Such differences only impact on the taxation computation of one period.
Deferral method is where the tax effects of current timing differences are deferred and allocated to future periods when the timing differences reverse. Since deferred tax balances in the balance sheet are not considered to represent rights to receive or obligations to pay money, they are not adjusted to reflect changes in the tax rate or the imposition of new taxes. Under the deferral method, the tax expense for a period comprises of provision for taxes payable and the tax effects of timing differences deferred to or from other periods. Liability Method is where the expected tax effects of current timing differences are determined and reported either as liabilities for taxes payable in the future or as assets representing advance payment of future taxes. Deferred tax balances are adjusted for changes in the tax rate or for new taxes imposed. The balances may also be adjusted for expected future changes in tax rates. Under the liability method, the tax expense for a period comprises of the provision for taxes payable, the amount of taxes expected to be payable or considered to be prepaid in respect of timing differences originating or reversing in the current period and the adjustments to deferred tax balances in the balance sheet necessary to reflect either a change in the tax rate or the imposition of new taxes.
3. Nil provision, partial provision and full provision
Nil provision is where no provisions are made for deferred tax whatever the circumstances. This is based on the principal that only the tax that is deemed to be payable in respect of a period should be accounted for in the financial statements. Full provision is where the tax effects of all timing differences are recognized as and when they arise. Although this method is arithmetically accurate it can lead to the building up of large meaningless provisions in the balance sheet. Partial provision lies between the two extremes stated above. Deferred tax should be accounted for in respect of the net amount by which it is probable that any payment of tax will be temporarily deferred by the operation of timing differenced, which will reverse in the foreseeable future without being replaced.
Discounting deferred tax assets and liabilities enables to reflect the time value of money. IAS 12 does not permit discounting due to the difficulty in ascertaining the timing of reversal of each temporary difference
B) Critically assess the current IAS 12 requirements for accounting for deferred tax
Deferred tax is an accounting term, meaning future tax liability or asset, resulting from temporary differences between book (accounting) value of assets and liabilities, and their tax value. This arises due to differences between accounting for shareholders and tax accounting. Deferred tax arises when the actual tax as a result of a particular transaction (tax payable or recoverable) arises in a different period from the period in which the transaction is included in the financial statements.
The provision for taxes payable is calculated in accordance with rules for determining taxable income established by taxation authorities. In many circumstances these rules differ from the accounting policies applied to determine accounting income. The effect of this