the deferred tax calculation for 2016. We've finished step one which I call step one, the

calculation of the current taxes payable or the current tax expense for 2016. Now we'll

move on to step 2 or I call it step 2 which is the calculation of the deferred tax expense or if it's a credit balance that we

calculate, then it will be a benefit. Okay. We're going to calculate that. Before we do

the calculation of the deferred tax expense or benefit for the year, we need to understand

where we ended last year. Based on the facts that we are given in this situation, I didn't

actually give you the deferred tax asset or liability balance that we had at the end of

2015. We need to know that figure in order to finish the 2016 calculation of the deferred

tax expense.

Let's calculate our 2015 deferred tax asset or liability balance based on the facts we

are given and then we'll use that information to move on and do the step 2 calculation for

this year. The end of last year, so in 2015, we have to take a note of what were all the

timing differences that we had. What we're all the timing differences that we had at

the end of last year and in the facts the question that I gave you at the beginning

of this video, there was some property, plant, and equipment assets. They're depreciable

assets so we call them and those had a timing difference. We knew they had a timing difference

because of the balance sheet value. The balance sheet or the statement of financial position

values, we call NBV or you could call this carrying value.

You can call it whatever you want to call it, but it's whatever the value that is on

the balance sheet, that's the value we want to take note of here. The value that I gave

you at the beginning of this question was $40,000 was the net book value of the property,

plant, and equipment. For tax purposes, the value was at $25,000. These 2 values are different

and the difference is what has created a timing difference. In prior years, we've depreciated

this asset down to $40,000 for accounting purposes. For tax purposes, we've managed

to depreciate it down to $25,000. In effect, we've taken an extra $15,000 of tax 0depreciation

versus accounting appreciations. We've got more tax depreciation because we brought the

asset down to the $25,000 value.

The difference between the tax base, usually base or basis is usually the comment there.

The balance sheet base or accounting value is what we'll call the timing difference.

Okay. I usually set this chart up again. This is just rough works. You can set it up in

any way you want to. I usually set it up though that if the balance sheet value is a debit,

then I'll show it as a positive number. If the balance sheet value is a credit, I'll

put brackets around it. Obviously a property, plant, and equipment net book value is a debit

balance. I've got here as a positive number. For tax purposes, it's $25,000. For accounting

purposes, it's 40, so 25,000 - 40,000 gives us a credit figure of $15,000.

What does that mean? Well, that $15,000 is saying that we have created timing differences

over the years. It could have taken us 10 years. It could taken us one year. Over the

many years that we've owned this asset, we've created differences between the accounting

depreciation and the tax depreciation. A couple of things I want to say about this though.

Just a few things to take note. This $25,000 here, this is the UCC at the end of the year

that we're doing the 2015 calculations. That's the under appreciated capital costs at the

end of the year. This $40,000 is the net book value of the property, plant, and equipment

at the end of 2015.

When you're looking for your total differences that have accumulated over the year, you can

get it by just finding those 2 values and subtract the 2 of them and you get your total

time difference. We're here with a $15,000 timing difference between tax and accounting

for the property, plant, and equipment assets and that's because for tax purposes, we've

taken greater deductions than we have 4 accounting. That means that in future years, we're not

going to have as much left with the tax to take deductions on because we'll eventually

run out of it. We're already down to $25,000. In future years, we can expect our current

tax expense to be higher.

This figure here of negative $15,000 is saying that in future years, we're going to have

to pay additional current income tax because we won't have anymore CCA to take because

we've already depreciated everything here. This difference is saying to us that in the

future, we are going to have a higher tax liability because we were able to take a quick

accelerated depreciation for tax purposes here. Anyways, when you get a brackets around

the figure when you do this 25,000 minus this asset of 40,000, you got a $15,000. This timing

difference is going to give rise to a liability. If you see the brackets, it's going to give

rise to a liability. If you have no brackets, then it's going to give rise to an asset,

a deferred tax assets.

We've got timing differences $15,000 negative that's going to create a liability, multiply

that by the tax rate but not this year's tax rate. We want to multiply it by future tax

rates because this difference is going to go away when the CCA and the depreciation

eventually have brought both assets down to a zero value. It's going to go away in future

years. It doesn't matter what this year's tax rate is, what the current your tax rate

is. What matters is future years, so 2016 and beyond. We're looking at the 2015 timing

differences. We got to put ourselves back in time last year at December 31st, 2015.

At that point in time, all we knew at that point time was that the tax rate was still

20%. The future tax rate back then was 20%, so 15,000 times 20% is going to give us our

deferred tax.

It's going to give us either an asset value or a liability value. In this case because

it's brackets, it's going to be a liability value. At the end of last year, there would

have been a deferred tax liability for that $3000 and they would created the liability

by debiting deferred tax expense and crediting deferred tax liability. That wasn't the only

timing difference. There was another timing difference last year, at the end of last year

and that was the warranty liability. Notice, so I'm not writing the income statement values.

I'm writing the balance sheet accounts. I've got the warranty liability. Now so at the

end of last year, you said as we showed, there was an $18,000 warranty liability on our books.

We'll put brackets around it because it's a credit balance.

For tax purposes, there isn't any kind of such a thing as an accrual of a liability.

There's no tax base, so it's not applicable. You say not applicable or just put a 0 there.

To calculate what's our timing difference between tax and accounting. For tax, you weren't

allowed to expense anything. For accounting, we expense the entire thing. Zero minus a

negative means we had a positive timing difference, so that timing difference is going to create

a deferred tax assets. It's going to mean that we weren't allowed to expense anything

for accounting or for tax purposes last year, but eventually we're going to be able to expense

the entire $18,000 when we actually spend the money to repair some warranties.

We haven't deducted anything yet but in the future, we'll be able to detect the entire

amount and that will make our taxes smaller so it creates an asset. Eighteen thousand

times the future tax rate of 20% is an asset value of $3600. At the end of last year following

IFRS, the difference between this credit and this debit is we needed a deferred tax asset

last year of $600. If there was nothing in the deferred tax asset or liability of the

council, let's just pretend maybe this was the first year of the difference. Then the

journal entry when they recorded that, it would have been simply debit deferred tax

asset, $600 credit deferred tax benefit. The income statement account of $600. What I want

you to take note of is the $600 deferred tax assets would be sitting on the balance sheet

at the beginning of this fiscal year 2015.

We need to know our starting point for the deferred tax. We know our starting point for

the step 2 calculation for deferred tax for 2015. We know what's in our accounts at the

end of last year or the beginning of this year which is a $600 deferred tax asset. Now

we can start doing this year's calculation, the deferred tax. We've got to identify all

of our timing differences and these were 2 differences that we had identified from last

year, property plant, equipment and warranty. We know those are differences and we actually

have a couple more new ones that we created this year when we did our step one calculation

or calculation of taxable income.

Let's start with the property, plant and equipment line. As we talked about before, the tax base

number is going to be the undepreciated capital cost allowance value at the end of 2016. The

accounting base balance is going to be the net book value at the end of 2016. These 2

figures, we picked those up. This one is we talked about before is the UCC at the end

of 2016. We get to that figure by going the beginning UCC balance was $25,000, so that

was the number at the end of last year. Then we had CCA that we took for 2016 of $3000.

We've got an ending UCC balance of $22,000 this year. For accounting purposes, we had

a net book value at the end of 2015 of $40,000 and then the depreciation expense for 2016

was $2000. We ended up with a net book value at the end of 2016 of $36,000. That's where

those 2 figures are coming from.

To finish off the deferred tax effect calculation on property, plant, and equipment, we've got

$22,000 of tax base minus the net book value of $38,000 leaves us with a timing difference

of $16,000 at the end of 2016 times the future tax rate. Now in the original facts I gave

you for this question, we said that the tax rates for 2017 and beyond are known to be

15%. I'll use the future tax rate of 15%. Even though the current year's tax rate is

20%, we want to use the future year's tax rate to figure out the deferred tax piece,

because it's only going to be relevant to future years. Sixteen thousand times 15% is

a deferred tax liability is needed related to the property, plant, and equipment of $2400.

Next one which was a carryover from last year. I was the warranty liability. Now we've got

a warranty liability of only $9500. We have no warranty liability for tax because that

doesn't make any sense. You would never accrue a liability for tax purposes. How do we get

this value? Well, we just get it off the general ledger account if we had access to it, but

just how did we get to that point? Well, we had a warranty liability at the end of 2015

if you remember of $18,000. We spent in 2016 $8500, so the remaining warranty liability

balance at the end of 2016 is only $9500. The warranty liability timing difference is

zero minus a negative number, creates a positive number of $9500. This timing difference is

going to give rise to a deferred tax asset.

Times the future tax rate means we need a deferred tax asset for this remaining $9500

timing difference of 1425. Okay, so that's the 2 timing differences that we also had

last year, but we created 2 more timing differences this year. We have a restructuring liability.

If you look back to the temporary differences in the step one, current tax calculation,

we had a restructuring liability that we were not allowed to deduct for tax purposes. For

accounting purposes, the value is a $10,000 liability. For tax purposes, there's nothing

recorded. You're going to find that most things in the timing difference tax base column are

going to be zero for anything that's related to an accrual. An accrual of an expense or

an accrual of a revenue, there's no such thing as accruals for most tax situations.

Most of the tax law is based on cash accounting, so that's why there'd be nothing really accrued,

no receivables and no liabilities. If you've got an asset, there certainly would be tangible

assets have a tax base and investments have a tax base. When we're talking about liabilities

and receivables, they usually don't have a tax base. The restructuring liability is zero

minus the negative number creates a positive number. We need a deferred tax asset for related

to this restructuring liability that was not deductible this year. In the future years,

we can deduct it for tax purposes. We'll make our taxes smaller, so that's why this is going

to create a deferred tax asset. Ten thousand times the future tax rate equals a deferred

tax asset is needed of $1500 on this item.

Then the 4th and the last timing difference we've got at the end of 2016 is a rent receivable.

We had accrued rent of $6000. We had a receivable sitting there on our balance sheet. Nothing

accrued for tax purposes, so there's no tax base value. Zero minus an asset is going to

create a negative $600 timing difference times a future tax rate. Says that we need a deferred

tax liability of $900, and that would make sense because in future years, we're going

to have to pay tax on the $600. Remember, we didn't have to pay tax in 2016 because

we didn't collect the money yet. Next year when we get the money from our tenant, we

will have to pay tax on it so that's going to make our taxes higher next year and the

amount that is going to make it higher by is this differed tax liability of $900.

Adding up all these deferred tax assets and liabilities that we've got here under IFRS,

we can just calculate the the net value. We've got a net 375 deferred tax liability for 2016.

Okay, that's the number we want to see on our balance sheet. In order to do the journal

entries to get to that number, we've got to figure out what we've got in our account,

so we did that already. Our 2015 balance was a deferred tax asset of $600. We actually

need a journal entry to reverse that deferred tax asset and set up a deferred tax liability.

The effect of our journal entry is going to be a $975 deferred tax expense.

Okay, thanks for watching. We've just concluded the deferred tax calculation step 2 as O like

to call it. When you're ready, you can move on to the next video which will wrap up the

journal entries in the income statement and balance sheet presentation.