Tax accounting and reporting: the tax account, journals, deferred tax and disclosure

A company reports a profit before tax of ₦500 million. The tax charge in its income statement is ₦154.68 million. The tax it actually owes the authority for the year is ₦156.68 million, and the balance on its tax account at the year end is ₦114.68 million.

Three different numbers, all correct, because they answer three different questions: what the profit is taxed on, what the accounts show as an expense and what is still unpaid. The ledger entries, the deferred tax and the note to the accounts tie them together, and the exam asks for all three.

This topic covers the nature of the tax account, the journals posted into it, deferred tax under IAS 12, the disclosure and presentation of tax in the financial statements and the risks of wrong or misleading tax disclosure. The previous topic covered ethics and professionalism in tax. The next section of the syllabus covers the taxation of extractive industries.

Key terms in plain English

Syllabus check

This topic is in syllabus area E (tax management and planning, 10% of marks). It covers:

• the nature of the tax account and the journals posted into it;
• deferred tax, its computation and journals;
• disclosure and presentation of taxes in the financial statements, and the risks of wrong disclosure.

CAMA 2020 and tax in the accounts

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Nature of the tax account

The tax account records the movement in a company’s tax each year. A separate account for each tax keeps it clear. A typical account holds:

Journals

For years before 2026 the education tax (tertiary education tax at 3% of assessable profit) was posted in the same way as the levy.

Deferred tax

Deferred tax is the tax on temporary (timing) differences between the accounts and the tax computation. It makes the tax expense in a period reflect the tax effect of the transactions in that period’s accounting profit. Permanent differences, such as fines or franked income, never reverse, so they are ignored.

Computation (IAS 12). Multiply the difference between the carrying amount and the tax base by the tax rate, 30%:

• carrying amount (NBV) higher than tax base (TWDV): a taxable temporary difference, so a deferred tax liability;
• tax base higher than carrying amount: a deductible temporary difference, so a deferred tax asset, recognised only to the extent that future taxable profit will probably be available.

The charge or credit for the year is the movement in the balance. Use the rate that is enacted or substantively enacted for the period in which the difference will reverse.

Revaluation. The total deferred tax is on the whole difference. The part that arises from a revaluation surplus is charged to other comprehensive income (equity), not to profit or loss. To find the profit or loss part, take the surplus (less depreciation on it) out of the carrying amount.

For example, with TWDV ₦500m, NBV ₦420m and a surplus of ₦50m, the profit or loss part is (500 − 370) × 30% = ₦39m asset, and the surplus carries a ₦15m liability in equity, so the net asset is ₦24m.

Disclosure and presentation

Companies must disclose the components of tax expense and the tax assets and liabilities in the notes. IAS 12 also asks for the main reasons the tax charge differs from accounting profit at the statutory rate, the deferred tax balances by type of difference, and unused losses for which no deferred tax asset is recognised. The note is usually in vertical form:

Risks of wrong or misleading tax disclosure

Statements follow a financial reporting framework, such as IFRS, to give faithful and comparable information. Tax, current and deferred, is part of that information, so a wrong provision or a missing disclosure misleads investors, lenders, the authority and the directors themselves. Tax experts also use the statements as the starting point of the tax computation, so they must test how far they can rely on them.

Risks include a provision that is too low (understated expense and liability, and a later under-provision charge), a deferred tax asset recognised without probable profit, mixing permanent and temporary differences, and use of the wrong rate.

Worked examples

1. Assessable profit.
   500 + 60 + 2 − 20 = ₦542m.
   Total profit = 542 − 12 − 80 = ₦450m.
2. Company income tax.
   30% × 450 = ₦135m.
   Development levy = 4% × 542 = ₦21.68m.
3. Tax account.
   credits 40 + 135 + 21.68 + 3 = 199.68
   debits 60 + 25 = 85.
   Closing balance = ₦114.68m credit.

1. Carrying amount is higher than the tax base by ₦150m, so a liability: 30% × 150 = ₦45m.
2. The liability falls from ₦50m to ₦45m, a credit of ₦5m to profit or loss.
3. Journal: Dr Deferred tax account ₦5m; Cr Profit or loss ₦5m.

1. Income tax 135.00 + levy 21.68 + prior year under-provision 3.00 − deferred tax credit 5.00 = ₦154.68m per profit or loss.
2. Current tax.
   opening 40.00 + charge 156.68 + under-provision 3.00 − payments 60.00 − credit notes 25.00 = ₦114.68m per financial position.
3. The two figures differ because deferred tax and the opening balance do not enter the same way.

1. Total deferred tax liability.
   (900 − 350) × 30% = ₦165m.
2. Part on the surplus.
   30% × 120 = ₦36m, charged to other comprehensive income.
3. Part through profit or loss.
   (900 − 120 − 350) × 30% = ₦129m.

How to score full marks

• Compute assessable profit first, then total profit; use each for its own tax.
• Lay out the tax account with debits and credits, ending in the closing balance.
• Separate temporary from permanent differences before the deferred tax calculation.
• State whether the difference gives an asset or a liability and why.
• Finish with the vertical note and show how the two figures reconcile.

Common mistakes in the exam

• Applying 4% to total profit instead of assessable profit.
• Using the tertiary education tax in 2026.
• Posting deferred tax on fines or franked income.
• Reversing the asset and liability.
• Charging the whole movement to profit or loss when part relates to a revaluation surplus.
• Forgetting to deduct withholding tax credit notes from the tax liability.

Quick revision

• Tax account: opening and charges on the credit side; payments and credit notes on the debit side.
• Company tax 30% of total profit; levy 4% of assessable profit.
• Deferred tax: (carrying amount − tax base) × 30%; movement to profit or loss.
• Surplus on revaluation: deferred tax to equity.
• Note: charge in profit or loss, then the movement of the liability.
• CAMA 2020: ss. 305, 308, 377(1), 378, 426, 427, 433.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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