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INCOME TAXES
Capital Allowances
• IAS 16 governs property, plant and equipment, and requires assets to be depreciated at a
rate based on the expected useful life.
• However, tax legislation requires assets to be depreciated based on the standard rates of
depreciation set out in the legislation, irrespective of the actual expected rate of usage
by the entity.
• The depreciation calculated by the tax authorities is often referred to as a capital allowance or tax
allowance.
• If the depreciation rate and the tax allowance rate (capital allowances) on the same asset
differ, it will result in a different carrying amount and tax base for that asset. The
difference between the carrying amount and the tax base of the asset leads to taxable or
deductible temporary differences.
• This in turn may result in the profit or loss on sale of the asset in the statement of profit
or loss and other comprehensive income differing from that calculated in accordance
with the tax legislation. A profit on sale is generally referred to in the tax legislation as a
recoupment whereas a loss on sale is often referred to as a scrapping allowance
(generally granted as a deduction if certain criteria are met).
