Loss Unaffected by Deferred Tax Asset in Xero Accounts

[numbersrule]

I am using Xero Accounts ( The Accounting Extension to Xero Online Software ) to prepare my Ltd Company's End of Year Annual CH Filing.

There is a loss for the year.

I have created a Manual Journal for 19% of the loss as a Debit to 'Deferred Tax Asset', and Credit to Corporation Tax as future profits are highly likely against which I will be able to off-set last year's loss.

However, on the Draft Balance Sheet, the Loss is unaffected by the Credit to Corporation Tax.

This means the DTA is not reflected in the Net Balance on the BS.

What might be causing this discrepancy?

 

[neilsolaris]

On the balance sheet, the “Loss for the year” line is usually before tax — so the DTA probably won't reduce it. Instead, check the “Net Assets” figure: it should now include the DTA asset you recognised.

 

[DWS]

I am using Xero Accounts ( The Accounting Extension to Xero Online Software ) to prepare my Ltd Company's End of Year Annual CH Filing.

There is a loss for the year.

I have created a Manual Journal for 19% of the loss as a Debit to 'Deferred Tax Asset', and Credit to Corporation Tax as future profits are highly likely against which I will be able to off-set last year's loss.

However, on the Draft Balance Sheet, the Loss is unaffected by the Credit to Corporation Tax.

This means the DTA is not reflected in the Net Balance on the BS.

What might be causing this discrepancy?

What accounting standards are you reporting under?
If under micro entities then no need to report DTA as far as I am aware, so no journals needed, loss is shown on P&L and the B/S and carried forwards in the CT600 and tax calcs to next year.

 

[Bobbo]

What accounting standards are you reporting under?
If under micro entities then no need to report DTA as far as I am aware, so no journals needed, loss is shown on P&L and the B/S and carried forwards in the CT600 and tax calcs to next year.

It's not so much "no need" under FRS 105 micro entities, it's more specifically prohibited from recognising deferred tax.

 

[numbersrule]

It's not so much "no need" under FRS 105 micro entities, it's more specifically prohibited from recognising deferred tax.

Yes, my query had arisen after attempting to report DTA under FRS 105 micro entities for the draft.
Thanks for alerting me to that.

So if I wish to include for DTA, would reporting under FRS 102 voluntarily be an option?

 

[UK Contractor Accountant]

So if I wish to include for DTA, would reporting under FRS 102 voluntarily be an option?

yes

 

[numbersrule]

yes

Thanks

 

[TheoNe]

Classic accounting plot twist — you’ve booked the DTA, but it’s just quietly sitting on the balance sheet while your P&L still sulks about the loss.

The reason it’s not reducing the loss is because posting a journal straight to ‘Corporation Tax’ on the balance sheet doesn’t flow through your profit & loss. To affect the loss, you’d normally:

• Create a tax charge entry in the P&L (e.g. ‘Income Tax’ or ‘Corporation Tax’ expense line), and
• Post the opposite side to the Deferred Tax Asset on the balance sheet.

That way, the tax benefit shows as a credit in the P&L (reducing the loss) and the DTA appears as an asset on the BS.

Right now, you’ve likely only hit balance sheet accounts, so the P&L is untouched

 

[numbersrule]

Classic accounting plot twist — you’ve booked the DTA, but it’s just quietly sitting on the balance sheet while your P&L still sulks about the loss.

The reason it’s not reducing the loss is because posting a journal straight to ‘Corporation Tax’ on the balance sheet doesn’t flow through your profit & loss. To affect the loss, you’d normally:

• Create a tax charge entry in the P&L (e.g. ‘Income Tax’ or ‘Corporation Tax’ expense line), and
• Post the opposite side to the Deferred Tax Asset on the balance sheet.

That way, the tax benefit shows as a credit in the P&L (reducing the loss) and the DTA appears as an asset on the BS.

Thanks TheoNe,

Yes, I did exactly as your DR & CR above suggests and in blue Xero ( the accounting / bookkeeping part of the software ) it had what I consider to be the correct effect on both the BS & P&L.

However, as Bobbo pointed out, under FRS 105, DTA must not be reported. But in any event, it turns out Xero Tax ( the Annual Filing part of the software ) ignores the CT Expense when it does not match Xero Tax's CT600 calculation, which is 0.00 in this case due to the Loss. Therefore the DTA was not reflected in the BS or the P&L.

I now intend to opt for FRS 102, which allows DTA. However, in addition to the change of reporting standard, I suspect I will have to amend the Tagging on the CT so that it goes to 'other costs' thereby enabling the Credit to 'other costs' to appear in the P&L.

So the discrepancy had nothing to do with the bookkeeping in blue Xero.

I think it was to do with the mismatch between Xero Tax's CT600 calculation of 0.00 and my CT estimate.

More to follow after I have amended in due course.

 

[DWS]

Thanks TheoNe,

Yes, I did exactly as your DR & CR above suggests and in blue Xero ( the accounting / bookkeeping part of the software ) it had what I consider to be the correct effect on both the BS & P&L.

However, as Bobbo pointed out, under FRS 105, DTA must not be reported. But in any event, it turns out Xero Tax ( the Annual Filing part of the software ) ignores the CT Expense when it does not match Xero Tax's CT600 calculation, which is 0.00 in this case due to the Loss. Therefore the DTA was not reflected in the BS or the P&L.

I now intend to opt for FRS 102, which allows DTA. However, in addition to the change of reporting standard, I suspect I will have to amend the Tagging on the CT so that it goes to 'other costs' thereby enabling the Credit to 'other costs' to appear in the P&L.

So the discrepancy had nothing to do with the bookkeeping in blue Xero.

I think it was to do with the mismatch between Xero Tax's CT600 calculation of 0.00 and my CT estimate.

More to follow after I have amended in due course.

Just out of interest why are you intent on including in the accounts as a DTA?
Are you positive that a DTA is the correct method even under FRS102, as per my #3 post why do it if not needed.
You may also need to look at other aspects of the accounts if reporting under FRS102.

 

[DWS]

And funny enough on Aweb today for a bit of light reading

https://www.accountingweb.co.uk/any-answers/corporation-tax-value-of-a-loss

 

[numbersrule]

And funny enough on Aweb today for a bit of light reading

https://www.accountingweb.co.uk/any-answers/corporation-tax-value-of-a-loss

My interpretation of the AWeb Thread is that the posters are sceptical that such a large loss could be turned into a profit in the foreseeable future. On that basis, it would seem that any DTA would not be true and fair as it may never be recoverable. Obviously, those closer to the action will be better placed than me to know the reality of that particular situation.

My numbers are miniscule compared to that example. But nevertheless, allowing my company's DTA results in positive net assets, whereas ignoring the DTA results in a negative net assets.

Call me vain if you like. But I won't mind and I may carry on regardless into profitability and recoverability with the cosmetic support of a DTA.