Sunday, February 3, 2013

Disclosure of the source of deferred tax assets and liabilities

Our audit client may have recorded deferred tax assets and liabilities on its balance sheet/ statement of financial position. Deferred tax is essentially the tax impact arising from the temporary difference between the Company's accounting and tax carrying value. For instance, the net book value of a property-plant and equipments are usually different between accounting book and tax book. This could be because the depreciation policy for accounting book ( i.e. set by the Company) and tax book (i.e. set by the authority) is different.

In reviewing the financial statement of our audit clients, who has recorded the deferred tax, we need to ensure that the Company has disclosed the source of the deferred tax assets / liabilities. This helps the financial statement users to understand the nature of the deferred tax assets / liabilities.

Generally, deferred tax assets are mainly attributable to:
- recognition of unutilised tax losses
- recognition of unabsorbed capital allowance
- differences on depreciation

Whereas, deferred tax liabilities are attributable to:
- differences on depreciation
- differences on provision

By disclosing the source of deferred taxes, the financial statement users can understand the balance sheet, as well as the tax expense of the Company.

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