • Permanent differences undermine the deferred tax matching theory anyway! • Deferred tax accounting is an excellent example of accrual accounting • An environment in which substance over form is encouraged justifies accounting for deferred tax.

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