DEFERRED TAX AND ITS

PRACTICAL ACCOUNTING
- MD. SHAKHAWAT HOSSAIN (FCA)
Partner

Rahman Mostafa Alam & CO.

Fare Diya Complex, Flat No-2/D, 29d Floor,
11/&/F, Free School Street, Panthpath, Dhaka
 1. Concept of Deferred Tax
2. Practical Example with accounting treatment
3. Financial Statement Presentation
4. Complex Case of Deferred Tax
5. Significance of Deferred Tax
6. Tax Base
7. Example with Tax Base
8. Complex Scenario with Tax Base

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 1. Concept of Deferred Tax

Deferred tax is a concept in accounting and finance that arises when there are
temporary differences between accounting income (based on accounting standards)
and taxable income (based on tax laws). It helps companies recognize tax effects
associated with these timing differences, which impact financial statements and cash
flows.
Key Concepts of Deferred Tax

1. Temporary Differences:
These are differences between the carrying amount of an asset or liability in the
financial statements and its tax base.
Temporary differences can be taxable (resulting in deferred tax liabilities) or
deductible (resulting in deferred tax assets).
For example, depreciation may be accounted for differently in tax and accounting,
causing a temporary difference.
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 2. Deferred Tax Liabilities (DTL):
Arises when taxable income is lower than accounting income in a
particular period but will be higher in future periods.
Example: Accelerated depreciation for tax purposes leads to lower
tax expenses in the early years and deferred tax liability since more
tax will be paid in later years when depreciation slows.

3. Deferred Tax Assets (DTA):

Arises when taxable income is higher than accounting income,
allowing the business to save on taxes in the future.
Example: If a company has carried forward losses, they can offset
future taxable income, creating a deferred tax asset.

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 4. Recognition:
According to accounting standards (e.g., IAS 12 for IFRS), deferred tax assets
and liabilities should be recognized in the balance sheet.
However, deferred tax assets are only recognized if it is probable that there will
be sufficient future taxable profit against which the asset can be utilized.

5. Calculation:
Deferred tax is calculated using the applicable tax rate on the temporary
differences at the reporting date.
If tax rates change, deferred tax assets and liabilities must be adjusted to reflect
the new rates.

6. Impact on Financial Statements:

Balance Sheet: Deferred tax assets and liabilities are reported in the non-
current section.
Income Statement: Changes in deferred tax assets and liabilities affect income
tax expense.
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 7. Examples of Temporary Differences:
Accelerated depreciation or amortization
Provision for bad debts (allowance that is recognized in accounting but not yet
deductible for tax)
Carryforward of tax losses or unused tax credits

8. Reversing of Deferred Tax:

Over time, deferred tax assets and liabilities reverse as the timing differences
even out.
Deferred tax assets are recognized as reductions in future tax payments, while
liabilities represent future tax expenses.

Practical Importance
Deferred tax accounting is important because it aligns tax expenses with
accounting principles, accurately reflecting a company's financial position and
future cash flows. It’s particularly relevant for companies that experience large
differences between their accounting and taxable incomes.
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2. Practical Example with the accounting treatment
of Deferred Tax
 Let’s complete the full life cycle of the asset, following ABC Corp. through the
entire 5-year depreciation period, showing how the deferred tax liability is
recognized and eventually reverses as the asset is fully depreciated. The
accounting treatment for deferred tax involves recognizing deferred tax assets
(DTAs) and deferred tax liabilities (DTLs) in the financial statements. Here’s a
breakdown of the journal entries and how they are recorded on the financial
statements.

Asset Details Recap :

Purchase Price: Tk.10,000
Useful Life: 5 years
Accounting Depreciation (Straight-Line): Tk.2,000 per year
Tax Depreciation: Accelerated: Tk.4,000 (Year 1), Tk.3,000 (Year 2),
Tk.2,000 (Year 3), Tk.1,000 (Year 4), Tk.0 (Year 5)
Tax Rate: 30%

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 Year-by-Year Analysis

Year 1 :
Item Accounting Tax Difference Deferred Tax
(Book) (Temporary) Liability (DTL)

Depreciation Tk.2,000 Tk.4,000 +Tk.2,000 Tk.2,000 ×

30% = Tk.600

Cumulative +Tk.2,000 DTL at End of

Temporary Year 1 = Tk.600
Difference

Explanation: The higher tax depreciation in Year 1 creates a Tk.2,000 temporary

difference, resulting in a Tk.600 deferred tax liability.
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 Journal Entries
Each year, ABC Corp. must record journal entries to recognize the deferred
tax liability or asset created by the temporary difference.
Deferred Tax Liability: Tk.600 (due to a Tk.2,000 temporary difference)

Journal Entry:
DR. Income Tax Expense (Deferred) Tk.600

CR. Deferred Tax Liability Tk.600

Explanation: This entry increases the income tax expense on the income
statement to reflect the future tax owed. The deferred tax liability is recorded
on the balance sheet as a non-current liability.

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 Year 2
Item Accounting Tax Difference Deferred Tax
(Book) (Temporary) Liability (DTL)

Depreciation Tk.2,000 Tk.3,000 +Tk.1,000 Tk.1,000 × 30%

= Tk.300

Cumulative +Tk.3,000 DTL at End of

Temporary Year 2 = Tk.900
Difference

Explanation: In Year 2, there is an additional Tk.1,000 temporary difference,

resulting in an additional Tk.300 deferred tax liability, bringing the cumulative
deferred tax liability to Tk.900.

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 Additional Deferred Tax Liability: Tk.300 (due to an additional Tk.1,000
temporary difference)

Journal Entry:

DR. Income Tax Expense (Deferred) Tk.300

CR. Deferred Tax Liability Tk.300
Explanation: Another portion of the income tax expense is recognized as
deferred tax, increasing the deferred tax liability on the balance sheet to
Tk.900.

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 Year-3:

Item Accounting Tax Difference Deferred Tax

(Book) (Temporary) Liability (DTL)

Depreciation Tk.2,000 Tk.2,000 Tk.0 No New DTL

Cumulative +Tk.3,000 DTL at End of

Temporary Year 3 =
Difference Tk.900

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 Explanation: In Year 3, accounting and tax depreciation are equal
(Tk.2,000), so there is no new temporary difference. The deferred tax
liability remains unchanged at Tk.900.

No Change in Deferred Tax Liability: Temporary difference is Tk.0.

No journal entry is needed, as there is no change in deferred tax.

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 Year-4:

Item Accounting Tax Difference Deferred Tax

(Book) (Temporary) Liability (DTL)

Depreciation Tk.2,000 Tk.1,000 -Tk.1,000 -Tk.1,000 ×

30% = -Tk.300

Cumulative +Tk.2,000 DTL at End of

Temporary Year 4 =
Difference Tk.600

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 Explanation: In Year 4, tax depreciation is lower than accounting depreciation,
creating a -Tk.1,000 temporary difference. This reverses Tk.300 of the deferred
tax liability, reducing it to Tk.600.

Reversal of Deferred Tax Liability: -Tk.300 (due to a -Tk.1,000 temporary

difference)

Journal Entry:
Deferred Tax Liability Tk.300

Income Tax Expense (Deferred) Tk.300

Explanation: This reverses part of the deferred tax liability as the difference
between accounting and tax depreciation decreases. This adjustment reduces
the total deferred tax liability to Tk.600.

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 Year-5:

Item Accounting Tax Difference Deferred Tax

(Book) (Temporary) Liability (DTL)

Depreciation Tk.2,000 Tk.0 -Tk.2,000 -Tk.2,000 ×

30% = -Tk.600

Cumulative Tk.0 DTL at End of

Temporary Year 5 = Tk.0
Difference

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 Explanation: In Year 5, there is no tax depreciation left while accounting
depreciation continues, creating a -Tk.2,000 temporary difference. This
reverses the remaining Tk.600 of deferred tax liability, bringing it to zero.

Final Reversal of Deferred Tax Liability: -Tk.600 (due to a -Tk.2,000

temporary difference)

Journal Entry:
DR. Deferred Tax Liability Tk.600
CR. Income Tax Expense (Deferred) Tk.600

Explanation: This fully reverses the deferred tax liability since the asset has
now been fully depreciated. The deferred tax liability balance becomes
Tk.0.
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 Summary of Deferred Tax Liability Over Asset’s Life Cycle :

Year Temporary Deferred Tax Deferred Tax

Difference Liability Change Liability (End of
Year)

1 +Tk.2,000 +Tk.600 Tk.600

2 +Tk.1,000 +Tk.300 Tk.900

3 Tk.0 Tk.0 Tk.900

4 -Tk.1,000 -Tk.300 Tk.600

5 -Tk.2,000 -Tk.600 Tk.0

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 Final Explanation
At the end of the asset’s useful life, the deferred tax liability has fully reversed.
This demonstrates how temporary differences balance out over time, ensuring
the deferred tax liability created by accelerated tax depreciation reverses
once the tax benefit ends. ABC Corp. aligns its financial statements with the
tax reality by recognizing these deferred tax effects over the asset’s life.

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3. Financial Statement Presentation :
 1. Balance Sheet:
Deferred Tax Liability: Recorded as a non-current liability each year until it fully
reverses.
In this example:
Year 1: Tk.600 DTL
Year 2: Tk.900 DTL
Year 3: Tk.900 DTL (no change)
Year 4: Tk.600 DTL
Year 5: Tk.0 (fully reversed)

2. Income Statement:
Income Tax Expense: Includes both current tax expense (based on taxable income)
and deferred tax expense (based on the changes in deferred tax liabilities or assets).
For each year:
Year 1: Deferred tax expense = Tk.600
Year 2: Deferred tax expense = Tk.300
Year 3: Deferred tax expense = Tk.0
Year 4: Deferred tax expense = -Tk.300 (benefit as DTL reverses)
Year 5: Deferred tax expense = -Tk.600 (benefit as DTL reverses)

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 3. Statement of Cash Flows:
Deferred tax does not affect cash flow directly. However, it is part of
the reconciliation of net income to cash from operating activities in
the cash flow statement. Deferred tax expense or benefit is added or
subtracted to adjust net income, reflecting its non-cash nature.

Summary
The deferred tax liability allows ABC Corp. to spread the tax effects
of temporary differences over the asset’s life, aligning the tax expense
more closely with accounting income. This treatment provides a more
accurate view of ABC Corp.'s financial position and performance by
accounting for future tax impacts over time.

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4. Complex Case of Deferred Tax
 Let’s consider a complex scenario involving deferred
tax with the following components:

1. Revaluation of Assets: The company revalues an asset, creating an

upward adjustment in value for accounting purposes but not for tax.

2. Accelerated Tax Depreciation: The tax law allows faster

depreciation compared to accounting depreciation.

3. Tax Rate Changes: During the asset's useful life, the corporate tax
rate changes, affecting deferred tax balances.

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 Scenario: Revaluation and Tax Depreciation Differences with Changing Tax Rates

Background:
Asset Cost: Tk.500,000
Useful Life: 10 years (straight-line method for accounting)
Tax Depreciation: Accelerated, allowing 50% in Year 1 and the remaining
balance spread over the next 4 years.
Revaluation: After 3 years, the asset is revalued upward by Tk.200,000.
Initial Tax Rate: 30%
Revised Tax Rate: In Year 4, the tax rate changes to 25%.

Year-by-Year Treatment:
1. Year 1 (2024): Initial Purchase and Depreciation
Accounting Depreciation: Tk.50,000 (Tk.500,000 ÷ 10 years)
Tax Depreciation: Tk.250,000 (50% accelerated depreciation)
Temporary Difference: Tk.200,000 (Tk.250,000 - Tk.50,000)
Deferred Tax Liability (DTL): Tk.200,000 × 30% = Tk.60,000

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 Journal Entry in 2024:
Debit Income Tax Expense: Tk.60,000
Credit Deferred Tax Liability: Tk.60,000

1. Year 2 (2025): Continuing Depreciation:

Accounting Depreciation: Tk.50,000
Tax Depreciation: Tk.125,000
Temporary Difference: Tk.75,000 (Tk.125,000 - Tk.50,000)
DTL Adjustment: Tk.75,000 × 30% = Tk.22,500 (increase DTL)

Journal Entry in 2025:

Debit Income Tax Expense: Tk.22,500
Credit Deferred Tax Liability: Tk.22,500

1. Year 3 (2026): Continuing Depreciation and Revaluation:

Accounting Depreciation: Tk.50,000
Tax Depreciation: Tk.62,500
Temporary Difference: Tk.12,500 (Tk.62,500 - Tk.50,000)

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 DTL Adjustment: Tk.12,500 × 30% = Tk.3,750 (increase DTL)
Revaluation Adjustment:
The asset’s value is revalued upward by Tk.200,000, which increases the
carrying amount for accounting but does not affect the tax base.
Deferred Tax on Revaluation: Tk.200,000 × 30% = Tk.60,000

Journal Entry in 2026:

Debit Income Tax Expense: Tk.3,750
Credit Deferred Tax Liability: Tk.3,750
Debit Revaluation Surplus: Tk.200,000
Credit Deferred Tax Liability (Revaluation): Tk.60,000

1. Year 4 (2027): Tax Rate Change

Revised Tax Rate: 25%
Accounting Depreciation: Tk.50,000
Tax Depreciation: Tk.62,500
Temporary Difference: Tk.12,500 (Tk.62,500 - Tk.50,000)

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 Revaluation DTL Adjustment: Recalculate the DTL on the revaluation surplus based on the
new tax rate.

Revised DTL on Revaluation Surplus: Tk.200,000 × 25% = Tk.50,000 (a decrease of

Tk.10,000)
Adjust the previously recognized DTL related to revaluation by reducing it by
Tk.10,000.

Journal Entries in 2027:

Debit Income Tax Expense: Tk.10,000
Credit Deferred Tax Liability (Revaluation): Tk.10,000 (adjust for tax rate change)

1. Year 5 to Year 10 (2028-2033): Remaining Depreciation and Full Reversal

Continue with the depreciation adjustments year by year.
By the end of Year 10, both accounting and tax depreciation will fully depreciate the
asset, and the DTL from depreciation differences will be reversed.

Final Journal Entries (End of Year 10):

Reverse any remaining DTL from temporary differences as the carrying and tax
bases align at zero.

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 Key Takeaways :

Revaluation: Creates a deferred tax liability on the revaluation surplus

since the tax base is unaffected.
Tax Rate Change: Adjusts both the DTL from depreciation differences and
the DTL on the revaluation surplus.
End of Useful Life: Temporary differences fully reverse by the end of the
asset’s useful life, eliminating the deferred tax liability for this asset.

This example shows how deferred tax can become complex with revaluations
and changing tax rates, requiring recalculations of DTL balances and
adjustments to both the income statement and equity (for revaluations).

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5. Significance of Deferred Tax
 1. Accurate Representation of Future Tax Impacts
Deferred tax ensures that financial statements reflect future tax
liabilities or assets that arise from timing differences between
accounting rules (GAAP or IFRS) and tax laws. This accurate
representation helps stakeholders understand the true financial
position of a company by recognizing taxes that will be paid or saved
in the future.

2. Matching Principle in Accounting

Deferred tax supports the matching principle, which states that
expenses should be recorded in the same period as the revenue they
help generate. Since taxes are a part of expenses, deferred tax
allocates tax expense across the life of an asset or liability, matching
tax effects to the associated revenue, even if tax payments are made
in different periods.
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 3. Provides Insight into Future Cash Flows
Deferred tax liabilities and assets give insights into expected future
cash flows related to tax payments or savings. For example, a
deferred tax liability shows potential tax payments that will occur as
temporary differences reverse, affecting cash flows and helping
companies plan for future tax obligations.

4. Enables Better Comparison Across Periods

Recognizing deferred tax provides consistency in how tax expenses
are reported, making it easier for investors and analysts to compare a
company’s financial performance across different periods. Without
deferred tax adjustments, companies could report highly variable tax
expenses, making it challenging to assess real performance trends.

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 5. Improved Financial Analysis and Ratios
Deferred tax affects important financial ratios, such as return on assets
(ROA), return on equity (ROE), and the debt-to-equity ratio. Accurate
recognition of deferred tax prevents distortions in these ratios, providing
a more reliable basis for financial analysis and decision-making.

6. Compliance with Accounting Standards

Most accounting standards (like IFRS and GAAP) require the recognition
of deferred taxes. Complying with these standards improves the
credibility and transparency of financial reporting, reassuring investors,
regulators, and other stakeholders of the company's adherence to
accepted accounting practices.

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 7. Valuation of a Business :
When assessing a business's value, deferred tax liabilities and assets play
a role in determining the actual value of the company’s net assets.
Deferred tax liabilities represent future cash outflows, while deferred tax
assets could indicate future savings, both of which impact a company’s
valuation.

8. Tax Planning and Strategy :

Deferred tax provides insights into the effects of a company’s tax
planning strategies. For instance, companies with deferred tax assets
might have future tax benefits due to losses or credits that can be
utilized, offering a clear view of tax advantages that may affect strategic
planning and financial structuring.

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 9. Helps Manage Earnings :
While not a primary goal, deferred tax can impact earnings management,
allowing companies to smooth tax expenses over time. By reflecting the tax
implications of timing differences, deferred tax helps to show a more stable
earnings trajectory.

10. Transparency for Stakeholders :

Deferred tax liabilities and assets help stakeholders understand a company’s
tax strategies and potential future tax obligations. Transparent reporting of
these items allows investors and analysts to make informed decisions
regarding a company's financial health and tax planning effectiveness.

In essence, deferred tax plays a critical role in bridging the differences between
accounting profit and taxable income, supporting accurate and consistent financial
reporting, and aiding in strategic decision-making.

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6. Tax Base
 The tax base is the value of an asset or liability as recognized for tax purposes. It’s
used to calculate taxable income and differs from the carrying amount (or book
value) recorded in the financial statements. The difference between the tax base
and the carrying amount often creates a temporary difference, which can lead to
deferred tax assets or liabilities.

Here’s a breakdown to clarify:

1. For Assets:
The tax base of an asset is the amount that will be deductible for tax
purposes in the future. For example, if a company buys equipment, its tax
base is the amount the company can depreciate in future tax returns.
Example: If a machine costs Tk.100,000 and Tk.20,000 has been
depreciated for tax purposes, the tax base of the machine is Tk.80,000
(since Tk.80,000 is still available for future tax deductions).

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 2. For Liabilities:
The tax base of a liability is its carrying amount minus any amount that
will be deductible for tax purposes in the future.
Example: Suppose a company has recognized a warranty liability of
Tk.10,000. If the warranty costs will be deductible for tax purposes in
the future, the tax base of the liability is Tk.0, because the full
Tk.10,000 will reduce taxable income when it is paid.

In simple terms, the tax base reflects the amount recognized by tax
authorities for deduction or inclusion in future taxable income, impacting
deferred tax calculations when it differs from the carrying amount.

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7. Example with Tax Base
 Let’s go through an example to understand how the tax base, carrying
amount, and deferred tax are calculated for an asset, including each step and
how the deferred tax asset or liability is determined.

Example Scenario
Background:
A company buys equipment for Tk.100,000 on January 1, 2024.
Useful Life for Accounting Purposes: 5 years (straight-line depreciation,
Tk.20,000 per year).
Tax Depreciation Method: Accelerated depreciation allowing 50%
depreciation in Year 1 and 25% each in Years 2 and 3.
Tax Rate: 30%

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 Year-by-Year Calculations
Year 1 (2024)

1. Accounting Depreciation (Carrying Amount):

Cost: Tk.100,000
Depreciation: Tk.20,000 (100,000 ÷ 5)
Carrying Amount at End of Year 1: Tk.100,000 - Tk.20,000 = Tk.80,000

2. Tax Depreciation (Tax Base):

Tax Depreciation: 50% of Tk.100,000 = Tk.50,000
Tax Base at End of Year 1: Tk.100,000 - Tk.50,000 = Tk.50,000

3. Temporary Difference:
Temporary Difference = Carrying Amount - Tax Base = Tk.80,000 -
Tk.50,000 = Tk.30,000

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 4. Deferred Tax Liability (DTL):
Since the carrying amount is higher than the tax base,
there is a deferred tax liability.
Deferred Tax Liability = Temporary Difference × Tax Rate
= Tk.30,000 × 30% = Tk.9,000

Journal Entry for Year 1:

Debit Income Tax Expense: Tk.9,000
Credit Deferred Tax Liability: Tk.9,000

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 Year 2 (2025)
1. Accounting Depreciation (Carrying Amount):
Depreciation: Tk.20,000
Carrying Amount at End of Year 2: Tk.80,000 - Tk.20,000 =
Tk.60,000
2. Tax Depreciation (Tax Base):
Tax Depreciation: 25% of Tk.100,000 = Tk.25,000
Tax Base at End of Year 2: Tk.50,000 - Tk.25,000 = Tk.25,000
3. Temporary Difference:
Temporary Difference = Carrying Amount - Tax Base = Tk.60,000 -
Tk.25,000 = Tk.35,000

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 4. Deferred Tax Liability (DTL):
Deferred Tax Liability = Temporary Difference × Tax Rate =
Tk.35,000 × 30% = Tk.10,500

Adjustment to Deferred Tax Liability for Year 2:

Increase in DTL from Year 1 to Year 2: Tk.10,500 - Tk.9,000 =
Tk.1,500

Journal Entry for Year 2:

Debit Income Tax Expense: Tk.1,500
Credit Deferred Tax Liability: Tk.1,500

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 Year 3 (2026)

1. Accounting Depreciation (Carrying Amount):

Depreciation: Tk.20,000
Carrying Amount at End of Year 3: Tk.60,000 - Tk.20,000 =
Tk.40,000

2. Tax Depreciation (Tax Base):

Tax Depreciation: 25% of Tk.100,000 = Tk.25,000 (remaining
balance)
Tax Base at End of Year 3: Tk.25,000 - Tk.25,000 = Tk.0

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 3. Temporary Difference:
Temporary Difference = Carrying Amount - Tax Base =
Tk.40,000 - Tk.0 = Tk.40,000
4. Deferred Tax Liability (DTL):
Deferred Tax Liability = Temporary Difference × Tax Rate =
Tk.40,000 × 30% = Tk.12,000
Adjustment to Deferred Tax Liability for Year 3:
Increase in DTL from Year 2 to Year 3: Tk.12,000 - Tk.10,500 =
Tk.1,500
Journal Entry for Year 3:
Debit Income Tax Expense: Tk.1,500
Credit Deferred Tax Liability: Tk.1,500

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 Summary of Deferred Tax Liability
Year 1 DTL: Tk.9,000
Year 2 DTL: Tk.10,500 (additional Tk.1,500 recognized)
Year 3 DTL: Tk.12,000 (additional Tk.1,500 recognized)

By the end of Year 3, the entire tax base for the asset had been
depreciated for tax purposes, but the accounting base still had
Tk.40,000 remaining to be depreciated over the next two years.
Deferred tax liability reflects the future tax impact of this
difference and will reduce as the carrying amount reaches zero.

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 Key Points:
The tax base reflects how much value is still available for tax
deductions in future periods, while the carrying amount is based on
accounting depreciation.
Temporary differences between the carrying amount and tax base
create deferred tax liabilities (if the carrying amount exceeds the
tax base) or deferred tax assets (if the tax base exceeds the
carrying amount).
The deferred tax liability increases or decreases depending on
changes in the temporary difference, which aligns the tax effect
over the asset’s useful life.

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8. Complex Scenario with Tax Base
 Let’s consider a more complex scenario that includes various
elements affecting the tax base and deferred tax, including
revaluation, impairment, and tax rate changes. This example
will demonstrate how deferred tax is calculated and adjusted
over time in response to changing circumstances.

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 Scenario: Asset Revaluation, Impairment, and Tax Rate Change
Background:
A company purchases a building for Tk.1,000,000 on January 1,
2024.
Useful Life for Accounting Purposes: 10 years (straight-line
depreciation, Tk.100,000 per year).
Tax Depreciation: 25% declining balance method.
Initial Tax Rate: 30%, which changes to 25% starting in 2026.
Revaluation: At the end of Year 2, the building is revalued upwards
by Tk.200,000.
Impairment: In Year 3, an impairment loss of Tk.50,000 is
recognized for accounting purposes.

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 Step-by-Step Yearly Analysis

Year 1 (2024): Initial Purchase and Depreciation

1. Accounting Depreciation (Carrying Amount):
Depreciation: Tk.100,000
Carrying Amount at End of Year 1: Tk.1,000,000 - Tk.100,000 =
Tk.900,000
2. Tax Depreciation (Tax Base):
Tax Depreciation: 25% of Tk.1,000,000 = Tk.250,000
Tax Base at the end of Year 1: Tk.1,000,000 - Tk.250,000 =
Tk.750,000

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 3. Temporary Difference:
Temporary Difference = Carrying Amount - Tax Base =
Tk.900,000 - Tk.750,000 = Tk.150,000

4. Deferred Tax Liability (DTL):

Deferred Tax Liability = Temporary Difference × Tax Rate =
Tk.150,000 × 30% = Tk.45,000

Journal Entry for Year 1:

Debit Income Tax Expense: Tk.45,000
Credit Deferred Tax Liability: Tk.45,000

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 Year 2 (2025): Continuing Depreciation and Revaluation
1. Accounting Depreciation (Carrying Amount):
Depreciation: Tk.100,000
Carrying Amount at End of Year 2: Tk.900,000 - Tk.100,000 =
Tk.800,000
2. Tax Depreciation (Tax Base):
Tax Depreciation: 25% of Tk.750,000 = Tk.187,500
Tax Base at the end of Year 2: Tk.750,000 - Tk.187,500 =
Tk.562,500
3. Temporary Difference:
Temporary Difference = Carrying Amount - Tax Base =
Tk.800,000 - Tk.562,500 = Tk.237,500

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 4. Deferred Tax Liability (DTL):
Deferred Tax Liability = Temporary Difference × Tax Rate =
Tk.237,500 × 30% = Tk.71,250
Revaluation Adjustment:
The building is revalued upward by Tk.200,000.
New Carrying Amount after Revaluation = Tk.800,000 +
Tk.200,000 = Tk.1,000,000
Deferred Tax on Revaluation: Tk.200,000 × 30% = Tk.60,000
(added to DTL).

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 Journal Entries for Year 2:

Adjust Deferred Tax Liability for depreciation difference:

Debit Income Tax Expense: Tk.26,250 (to adjust from
Tk.45,000 to Tk.71,250)
Credit Deferred Tax Liability: Tk.26,250
Record revaluation DTL:
Debit Revaluation Surplus: Tk.60,000
Credit Deferred Tax Liability (Revaluation): Tk.60,000

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 Year 3 (2026): Impairment and Tax Rate Change

1. Tax Rate Change: The tax rate drops from 30% to 25%.
2. Impairment Loss (Carrying Amount): The company records a
Tk.50,000 impairment loss.
Adjusted Carrying Amount after Impairment: Tk.1,000,000 -
Tk.50,000 = Tk.950,000
3. Accounting Depreciation (Carrying Amount):
Depreciation: Tk.100,000
Carrying Amount at the end of Year 3 (after depreciation):
Tk.950,000 - Tk.100,000 = Tk.850,000

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 4. Tax Depreciation (Tax Base):
Tax Depreciation: 25% of Tk.562,500 = Tk.140,625
Tax Base at End of Year 3: Tk.562,500 - Tk.140,625 = Tk.421,875

5. Temporary Difference:
Temporary Difference = Carrying Amount - Tax Base = Tk.850,000 -
Tk.421,875 = Tk.428,125

6. Deferred Tax Liability (DTL) – Adjusted for Tax Rate Change:

Revised Deferred Tax Liability = Temporary Difference × New Tax Rate
DTL = Tk.428,125 × 25% = Tk.107,031

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 7. Adjust Deferred Tax on Revaluation due to Tax Rate Change:
Original Deferred Tax on Revaluation (at 30%): Tk.60,000
Revised Deferred Tax on Revaluation (at 25%): Tk.200,000 × 25% =
Tk.50,000
Adjustment Required: Tk.60,000 - Tk.50,000 = Tk.10,000 reduction in DTL.
Journal Entries for Year 3:
Adjust DTL for depreciation difference and tax rate change:
Debit Income Tax Expense: Tk.35,781 (to adjust from Tk.71,250 to
Tk.107,031)
Credit Deferred Tax Liability: Tk.35,781
Adjust DTL for revaluation tax rate change:
Debit Deferred Tax Liability (Revaluation): Tk.10,000
Credit Revaluation Surplus: Tk.10,000

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 Summary of Deferred Tax Liability Balances

Year 1 DTL: Tk.45,000

Year 2 DTL: Tk.71,250 + Tk.60,000 (revaluation) = Tk.131,250
Year 3 DTL after Adjustments: Tk.107,031 + Tk.50,000 (adjusted revaluation
DTL) = Tk.157,031

Key Points
Revaluation of Assets: When the asset’s value is revalued upwards, it creates an
additional deferred tax liability due to the higher carrying amount for
accounting, even though the tax base remains unchanged.
Tax Rate Change: Deferred tax liabilities are recalculated based on the new tax
rate, affecting both the temporary differences from depreciation and the
revaluation surplus.

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 Impairment Loss: Recognizing impairment affects the carrying amount
but doesn’t impact the tax base directly. The reduced carrying amount
will affect future deferred tax calculations by changing the temporary
difference between the carrying amount and the tax base.

9. Presentation in Financial Statements

In the financial statements, deferred tax is presented in both the Statement

of Financial Position (Balance Sheet) and the Statement of Comprehensive
Income. Here’s how deferred tax items from the above complex example
would be shown across the financial statements:

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 1. Statement of Financial Position (Balance Sheet)
Non-Current Liabilities
The deferred tax liabilities (DTL) would be shown under the Non-
Current Liabilities section of the balance sheet as follows:

Deferred Tax Liability (DTL)

Deferred Tax Liability on Depreciation Tk.107,031

Deferred Tax Liability on Revaluation Surplus Tk.50,000

Total Deferred Tax Liability Tk.157,031

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 Deferred Tax Liability on Depreciation: Represents the tax effect on
the difference between the carrying amount and the tax base of the
asset (calculated based on the depreciation difference and the tax
rate change).

Deferred Tax Liability on Revaluation Surplus: Represents the

deferred tax effect on the revaluation surplus after adjusting for the
tax rate change in Year 3.

Note: Both components are combined and shown as a single deferred

tax liability of Tk.157,031 on the balance sheet, although they are detailed
separately in the notes to the financial statements.

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 2. Statement of Comprehensive Income (Income Statement)

The deferred tax expense (or income) for each year is presented in the
Income Tax Expense section. In this example, the deferred tax expense
includes adjustments for the temporary differences in depreciation,
impairment, revaluation, and tax rate changes.

Deferred Tax Expense by Year

Year 1: Tk.45,000
Year 2: Tk.26,250 (on depreciation difference) + Tk.60,000 (on
revaluation) = Tk.86,250
Year 3: Tk.35,781 (on depreciation difference after-tax rate change) -
Tk.10,000 (adjustment for revaluation tax rate change) = Tk.25,781

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 These deferred tax expenses are recognized in the income
statement:

Income Tax Expense

Current Tax Expense TK.X

Deferred Tax Expense

- Related to Depreciation Tk.35,781

- Revaluation Adjustment (Tk.10,000)

Total Deferred Tax Expense for Year 3 Tk.25,781

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 3. Statement of Other Comprehensive Income (OCI)
In Year 2, the deferred tax liability related to the revaluation is recognized in
OCI, rather than in the income statement, because the revaluation surplus
itself is recognized in OCI. In Year 3, the tax rate change adjustment on the
revaluation surplus would also be reflected in OCI.

Other Comprehensive Income (OCI)

Revaluation Surplus Tk.200,000

Deferred Tax Expense on Revaluation (Tk.60,000)

Net Revaluation Surplus (Year 2) Tk.140,000

Adjustment on Revaluation Tax Rate Change (Year 3) Tk.10,000

Total Comprehensive Income Impact of Revaluation Tk.1,50,000

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 4. Notes to the Financial Statements :
The notes to the financial statements provide details about deferred tax
liabilities, including breakdowns and explanations of the changes in each year.

Example Disclosure:
Deferred Tax Liabilities

The following temporary differences resulted in the recognition of deferred

tax liabilities:
Depreciation Difference: A deferred tax liability of Tk.107,031 (adjusted for
the tax rate change in Year 3) related to the difference between the
carrying amount and tax base of depreciable assets.
Revaluation Surplus: A deferred tax liability of Tk.50,000 related to the
revaluation surplus, adjusted for the tax rate change in Year 3.

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 This structure ensures clarity in the financial statements regarding the
origin and components of deferred tax liabilities, aligning with both
accounting standards and stakeholder information needs.

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 Thank you.

Md Shakhawat Hossain FCA

Partner & Branch In-charge
+880 1733-629 666

Panthapath Branch:
Fare Diya Complex, Flat No-2/D, 29d Floor,
11/&/F, Free School Street, Panthpath, Dhaka