In this topic 8 sections
- 33A connected closing process
- 34Kestrel: derive the closing deferred balances
- 35Reconcile the balances to the annual movements
- 36Explain the effective tax rate
- 37Presentation and permitted offsets
- 38Disclose the causes, not only the totals
- 39Final checks before you close the workings
- 40Sources and further reading
A connected closing process
Build current tax from the taxable-profit reconciliation. Separately compute closing deferred tax from the asset and liability worksheet, including recognition limits. Reconcile opening to closing balances and identify which movements belong to profit or loss, OCI, equity or an acquisition. Only then prepare the combined tax entries and disclosures.
The complete original Kestrel workbook provides the facts, tax reconciliation, deferred worksheet, journals and checks in one download. The presentation checklist is useful after the calculations are complete.
Kestrel: derive the closing deferred balances
Return to Kestrel's original case in the first topic. All DTAs qualify for recognition; the rate is 30%; no OCI, equity, acquisition or rate-change movements occur. Equipment cost is $120,000. Opening accumulated accounting and tax depreciation are $30,000 and $45,000; add the current charges of $18,000 and $27,000 to obtain closing CA $72,000 and TB $48,000.
| Closing item | CA | TB | Temporary difference | Closing DTA | Closing DTL |
|---|---|---|---|---|---|
| Equipment | 72,000 | 48,000 | Taxable 24,000 | — | 7,200 |
| Trade receivables: gross 36,000, allowance 2,200 | 33,800 | 36,000 | Deductible 2,200 | 660 | — |
| Prepaid insurance | 5,000 | 0 | Taxable 5,000 | — | 1,500 |
| Interest receivable | 2,400 | 0 | Taxable 2,400 | — | 720 |
| Warranty provision | 7,600 | 0 | Deductible 7,600 | 2,280 | — |
| Unearned service revenue | 7,000 | 0 | Deductible 7,000 | 2,100 | — |
| Total recognised balances | 5,040 | 9,420 |
The original tax assumptions explain each zero. Warranty claims qualify on payment; advance revenue was already taxed; prepaid insurance was deducted on payment; interest becomes taxable on receipt. Trade revenue was already taxed, while only qualifying write-offs are deductible.
Reconcile the balances to the annual movements
| Deferred item | Opening | Closing | Effect on P/L tax expense |
|---|---|---|---|
| Equipment DTL | 4,500 | 7,200 | +2,700 |
| Insurance DTL | 600 | 1,500 | +900 |
| Interest DTL | 180 | 720 | +540 |
| Receivable DTA | 300 | 660 | -360 |
| Warranty DTA | 1,200 | 2,280 | -1,080 |
| Advance-revenue DTA | 900 | 2,100 | -1,200 |
| Net deferred expense | 1,500 |
Gross DTLs increase by $4,140 and gross DTAs increase by $2,640. Combined deferred entry: Dr DTA $2,640; Dr deferred tax expense $1,500; Cr DTL $4,140. Debits equal credits. This net journal is a bookkeeping convenience and does not establish that balance-sheet offset is permitted.
Add the $53,700 current tax charge: total profit-or-loss tax expense is $55,200. Profit after tax is $186,400 - $55,200 = $131,200. Closing current tax payable remains $16,700 after the $48,000 cash payment; it is not the same as any of those expense figures.
Explain the effective tax rate
At 30%, Kestrel's accounting profit implies $55,920 of tax. The non-deductible fine adds $720; exempt income reduces tax by $1,440. Total tax expense is therefore $55,920 + $720 - $1,440 = $55,200, agreeing to the current-plus-deferred calculation.
The effective tax rate is $55,200 / $186,400 = 29.61%, rounded to two decimal places. This is a reconciliation of total P/L tax expense, not of cash paid or the current tax payable. Timing differences do not change the final rate here because all related deferred amounts are recognised at the same rate and allocated to P/L.
In other cases, rates on reversal, unrecognised DTAs, recognition exceptions, prior-period adjustments and foreign jurisdictions can affect the reconciliation. Do not force the answer to the statutory rate by introducing an unexplained balancing item.
Presentation and permitted offsets
Present tax assets and liabilities distinctly from other assets and liabilities. When the statement of financial position uses current/non-current classification, deferred tax is non-current. An expected reversal in the next twelve months does not make a DTA current under IAS 1.
Offset current tax assets and current tax liabilities only when there is a legally enforceable right and an intention to settle net or realise the asset and settle the liability simultaneously. For deferred tax, require the legally enforceable right to offset current tax balances and the applicable same-authority/same-taxable-entity conditions. Different taxable entities also require the specified net/simultaneous settlement intention in each relevant future period.
Do not net a DTA against current tax payable just because both concern tax. Do not assume a group can net all subsidiaries. If Kestrel satisfies the deferred offset conditions, its $9,420 DTL less $5,040 DTA is a $4,380 net deferred liability. Otherwise present the gross balances. Maintain the underlying schedules either way.
Disclose the causes, not only the totals
| Disclosure area | What the reader needs |
|---|---|
| Components of tax expense | Current and deferred components, relevant prior-period adjustments, rate changes and recognised benefits |
| Tax reconciliation | Amount or rate reconciliation with the applicable rate and an explanation of the basis |
| Each type of difference and unused losses/credits | Recognised balances and relevant deferred amounts in P/L where not otherwise apparent |
| Unrecognised benefits | Deductible differences and unused losses/credits, including expiry information where required |
| DTA supported despite recent losses | Amount and nature of evidence when the specific IAS 12 paragraph 82 conditions apply |
| Tax outside P/L | Tax related to OCI and directly recognised equity items, presented under the relevant requirements |
Also consider business-combination effects, discontinued operations and other required information where those circumstances exist. A small study example need not fabricate inapplicable disclosures, but a real reporting checklist must respond to the actual facts.
Final checks before you close the workings
Reconcile each opening asset and liability to the closing balance. For example, Kestrel's warranty provision is $4,000 + $9,600 expense - $6,000 claims = $7,600. Its loss allowance is $1,000 + $2,000 expense - $800 write-offs = $2,200. Its insurance prepayment is $2,000 + $9,000 paid - $6,000 consumed = $5,000.
Then check the interest receivable: $600 + $5,000 earned - $3,200 collected = $2,400. Check advance revenue: $3,000 + $12,000 receipts - $8,000 earned = $7,000. These movements independently support the differences used in the current-tax reconciliation.
Finally check balanced journals, the correct destination of tax, DTA support and the distinction between balances and movements. The complete workbook's examples are deliberately new; use their method to analyse a different problem rather than memorising one set of figures.
Sources and further reading
Concept sources: CPA Australia, Financial Reporting study guide, sixth edition (October 2022), Module 4, sections 4.9–4.12, printed pages 201–209; Part E, printed pages 210–216, provides the guide's integrated-workings scope. Kestrel Studio is a separate original case, not a reproduction or numerical adaptation of the guide's case.
Concept sources: AASB 112, June 2021 compilation, corresponding IAS 12 paragraphs 71–82; AASB 101, December 2021 compilation, corresponding IAS 1 paragraphs 54(n)–(o), 56 and 82(d).