Exam Approach
The first thing to do in an exam is look at the carrying amount of the asset or liability which is its net book value, in the financial statements.
This should be then compared to the tax base of the asset or liability.
The tax base may also be noted as the tax written down amount of the asset.
If there is a difference between the carrying amount and the tax base, this will give rise to a deferred tax asset or liability.
| Net book value (‘NBV’) vs tax base |
Tax effect | Deferred tax |
| NBV asset > tax base | More tax payable | Liability |
| NBV asset < tax base | Less tax payable | Asset |
| NBV liability > tax base | Less tax payable | Asset |
| NBV liability < tax base | More tax payable | Liability |
Once you know the difference between the carrying amount and the tax base, the taxable difference is multiplied by the tax rate.
This will give you a balance for deferred tax (either an asset or liability) which will be recorded in the statement of financial position.
If there’s already a deferred tax asset or liability, any movement should be recorded as a movement in deferred tax and either added or subtracted from the tax change for the year in the income statement.
Exam steps
- Compare NBV to tax base
- Multiply taxable difference by tax rate
- Previous deferred tax asset/liability? – Movement to I/S as tax charge for the year