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2016 Accounting and Reconciliation

Presented by

Herman van Dyk

Herman van Dyk is the Programme Leader for Taxation at the Potchefstroom Campus of the North-West University. He is a Chartered Accountant (SA) and Associate Chartered Accountant (England & Wales). He graduated with an MCom in South African and International Taxation cum laude. He received an academic award for the research part of this qualification titled Grounds for allowing a tax deduction for employee share incentives (best dissertation in the class).

Programme: 08:15 – 08:55 Registration 09:00 – 10:30 2016 Accounting and Reconciliation for Tax Practitioners 10:30 – 10:50 Tea Break (20 mins) 10:50 – 13:00 2016 Accounting and Reconciliation for Tax Practitioners

13:00 Conclusion

1

Welcome2016 Accounting and Reconciliation for Tax Practitioners Presented by Herman van Dyk

Upcoming CPD Events

2

Upcoming CPD EventsRefer to our website for all upcoming events

September • 2016 Tax Consequences of ITR14

and IT14SD forms

October • 2016 Tax Administration Act

2016 Accounting and Reconciliation

3

Introduction

• The starting point for determining a company's tax liabilityis its ACCOUNTING PROFIT reported in its financialstatements.

• However, general purpose financial statements aim toprovide financial information such as financial performance,financial position and cash flows to a wide audience of userssuch as financiers and investors.

• Financial statements are therefore not specificallytailored for tax reporting.

IFRS is not the "tax base" in South Africa

Overview

1. Format of financial statements and assurancerequirements

2. Fundamental differences between accounting standardsand tax law and tax risk analysis

3. Essential reconciliations to perform when compiling thefinancial statements

4. Accounting for taxation and deferred tax

4

Format of financial statements and assurance requirements

Critical questions

• Who must/may compile the financial statements?

• Is there a prescribed format and financial reportingframework that must be applied?

• Are there specific assurance requirements – audit orindependent review?

5

Who must compile financial statements?• Financial statements may be compiled:

Internally Independently

Consequences?

Independently compiled and reportedRequirements

1. Professional requirement: must be RA or CA(SA) ormember of qualified to be appointed as an accountingofficer of a close corporation;

2. Independence requirement: does not have a personalfinancial interest in the company or a related company andis/was not involved in day to day management or aprescribed officer or full-time executive employee of thecompany or related company for the current or previousthree financial years.

6

Close CorporationsAccounting officers: recognised professions

• The South African Institute of Chartered Accountants• Auditors registered in terms of the provisions of the

Auditing Profession Act, 2005• The Southern African Institute of Chartered Secretaries and

Administrators• The Chartered Institute of Management Accountants• The South African Institute of Professional Accountants• IAC members with a Diploma in Accountancy• The Association of Chartered Certified Accountants• The Chartered Institute of Business Management• The South African Institute of Business Accountants• The South African Institute of Government Auditors

Engagements to compile financial statementsISRS 4410 (previously ISA 930)

1. Use of accounting expertise to collect, classify andsummarise financial information.

2. Entails reducing detailed data to a manageable andunderstandable form without a requirement to test theassertions underlying that information.

3. The procedures employed do not enable the accountant toexpress any assurance on the financial statements.

4. However, users of financial statements do derive somebenefit as a result of the accountant's involvementbecause the service has been performed with professionalcompetence and due care.

5. Must comply with the IFAC Code of Ethics.

7

IFAC Code: Fundamental principles

Integrity

Objectivity

Professional competence and due care

Confidentiality

Professional behaviour

Report

8

Timeline for preparing annual financial statementsSection 30(1)

with period of six months6 months

Year-end AFS prepared

Critical questions




9

• Possible standards to apply

IFRS IFRS for SMEs SA GAAP

No specific framework

withdrawn from 1 December 2012

State owned (SOC) companies

• IFRS, but in the case of any conflict with any requirementin terms of the Public Finance Management Act, the latterprevails.

10

Public companies listed on an exchange

• Must apply full IFRS.

Public companies (not listed)

• Choice:

Provided that the company meets the

scoping requirements in IFRS for SMEs

11

Scope of IFRS for SMEs

The IFRS for SMEs is intended for use by small and medium-sized entities (SMEs).

Entities that do not have public accountability

Public accountability

An entity has public accountability if:• its debt or equity instruments are traded in a public

market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or

• it holds assets in a fiduciary capacity for a broad groupof outsiders as one of its primary businesses (most banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks would meet this second criterion).

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Private companies

• Choice:



Public interest score of 350+

Private companies

• Choice:



Public interest score of 100 - 349

Public interest score of 0 - 99 AND

AFS are independently compiled

13

Private companies

• The Financial Reporting Standard as determined by thecompany for as long as no Financial Reporting Standard isprescribed.

Public interest score of 0 - 99 AND

AFS are internally compiled

No specific framework

Non profit companies (NPC)

• NPC incorporated directly or indirectly by the state, anorgan of state, a state-owned company, an internationalentity, a foreign state entity or a foreign company OR

• NPC incorporated primarily to perform a statutory orregulatory function in terms of any legislation, or to carryout a public function at the direct or indirect initiation ordirection of an organ of the state, a state-owned company,an international entity, or a foreign state entity, or for apurpose ancillary to any such function.

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Non profit companies (NPC)

• Other non profit companies – follow the same rules as forprivate companies (PI score).

Important principle

• If IFRS or IFRS for SMEs is adopted, it must be fullyapplied.

• Selective application is not permitted.

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Complete set of financial statements (IFRS/IFRS for SMEs)• Statement of financial position (balance sheet)• Statement of profit or loss and other comprehensive income

(income statement)• Statement of changes in equity*• Statement of cash flows• Notes including basis of preparation and accounting policies

Other important features of IFRS and IFRS for SMEs• Accrual basis of accounting• Comparative information is required• Disclosures

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Critical questions




Levels of assurance

Compilation Independent review

External audit

No assurance

Moderate assurance

Reasonable assurance

Expressed as negative

assurance

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Independent reviewISRE 2400

The objective of a review of financial statements is to enable a practitioner to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the practitioner’s attention that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework (negative assurance).

Must apply the same materiality considerations as if an audit opinion were

being given

Negative assurance

RI reported to CIPC

Mostly inquiries and AP

Independent review proceduresISRE 2400

• Obtaining an understanding of entity's business andindustry

• Inquiries• Analytical procedures• Review (reading) of the financial statements• Subsequent events procedures

• List of procedures in Appendix 2 of ISRE 2400.

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Who may performIndependent review?

• PI score 100+: registered auditor or CA(SA)• PI score <100: a person qualified to be appointed as an

accounting officer of close corporation

Must be independent (no financial interest, not director or employee)

May not be same person who was involved in preparation of financial

statements

Audit requirement: regulation 28Companies and close corporations

• public companies• state owned companies• companies if, in the ordinary course of its primary activities, it holds

assets in a fiduciary capacity for persons who are not related to thecompany, and the aggregate value of such assets held at any timeduring the financial year exceeds R 5 million

• NPC incorporated directly or indirectly by the state, an organ ofstate, a state-owned company, an international entity, a foreignstate entity or a foreign company

• NPC incorporated primarily to perform a statutory or regulatoryfunction in terms of any legislation, or to carry out a public functionat the direct or indirect initiation or direction of an organ of thestate, a state-owned company, an international entity, or a foreignstate entity, or for a purpose ancillary to any such function

• other companies with a PI score of 350+• other companies with a PI score of 100+ and AFS are internally

compiled.

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Independent review requirementCompanies only

Compulsory or voluntary audit

performed

Independent review

requirement Unless if section 30(2A)

exemption applies

Exemption from audit and independent reviewSection 30(2A)

If, with respect to a particular company, every person who is a holder of, or has a beneficial interest in, any securities issued by that company is also a director of the company, that company is exempt from the requirements in this section to have its annual financial statements audited or independently reviewed.

Companies only

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Audit (section 90(2))Statutory independence requirement

Auditor or firm must not be:• a director or prescribed officer of the company;• an employee or consultant of the company who was or

has been engaged for more than one year in themaintenance of any of the company’s financial recordsor the preparation of any of its financial statements;

• a director, officer or employee of a person appointed ascompany secretary;

• a person who, alone or with a partner or employees,habitually or regularly performs the duties of accountantor bookkeeper, or performs related secretarial work, forthe company;

• any of the above at any time during the five yearspreceding appointment.

Close CorporationsAccounting officers: duties

• Determine whether financial statements are in agreementwith accounting records

• Review appropriateness of accounting policies• Report in respect of the above.

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Public Interest Score (PI Score)Calculation

1. Number of points equal to average number of employeesduring the financial year +

2. One point for every R1 million (or portion thereof) in thirdparty liability at the financial year end +

3. One point for every R1 million (or portion thereof) inturnover during the financial year +

4. one point for every individual who, at the end of thefinancial year, is known by the company

• in the case of a profit company, to directly or indirectly have abeneficial interest in any of the company’s issued securities; or

• in the case of a non-profit company, to be a member of thecompany, or a member of an association that is a member of thecompany.

Interpretation: "employee"

• According to Companies Regulations, use definition inLabour Relations Act (66 of 1995):

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Interpretation: "beneficial interest"“beneficial interest”, when used in relation to a company’s securities, means the right or entitlement of a person, through ownership, agreement, relationship or otherwise, alone or together with another person to—• receive or participate in any distribution in respect of the

company’s securities;• exercise or cause to be exercised, in the ordinary course,

any or all of the rights attaching to the company’ssecurities; or

• dispose or direct the disposition of the company’ssecurities, or any part of a distribution in respect of thesecurities,

• but does not include any interest held by a person in a unittrust or collective investment scheme in terms of theCollective Investment Schemes Act, 2002

Holders of a beneficial interest

Beneficiaries?

owns shares in

Company

Trust

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Case study 115 minutes

The following information pertains to CompCo (Pty) Ltd for the financial year ended 31 December 2016:

• The company had an average of 60 employees during theyear excluding the board of directors.

Case study 1Shareholders• Damon Hamilton• Lewis Button• Eddie Hill• Joanne Irvine• BE Family Trust (trust has three beneficiaries)

Board of directors• Damon Hamilton• Lewis Button• Eddie Hill• Joanne Irvine

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COMPCO (PTY) LTD PROVISIONAL

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DEC 2016

2016

R

REVENUE 126 100 000

Cost of sales -55 000 000

GROSS PROFIT 71 100 000

Administrative expenses -3 000 000

Other expenses -5 000 000

Finance costs -750 000

PROFIT BEFORE TAX 62 350 000

COMPCO (PTY) LTDPROVISIONAL STATEMENT OF FINANCIAL POSITION AS AT 31 DEC 2016

2016

R

ASSETS

Non-current assets

Property, plant and equipment 75 000 000

Current assets

Trade and other receivables 15 000 000

Cash and cash equivalents 9 000 000

99 000 000

EQUITY AND LIABILITIES

Equity

Share capital 5 000

Retained earnings 71 537 000

Non-current liabilities

Long-term borrowings 10 000 000

Current liabilities

Tax payable 17 458 000

99 000 000

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Matters to consider (required):

• Should the financial statements be prepared by an externalaccountant or may it be done by the company's internalfinance staff?

• By which date must the financial statements be prepared?

• Which financial reporting standards must be applied whenpreparing the financial statements?

• Are there any assurance (audit or independent review)requirements?

Solution

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Fundamental differences between accounting standards and tax lawTax risk analysis of financial statements

Profit before tax for accounting purposesRevenue 1 000 000Cost of sales (400 000)Gross profit 600 000Other income 100 000Expenses (350 000)Profit before tax 350 000

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Taxable incomeSection 1 of the Income Tax Act

Gross income 1 100 000Exempt income (20 000)Income 1 080 000Deductions (750 000)Taxable capital gain 0Taxable income 330 000

Completing corporate income tax return

Profit before tax

Taxable income

IT14

IFRS

Tax law

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Revenue• Accounting

• IAS 18/IFRS 15/section 29

• Recognised whenrecognition criteria is met.

• Recognised at fair value ofconsideration.

• Tax

• Gross income definition,special inclusions and caselaw.

• Earlier of receipt oraccrual.

• Recognised at face value(proviso to the definition).


• Propco (Pty) Ltd owns an office building that is rented outto a commercial tenant for R30 000 per month (excludingVAT).

• Propco (Pty) Ltd has a February financial year-end.• On 1 January 2016, the tenant paid rent for six months in

advance.

• Required: indicate the appropriate accounting and taxtreatment for Propco for the year ended 29 February 2016.

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Solution

Expenses• Accounting

• Recognised whenrecognition criteria is met.

• Tax

• "Trade" requirement• Must meet general or

special deduction provisionrequirements (certainexpenses may thereforenot qualify).

• Certain expenses areprohibited.

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Examples of expenses that do not qualify for a tax deduction• Equity-settled share-based payments are expensed for

accounting purposes, but would not qualify for a taxdeduction since no "expenditure" was incurred (CSARS vLABAT), unless special deduction in section 11(lA) applies.

• Mark-to-market losses ("book losses") on financialinstruments are usually expensed for accounting purposes,but would not ordinarily qualify for a tax deduction since theywere not actually incurred (however, section 24JB applies tocertain persons and provides for IFRS-based taxation offinancial instruments)

• Donations are not deductible in terms of section 11(a) sincethey are not in the production of income (CIR V PICK 'N PAYWHOLESALERS), unless the special deduction in section 18Aapplies (only applies to donations to certain PBO's).

Expenditure: variable remunerationSection 7B

In determining the taxable income derived by any person during a year of assessment, any amount to which an employee becomes entitled from an employer in respect of variable remuneration is deemed to-

• accrue to the employee• constitute expenditure incurred by the employeron the date during the year of assessment on which the amount is paid to the employee by the employer.

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Variable remunerationSection 7B

EMPLOYER

Deduction Taxed

EMPLOYEE

CASH BASIS

Variable remuneration means overtime pay, bonus, commission, travel allowances and advances, leave pay.

Variable remunerationSection 7B

CASH BASIS

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Prohibited deductions• Private maintenance expenses (s 23(a))• Domestic of private expenses (s 23(b))• Recoverable expenses (s 23(c))• Interest, penalties and taxes (s 23(d ))• Provisions and reserves (s 23(e))• Expenditure to produce exempt income (s 23(f ))• Non-trade expenses (s 23(g))• Notional interest (s 23(h))• Deductions already claimed against lump sums (s 23(i ))• Labour brokers and personal service providers (s23(k))• Restraint of trade unless it qualifies for special deduction (s23(l ))• Expenditure related to employment or holding of an office (s 23(m))• Unlawful activities (s 23(o))• Expenses incurred in production of foreign dividends (s23(q))• Policies (23(p) and (r)


Foxtrot (Pty) LtdStatement of profit or loss and other comprehensive income for the year ended 31 December 2015

Revenue 500,000Cost of sales (100,000)Gross profit 400,000Employee cost (120,000)Loss on financial instrument (5,000)Other expenses (100,000)Profit before tax 175,000

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Case study 3 (continued)

Additional information

1. Employee cost includes a R20 000 provision for bonuses that is due andpayable to staff in terms of employment contracts. The bonuses will bepaid during February 2016. Also included is a R10,000 equity-settledshare-based payment made to the company's managing director.

2. Shares were purchased in A Ltd for R15,000 on 18 July 2015. The shareswere trading at R10,000 on 31 December 2015 resulting in a loss ofR5,000.

3. Other expenses include:

Traffic fines R2 000Donation to homeless person R3 000SARS penalty for late VAT201 R5 000

CALCULATE TAXABLE INCOME FOR 2015

Solution

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Leases

• Accounting

• Operating lease paymentsare expensed – straight-line over lease period.

• Finance leases – leasedassets and liabilities arerecognised.

• Assets are depreciated• Interest recognised on

liabilities.

• Tax

• Lease payments actuallyincurred deductible ifs11(a) requirements aremet.

• Section 8(5) recoupmenton acquisition of leasedassets

Proposed changes

Fixed assets

• Accounting

• Depreciated over useful lifeto residual value.

• Depreciation starts whenasset is available for use.

• Tax

• Depreciated over periodsspecified in legislation orSARS rulings.

• Small items (<R7,000) arefully written off in firstyear.

• Capital allowancescommence when broughtinto use.

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Fixed assets (continued)

• Accounting

• Upon disposal, a gain orloss is recognised asdifference betweenproceeds and carryingamount.

• Revaluation/fair valuemodels.

• Tax law

• Upon disposal, a capitalgain arises as thedifference betweenproceeds and base cost,subject to exclusions, roll-over relief and only partlytaxable (40% or 80%).

• Timing of disposal rulesmay differ from accountingderecognition.

Related party/connected person transactions• Accounting

• Requires disclosure ofrelationships, keymanagement compensationand related partytransactions and balances.

• Tax

• Transactions with connectedpersons could have varioustax implications:– Transfer pricing and thin

capitalisation– Limitation of losses and

deductions– VAT implications (timing

and value of supplies)– Investments in CFC's could

result in net income offoreign company beingimputed in terms of s9D.

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Transfer pricing: affected transactionSection 31

Resident Non-resident

PE of non-resident in SA

Non-resident

Resident PE of other resident outside SA

CFC Non-resident

connected persons

connected persons

connected persons

connected persons

1. Any term or condition of that transaction should bedifferent from any term or condition that would haveexisted if those persons had been independent personsdealing at an arm’s length.

2. Such difference result in a tax benefit for any party to thetransaction.

Affected transactionSection 31

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Consequences of an affected transaction

Primary transfer pricing

adjustment31(2)

Secondary transfer pricing

adjustment31(3)

The taxable income or tax payable of • each party to the transaction• that derives a tax benefitmust be calculated as if the transaction had been entered into on arm’s-length terms and conditions.

Primary adjustmentSection 31(2)

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• Any primary adjustment to a person's taxable income ortax payable are deemed to be one of the following:

Secondary adjustmentSection 31(3)

Deemed dividend in

specie

Deemed donation

Resident company

Resident NP or trust

Low or zero interest loansBorrower (debtor)

• Could result in gross income for tax purposes if loan isgranted quid pro quo (in exchange for) something(Brummeria Renaissance principle)

• Debit loans to shareholders is a possible deemed inspecie dividend for dividends tax purposes.

39

Low or zero interest loansLender

• Attribution rules in section 7/paragraphs 69 to 72 of EighthSchedule.

• Possible donations tax (not currently SARS practice).• Proposed new legislation applicable to trusts.

Limitation of interest deductions

• Section 23M: Limitation of the deduction in respect of interestpaid to persons not subject to tax.

• Section 23N: limitation of interest in respect of reorganisationand acquisition transactions.

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Personal service providers

If a company is classified as a personal service provider, allowable deductions are limited to:• employee cost and fund contributions• legal expenses• bad debts• refund of employment income or restraint of trade

payments.

Essential reconciliationsto perform when compiling financial statements

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Income statement

Revenue 1 000 000Cost of sales (400 000)Gross profit 600 000Other income 100 000Expenses (350 000)Profit before tax 350 000

Taxable income IT14

VAT201

VAT201

EMP501

VAT reconciliations

Output VAT

Input VAT

Sales

Cost of sales

42

Output VAT reconciliation

Revenue/turnover for the year A

Total output VAT per VAT201 return periods that fall within financial yeardivide by 0.14 to determine total standard rated supplies for the year B

Total zero-rated supplies per VAT per VAT201 return periods that fall within financial year C

Total exempt and non-supplies per VAT201 return periods that fall within financial year DTotal VAT supplies made during the year (B+C+D) E

DIFFERENCE (A - E)

Input VAT reconciliation

Total input VAT as per VAT201 tax periods A

Total acquisitions ( A / 0.14) B

Opening stock CPurchases DClosing stock ECost of sales C+D+E F

Reconciling differences B - F

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PAYE reconciliationEmployee cost on

financial statements

Total amount on whichPAYE was calculated


You want to submit the ITR14 tax return of Gulf (Pty) Ltd.

The company sells retail goods to the local market, but usually exports one large shipment of goods to the UK during November.

The financial statements indicate total revenue for the 2015 financial year as R1,020,000.

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Case study 4continued

The company is a category B VAT vendor (two month VAT periods ending in even months).

A review of the VAT201 returns for the year revealed the following output tax amounts:

The invoice issued for the November shipment to the UK amounted to R240,000. This amount was correctly indicated as a zero-rated supply on the December VAT return.

PERFORM OUTPUT VAT RECONCILIATION

February 11 500.00 April 16 000.00 Junie 35 000.00 August 17 400.00 October 10 500.00 December 16 000.00

Solution

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Accounting for income tax

IAS 12Section 29 of IFRS for SMEs

Tax expense

Consists of:

Current tax

Deferred tax

46

Current tax

• Current tax is tax payable (refundable) in respect of thetaxable profit (tax loss) for the current period or pastperiods.

Usually the amount assessed on the tax assessment for the

year

Current tax assets and liabilities

• Current tax liability is recognised for tax payable (debtowing to tax authority)

• Current tax asset is recognised if the amount alreadypaid to tax authority is more than the amount owing(provisional tax paid was more than amount finallyassessed).

47

Deferred tax

• Deferred tax is tax payable or recoverable in futureperiods, generally as a result of the entity recovering orsettling its assets and liabilities for their current carryingamount, and the tax effect of the carry forward of currentlyunused tax losses and tax credits.

Deferred tax

• As indicated earlier in the course, there are a number ofDIFFERENCES between rules contained in accountingstandards and rules contained in tax law.

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Deferred tax: types of differences

Differences between Accounting and Tax

‘Permanent’ differences (non-taxable/deductible

items):The item is recognised for accounting purposes, but

NEVER by the tax authority (or the other

way around).

Temporary differences:The item is recognised by both accountants and tax

authority, but in a different period. The difference is only temporary. Over a

longer period, there is no difference.

Examples of permanent differences• Dividends received are income for accounting purposes but

exempt (therefore not included in taxable income) for taxpurposes.

• Fines paid are expensed for accounting purposes but notdeductible for tax purposes.

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Examples of temporary differences

• A laptop with a cost of less than R7 000 is fully deductiblefor tax purposes in the year acquired (section 11(e)).

• If the laptop has a two year useful life for accountingpurposes, it's cost will be expensed (as depreciation) overtwo years.

• This difference is only temporary, because after two yearsthe asset will be fully "depreciated" for both accounting andtax purposes.

Deferred tax

Permanent differences

Temporary differences

Changes effective tax rate of company

Gives rise to DEFERRED TAX

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Exampleimpact of permanent differences on effective tax rate on company

• Company A has profit before tax of R100,000• Included in this amount is a dividend of R20,000• The statutory tax rate is 28%


• TAXABLE INCOME

• Profit before tax R100,000• Less: exempt dividend (R20,000)• Taxable income R80 000

• Tax at 28% R22 400

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• So what is the company's effective tax rate?

• Tax/Profit before tax• 22,400/100,000 = 22.4%

• Compared to the statutory rate of 28%

• IAS 12 requires a reconciliation between a company'sstatutory and effective tax rate.

Deferred tax

• Deferred tax arises from temporary differences• Deferred tax = temporary differences x tax rate

• Deferred tax is the creation of an ASSET or LIABILITY forthe future tax consequences of temporary differences

• If you are going to pay more tax in future because oftemporary differences: LIABILITY

• If you are going to pay less tax in future because ofdifferences: ASSET

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Calculation of deferred tax

• Balance sheet method prescribed by IAS 12• Calculated on temporary differences

• Temporary difference (TD): difference between carryingamount (CA) and tax base (TB) of assets and liabilities

• Taxable temporary differences: more tax in future (deferredtax liability)

• Deductible temporary differences: less tax in future(deferred tax asset)

Balance sheet method

CA TB TD DT (balance in SoFP)

Movement (in P+L)

CA – TB TD x rate

This year’s SoFP

balance less last year’s

SoFP balance

104

53

How to calculate the tax base (TB)

Tax base

Of an asset (e.g. PPE)

Of a liability (e.g. creditors)

Rule 1:TB = tax

deductions to be granted by tax

authority in future

Rule 2 (exception to

rule 1):If economic

benefits of the asset are not taxable, then

TB = CA

Rule 1:TB = CA less

tax deductions in future

Rule 2 (exception to

rule 1):The TB of

income received in

advance = CA less amounts NOT taxable

in future

105


Calculate the tax base on 31 December 2016 of each of the following items:

1) Delivery vehicles purchased for R200 000 on 1 January 2016.SARS allows four year write off.

2) Trade creditors of R75 0003) Income received in advance of R110 000

54

Deferred tax asset or liability?

• Ask: will the company pay more tax in future(Taxable TD → liability), or less tax in future(Deductible TD → asset)?

• Useful shortcut:

Item = asset (e.g. PPE) CA > TB DT LIABILITY

Item = asset (e.g. PPE) CA < TB DT ASSET

Item = liability (e.g. loan) CA > TB DT ASSET

Item = liability (e.g. loan) CA < TB DT LIABILITY

107


AssetCo (Pty) Ltd has profit before tax of R300 000 for the year ended 31 December 2016, which includes dividends received of R20 000. AssetCo is not a small business corporation.

Included in the profit before tax is depreciation on equipment of R150 000. The SARS grants a wear-and-tear allowance of R100 000 per annum on equipment. The equipment was purchased on 1 January 2016 for R600 000.

During the year land with a cost price of R500 000 was sold for R550 000 (the gain is already included in the profit before tax figure above).

• Calculate the income tax expense of AssetCo for the yearended 31 December 2016.

• Reconcile the statutory income tax rate to the effective taxrate for the year ended 31 December 2016.

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Disclosure requirementsSection 29• current tax expense (income);• any adjustments recognised in the period for current tax of prior

periods;• the amount of deferred tax expense (income) relating to the

origination and reversal of temporary differences;• the amount of deferred tax expense (income) relating to changes in

tax rates or the imposition of new taxes;• the amount of the benefit arising from a previously unrecognised tax

loss, tax credit or temporary difference of a prior period that is usedto reduce tax expense;

• adjustments to deferred tax expense (income) arising from a changein the tax status of the entity or its shareholders;

• deferred tax expense (income) arising from the write-down, orreversal of a previous write-down, of a deferred tax asset

• the amount of tax expense (income) relating to those changes in• accounting policies and errors that are included in profit or loss

because they cannot be accounted for retrospectively.

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111

112

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Sources of informationUseful downloads

• Companies Act (71 of 2008)• Companies Regulations (2011)• International Standard on Review Engagements 2400• International Standard on Related Services 4410• IFRS for SMEs

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Thank you

• Thank you for attending this event.

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