Tax Base of Property, Plant and Equipment

Cost	Building	Motor Vehicles	Total
Balance at 31/12/X4	50,000	10,000	60,000
Additions X5	6,000	-	6,000
Balance at 31/12/X5	56,000	10,000	66,000
Additions X6	-	15,000	15,000
Balance at 31/12/X6	56,000	25,000	81,000
Accumulated Depreciation	10%	25%
Balance at 31/12/X4	40,000	5,000	45,000
Depreciation X5	5,600	2,500	8,100
Balance at 31/12/X5	45,600	7,500	53,100
Depreciation X6	5,600	6,250	11,850
Balance 31/12/X6	51,200	13,750	64,950
Tax Base
31/12/X4	10,000	5,000	15,000
31/12/X5	10,400	2,500	12,900
31/12/X6	4,800	11,250	16,050

Deferred Tax Assets, Liabilities andExpense at 31/12/X4

	Carrying Amount	Tax Base	Temporary Differences
Accounts receivable	500	500	-
Inventory	2,000	2,000	-
Product development costs	500	-	500
Investments	33,000	33,000	-
Property, plant ; equipment	36,000	15,000	21,000
TOTAL ASSETS	72,000	50,500	21,500
Current income taxes payable	3,000	3,000	-
Accounts payable	500	500	-
Fines payable	-	-	-
Liability for health care benefits	-	-	-
Long term debt	20,000	20,000	-
Deferred income taxes	8,600	8,600	-
TOTAL LIABILITIES	32,100	32,100
Share capital	5,000	5,000	-
Revaluation surplus	-	-	-
Retained earnings	34,900	13,400
TOTAL LIABILITIES / EQUITY	72,000	50,500
TEMPORARY DIFFERENCES			21,500
Deferred tax liability	21,500at 40%		8,600
Deferred tax asset	-	-	-
Net deferred tax liability			8,600

Deferred Tax Assets, Liabilities andExpense at 31/12/X5

	Carrying Amount	Tax Base	Temporary Differences
Accounts receivable	500	500	-
Inventory	2,000	2,000	-
Product development costs	250	-	250
Investments	33,000	33,000	-
Property, plant ; equipment	37,200	12,900	24,300
TOTAL ASSETS	72,950	48,400	24,550
Current income taxes payable	3,570	3,570	-
Accounts payable	500	500	-
Fines payable	700	700	-
Liability for health care benefits	2,000	-	(2,000)
Long term debt	12,475	12,475	-
Deferred income taxes	9,020	9,020	-
TOTAL LIABILITIES	28,265	26,265	(2,000)
Share capital	5,000	5,000	-
Revaluation surplus	-	-	-
Retained earnings	39,685	17,135
TOTAL LIABILITIES / EQUITY	72,950	48,400
TEMPORARY DIFFERENCES			22,550
Deferred tax liability 24,550 at 40%			9,820
Deferred tax asset (2,000) at 40%			(800)
Net deferred tax liability			9,020
Less: Opening deferred tax liability			(8,600)
Deferred tax expense (income) related tothe origination and reversal of temporary differences			420

Deferred Tax Assets, Liabilities andExpense at 31/12/X6

	Carrying Amount	Tax Base	Temporary Difference
Accounts receivable	500	500	-
Inventory	2,000	2,000	-
Product development costs	-	-	-
Investments	33,000	33,000	-
Property, plant ; equipment	75,750	16,050	59,700
TOTAL ASSETS	111,250	51,550	59,700
Current income taxes payable	2,359	2,359	-
Accounts payable	500	500	-
Fines payable	700	700
Liability for health care benefits	3,000	-	(3,000)
Long term debt	12,805	12,805	-
Deferred income taxes	19,845	19,845	-
TOTAL LIABILITIES	39,209	36,209	(3,000)
Share capital	5,000	5,000	-
Revaluation surplus	19,637	-	-
Retained earnings	47,404	10,341
TOTAL LIABILITIES / EQUITY	111,250	51,550
TEMPORARY DIFFERENCES			56,700
Deferred tax liability 59,700 at 35%			20,895
Deferred tax asset (3,000 at 35%)			(1,050)
Net deferred tax liability			19,845
Less: Opening deferred tax liability			(9,020)
Adjustment to opening deferred taxliability resulting from reduction in tax rate: 22,550 at 5 %			1,127
Deferred tax attributable to revaluationsurplus: 31,800 at 35%			(11,130)
Deferred tax expense (income) related tothe origination and reversal of temporary differences			822

Illustrative Disclosure
The amounts to be disclosed in accordance with the Standardare as follows:
Major components of tax expense (income)(paragraph 79)

	X5	X6
Current tax expense	3,570	2,359
Deferred tax expense relating to theorigination and reversal of temporary differences:	420	822
Deferred tax expense (income) resultingfrom reduction in tax rate	-	(1,127)
Tax expense	3,990	2,054

Aggregate current and deferred tax relatingto items charged or credited to equity (paragraph 81(a))

In addition, deferred tax of 557 was transferred in X6 fromretained earnings to revaluation reserve. This relates to the differencebetween the actual depreciation on the building and equivalent depreciationbased on the cost of the building.
Explanation of the relationship between taxexpense and accounting profit (paragraph 81(c))
The Standard permits two alternative methods of explainingthe relationship between tax expense (income) and accounting profit. Both ofthese formats are illustrated below.
(i) a numerical reconciliation betweentax expense (income) and the product of accounting profit multiplied by theapplicable tax rate(s), disclosing also the basis on which the applicable taxrate(s) is (are) computed

	X5	X6
Accounting profit	8,775	8,740
Tax at the applicable tax rate of 35%(X5: 40%)	3,510	3,059
Tax effect of expenses that are notdeductible in determining taxable profit:
Charitable donations	200	122
Fines for environmental pollution	280	-
Reduction in opening deferred taxesresulting from reduction in tax rate	-	(1,127)
Tax expense	3,990	2,054

The applicable tax rate is the aggregateof the national income tax rate of 30% (X5: 35%) and the local income tax rateof 5%.

(ii) a numerical reconciliation betweenthe average effective tax rate and the applicable tax rate, disclosing also thebasis on which the applicable tax rate is computed

	X5	X6
	%	%
Applicable tax rate	40.0	35.0
Tax effect of expenses that are notdeductible for tax purposes:
Charitable donations	2.3	1.4
Fines for environmental pollution	3.2	-
Effect on opening deferred taxes ofreduction in tax rate	-	(12.9)
Average effective tax rate (tax expensedivided by profit before tax)	45.5	23.5

The applicable tax rate is the aggregateof the national income tax rate of 30% (X5: 35%) and the local income tax rateof 5%.
An explanation of changes in the applicabletax rate(s) compared to the previous accounting period (paragraph 81(d))
In X6, the government enacted a change in the nationalincome tax rate from 35% to 30%.
In respect of each type of temporary difference, and inrespect of each type of unused tax losses and unused tax credits:
(i) the amount of the deferred tax assetsand liabilities recognised in the balance sheet for each period presented;
(ii) the amount of the deferred tax incomeor expense recognised in the income statement for each period presented, ifthis is not apparent from the changes in the amounts recognised in the balancesheet (paragraph 81(g))

	X5	X6
Accelerated depreciation for tax purposes	9,720	10,322
Liabilities for health care benefits thatare deducted for tax purposes only when paid	(800)	(1,050)
Product development costs deducted fromtaxable profit in earlier years	100	-
Revaluation, net of related depreciation		10,573
Deferred tax liability	9,020	19,845

(note: the amount of the deferred tax incomeor expense recognised in the income statement for the current year is apparentfrom the changes in the amounts recognised in the balance sheet)

Example 3 - Business Combinations
Editorial note: Substituted by IFRS 3 with effect for business combinations for which the agreement date is on or after 31 March 2004, subject to further transitional provisions.
On 1 January X5 entity A acquired 100 per cent of the shares of entity B at a cost of 600. At the acquisition date, the tax base in A's tax jurisdiction of A's investment in B is 600. Reductions in the carrying amount of goodwill are not deductible for tax purposes, and the cost of the goodwill would also not be deductible if B were to dispose of its underlying business. The tax rate in A's tax jurisdiction is 30 per cent and the tax rate in B's tax jurisdiction is 40 per cent.
The fair value of the identifiable assets acquired and liabilities assumed (excluding deferred tax assets and liabilities) by A is set out in the following table, together with their tax bases in B's tax jurisdiction and the resulting temporary differences.