Deferred tax on accelerated tax depreciation of manufacturing assets

Manufacturers that ignore this deferred tax liability understate liabilities and overstate net income and equity in the early, high-allowance years, then face an unexpected tax charge as the temporary difference reverses - a misstatement risk that compounds across large capital-intensive plant portfolios. Getting the rate and timing wrong also distorts the effective tax rate reconciliation reported to stakeholders and can trigger restatement if a substantively enacted rate change was missed.

For manufacturing PP&E where tax law allows accelerated capital allowances, has the tax base (cost less cumulative tax depreciation) been compared to the accounting carrying amount at each reporting date to identify the taxable temporary difference? Has the deferred tax liability been measured at the tax rate expected to apply on reversal, based on rates enacted or substantively enacted at the reporting date? Has the temporary difference been recomputed for additions, disposals and any rate changes each period, rather than left static?

1. Identify manufacturing PP&E items where tax law allows a capital allowance or depreciation rate that differs from the accounting depreciation rate/method used under IAS 16. 2. For each such asset (or asset class), compute the tax base (cost less cumulative tax depreciation/allowances claimed) and compare it to the accounting carrying amount at each reporting date. 3. Where the carrying amount exceeds the tax base (accelerated tax depreciation has outpaced accounting depreciation), recognize a deferred tax liability on the resulting taxable temporary difference. 4. Check that the initial recognition exemption does not apply. For a normal purchase of machinery whose cost is deductible for tax, the carrying amount and tax base are equal at purchase, so no difference exists on initial recognition; the difference created later by accelerated tax depreciation is not covered by the exemption and a deferred tax liability is recognised in full. The exemption matters only where a difference exists from day one (for example, part of the cost is never tax-deductible) in a transaction that is not a business combination, affects neither accounting nor taxable profit, and does not create equal taxable and deductible differences. 5. Roll the temporary difference forward each period for new additions, disposals, and impairments, and recompute the deferred tax liability at the applicable rate. 6. Monitor for the crossover point where accounting depreciation begins to exceed the tax deduction (once accelerated allowances are exhausted) and reverse the deferred tax liability systematically over the asset's remaining life.

Measurement basis: undiscounted deferred tax liability equal to the taxable temporary difference multiplied by the tax rate(s) expected to apply on reversal, based on rates (or tax laws) enacted or substantively enacted by the reporting date. Included: the full temporary difference between tax base and carrying amount for each qualifying asset/pool. Excluded: differences already reversed, and any portion covered by a valid initial-recognition exemption. Re-measurement triggers: enactment or substantive enactment of a new tax rate (remeasure the entire balance through profit or loss, not prospectively only); additions or disposals of qualifying assets; impairment of the underlying asset; and a change in the expected manner of recovery (use vs sale) if that changes the applicable rate.

Deferred tax liability on accelerated depreciation shown within non-current liabilities, split from deferred tax on other temporary differences where material; reconciliation of the deferred tax balance showing additions, reversals and rate changes during the period; major components of temporary differences disclosed by category (e.g., PP&E tax base vs carrying amount); tax rate(s) used to measure the balance and the basis for concluding they are enacted or substantively enacted; any unrecognized deferred tax items and the reason, if applicable.

• Failing to track the tax base of plant assets separately from accounting carrying amount, so the deferred tax liability is missed entirely
• using the current tax rate when a substantively enacted future rate change is already known
• netting the deferred tax liability against unrelated deferred tax assets without assessing whether offset criteria (same taxable entity/authority) are actually met
• forgetting to reverse the liability once accounting depreciation overtakes the (now exhausted) tax allowance, leaving a stale balance
• applying the deferred tax calculation only at year-end and missing the impact of mid-year additions and disposals on the temporary difference.