Question

The depreciation reported on the financial statements needs to be reconciled. What is the effect of this on tax in future periods? Discuss in 50 to 80 words.

ABC Ltd Depreciation Reconciliation Statement Year ended 30/6/20xx
Depreciation Per Financials	350,000
Less
Depreciation allowable per tax legislation	250,000
Equals
Differed depreciation amount	100,000

Answer 1

Solution:

The difference in the given example is arrived due to different depreciation rates defined under companies act and income tax act. The amount claimed in the financial statement is greater than the amount allowed under tax legislation, some of the expense will be a deferred tax asset (100,000). This means companies only can claim depreciation expense of 250,000 as expense in tax return, the differed amount 100,000 can be claimed in the next financial years. These differences are treated as deferred tax assets only when the differences are temporary.