Two concepts: Current tax and Deferred tax.

Current tax - is the tax payable (or refund due)to KRA in that year, based on tax laws.

Tax laws determine profit differently from accounting principles.

Consider a bond held for trading at 100. Value of bond goes up to 110 and HF books a profit of 10. However, Tax of 3 (30%) is only paid if the bond is actually sold. So no current tax.

Deferred tax - tax payable or recoverable in future.

In the example above HF has an asset of 110 in balance sheet. They know if the sell it they will pay tax on the 10 profit they already booked.

So they will record the tax they are likely to pay once they sell the asset as deferred tax liability in their balance sheet.

When they actually sell the bond, they will move the tax of 3 from balance sheet to profit and loss. Thats how the P&L is affected.

Note: A simplified example.

EPS - KES 6.03
NBV - KES 27.55

at the current share price of KES 45.50

P/E - 7.55x
P/B - 1.65x

There is some headroom for the share price

Another rights issue coming

New CBK prudetial guidelines effective 1 January 2013.

Core capital/RWA--->10.5% vs NIC Bank's 15.6%

Total capital/RWA--->14.5% vs NIC Banks 16.4%

Very little head room to expand balance sheet.

Which means retained profits will add to the Core Capital over the next 2 years.

@sparly thanks a lot,at least i understand it now.isn't it possible to manipulate books in accounting to suit a specific need,i find this field very dynamic and the smarter accountants can hide potential bombshells in many places....