RE: Albanian Tax Code - Deferred income tax
Here a simplistic example of how it works using Stream’s $58 million of PPE on their BS at year end. It is an accounting entry.
The high level rule I use to remember it is: “If tax carrying value of an asset is less than the accounting carrying value get a deferred income tax liability and an expense”
If you look at note 3 Stream uses depreciates PPE using the unit-of-production method – i.e. variable depreciation according to production. Let’s assume depreciation was $3M for the year as that was the accounting number for 2012.
The important thing you should read into this is that Albania is allowing very quick depreciation of capital costs for tax which shields taxes.
Tax Carrying Value of PPE
Start of 2012: $61M
Accelerated Tax Depreciation: ($12M)
End of 2012 :$49M
Accounting Carrying Value of PPE
Start of 2012: $61M
Accounting Depreciation: (3M)
End of 2012: $58M
Accounting Value ($58M) less Tax Value ($49M) =$9M difference between tax and accounting carrying value.
Stream’s tax accountants did this calculation at the end of the year, ended up with a $9M difference and booked this entry which is an accounting entry only and does not reflect cash flows:
Dr Deferred Income Tax Expense $9M
Cr Deferred Income Tax Liability $9M
The actual number is $8,896,000 and you see it literally in Stream’s financial statements in the accounts I indicated per that entry above. This is a very clean candidate for an example. Not that it is a simplifying assumption that both the tax and accounting carrying values are $61M at the start of 2012.
If you look at 2011 and 2010, Stream never did this end-of-year true-up. This is troubling and the only reason that they wouldn’t do this is perhaps the difference was not material enough. Even so, it seems like a massive difference for one year ($12M in tax depreciation vs. $3M in accounting depreciation), so I suspect that the differences in carrying values are actually built-up over 2010, 2011 and 2012 and this is the first time they booked this. Maybe there was a tax regime change in 2012 that wasn’t there in 2010/2011.
Hope that helps.