BUACC2603: Corporate Accounting - Tax Effect - Assessment Answer

November 27, 2018
Author : Ashley Simons

Solution Code: 1GFI

Question:Corporate Accounting

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Corporate Accounting Assignment

Assignment Task

With reference to the above statement describe what you understand by theaccounting concepts mentioned and provide examples from your selected annual report.

Discuss the problems of tax effect accounting addressed in the above statement in thecontext of the present AASB / IASB standards and the conceptual framework using your selected annual report to provide examples.

Comment on the issues of tax effect accounting in the above statement as they relate to the provision of decision useful information. Use your selected annual report to provide examples.

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Solution:

Abstract

Every entity required to pay the taxes on the recognized profits in the financial statements. But there are some differences related to accounting followed by the entities and accounting procedures defined by the tax authorities. These differences are crucial to be recorded and proper adjustments are required to be made in the financial statements. Therefore, IAS 12 and AAS 112 that deal with the accounting for income tax has made amendments in the tax accounting and make mandatory to record the temporary differences of the tax base and accounting base for various assets and liabilities in form of deferred tax assets and deferred tax liabilities. In this report we have discussed various issues related to recognition of deferred tax asset and deferred tax liabilities. TPG Telecom Limited has chosen to provide reasonable examples to discuss the issues in tax accounting. 

Introduction

IAS 12 and AAS 112 deals with the provisions related to deferred tax liabilities and assets. Deferred tax liabilities refers to amount to tax to paid in near future period in order to settle the temporary timing differences created for various issues in tax accounting. There are various temporary differences that might arise due difference of accounting procedures in tax and entity accounting (Income Taxes, 2012). Temporary differences refer to difference in amount of carrying value of assets reported by the entity in financial statements and tax base of assets and liabilities. In order to understand the concept of deferred tax, TPG Telecom Limited has been chosen and various examples have been provided from the annual report published by the company (Annual report, 2015).

Accounting Concept related Deferred Tax

The statement given aim to discuss the obligation to create the deferred tax liabilities as a counter parts of deferred tax assets. AAS 112 and IAS 12 deals with the income tax accounting and all companies have to report their assets and liabilities as per the standards. As we know all organizations are liable to pay taxes at the defined rate of tax. The obligation to pay taxes creates a framework in the accounting procedures that in defined in the AAS 112 and IAS 12. The accounting concept related to deferred tax liabilities are made clearer after amendment in year 2012 (Income Taxes, 2012). IAS 12 defines the deferred tax liability as the amount payable in the form of tax liability in any future period due to temporary differences. In order to understand the accounting concept of deferred tax liability it is necessary to understand the meaning of taxable temporary differences. According to concept mentioned in the IAS and AAS, temporary differences are created due to differences between the carrying amount of an asset or liability within the item mentioned in the balance sheet and value at which these assets or liabilities are valued for tax purpose. Taxable timing differences refer to those liabilities on which tax is tax is chargeable in the future when assets or liabilities are recovered or settled. IAS 12 require to make provisions for all timings/temporary differences and report it at liability side of balance sheet under head short or long term liabilities depending upon on the time it will going to settle (Annual report, 2015).

As mentioned deferred tax liabilities are created due to three reasons. Organizations followed accrual system of accounting whereas for tax purpose they have to record some receivables on receipt basis. It creates the difference between the amount of assets as per company accounting and tax accounting. So to settle this dispute temporary differences are created in the form deferred tax liabilities. There has impact of tax system on the accounting of the organization that forces to create the deferred tax liabilities (Income Taxes, 2012). Different treatment of depreciation expense in normal accounting and tax accounting tends to make the deferred tax liabilities that settle on any future date when actual liability to pay tax arises. Depreciation in normal accounting is mainly calculated on the basis of straight line method various as WDV method is followed for the tax purpose. Therefore it makes difference in amount of depreciation expense in both normal accounting and tax accounting that settles using the temporary differences in the amount of depreciation (Annual report, 2015). Accounting for tax purpose does not required to create any provision for obligations that is expected to arise in near future as provisions can be created only when there reasonable assurance that liability will arise in future and will settle within one year. Therefore it creates the difference of liabilities recorded in the balance sheet for normal accounting and for tax purpose. Thus it is settled using the temporary differences in both the accounting and deferring the tax in near future (International Accounting Standard 12 Income Taxes, 2012).

TPG Telecom Limited has provided the deferred tax through using the balance sheet liability method. This method records the temporary differences between the carrying amount of assets and liabilities for tax and normal accounting procedures. TPG Telecom Limited provides temporary differences for tax liabilities in relation to investments, property, plant and equipment, intangible assets, and other assets (Income Taxes, 2012). TPG Telecom Limited has made the deferred tax liability for 33.90 million dollar for investments for the year ending 31 July 2015. Apart for deferred tax liabilities TPG Telecom Limited also makes deferred tax assets in relation to receivables, inventories and other assets items (Annual report, 2015). TPG Telecom Limited does not provide for temporary differences in relation to initial recognition of goodwill and initial recognition of assets and liabilities as it does not impacts the taxable profit or the accounting profits (International Accounting Standard 12 Income Taxes, 2012).

Issues in tax affect accounting

Objective of IAS 12 and AAS 112 is to define the accounting procedure to follow for the income tax purpose. The main issue for accounting of income taxes is how to show the current and future tax liabilities or assets in relation to future settlement of carrying of amount of assets or liabilities shown in the balance sheet and various transactions or events related to current accounting period and reported in the financial statements. The tax base for the liability is the carrying amount of particular liability and amount that has to be deducted from the liability to be disallowed for tax purpose in current period and allowed in any future period. In case of any revenue received in advance the tax base is the carrying amount of receivables less any amount that is not taxable in future period (Income Taxes, 2012). There are also some item that have tax base but are not recognized as expense for tax purpose but allowed as expense in for accounting purpose like research cost. It make the taxable difference that has to be settle using the timing difference that will settle in near future when this cost is being recognized by the tax authorities. Difference of research cost creates the deferred tax asset to be settled on any future date. Conceptual framework related to taxes intends to make the recognition all assets and liabilities as per tax accounting procedures and difference between any value of assets and liabilities have to reported in the form of deferred tax assets and liabilities (Annual report, 2015).

Temporary differences related to taxable deferred tax liability has to be recognized for all taxable temporary differences except in case of initial recognition of goodwill and initial recognition of assets or liabilities not related to business combination and that do not impact the accounting as well as tax profits. Recognition of expense related to depreciation mainly creates the deferred tax liability and it can be said that temporary difference related to depreciation expense is the most important tax issue for any business organization. Temporary difference in relation to depreciation refers to difference between carrying amount of assets and its tax base. Tax base for the depreciable assets is computed after subtracting the allowable tax expenses from the WDV value of assets recognized previous accounting for tax purposes. Therefore issue of recognition of depreciation expenses for tax and accounting purpose differently creates the deferred tax liability (International Accounting Standard 12 Income Taxes, 2012). TPG Telecom Limited has recognized the deferred tax liabilities for property, plant and equipment and some intangible assets. On looking at notes to accounts it can be said that TPG Telecom Limited has created the deferred tax liabilities in case of depreciation related to property, plant and equipment and realized the 9.6 million dollar as temporary difference for the accounting period related to year 2015. TPG Telecom Limited has also recognized the timing difference related to depreciation in intangible assets and amount of deferred tax liability created is equal to 8.8 million dollars (Annual report, 2015). The AAS 112 require the entity to recognize the assets and liabilities that expects to recover and settle in future. If there is probability the carrying amount will make future tax payments higher or smaller than there will tax issues and this standard requires that entity should create the deferred tax asset or liabilities with some exceptions. TPG Telecom Limited has performed all tasks related to recognize the deferred tax assets and liabilities reported clearly in notes to accounts. TPG Telecom Limited has reported separately about the items that do not impact the taxable profits and accounting profits, therefore no requirement to create the deferred tax liabilities.

Issues Related to Provisions created and Problem under Tax Affect Accounting

There is vast impact of IAS 12 and AAS 112 on the entities and it creates a separate note to financial statements that is mandatory in nature. Creation of deferred tax assets or liabilities in relation to temporary differences is trouble some for entities as they have to keep a check which asset or liability has tax benefit or loss in future and whether to recognize the deferred tax asset or liability as the case may be. As per accounting procedures followed by the entities require provisions to create in the balance to meet the liabilities in near future. But the income tax authorities disallow this recognition or provisions as there is no certainty that these liabilities will mature and there will flow of real money out of the company. As per tax authorities entities intents to avoid tax through creating the provision for liabilities and in this way they avoid tax charge on such excess provisions (Income Taxes, 2012). Therefore IAS 12 has defined which provisions can be created under tax accounting and allowed the tax benefit upon them. Whereas there are some provisions that are not allowed as per tax authorities and there will be no tax benefits on such provisions. As per IAS 12 and AAS 112 only such provisions can be created that that has virtual surety that they will occur in future and amount of such liabilities are certain or as per income tax norms. Any excess provisions have to be deducted and tax has to be paid on the provisions and this extra tax paid recognized as deferred tax assets in the balance sheet. TPG Telecom Limited has also created various provisions in relation leases and other assets that has disallowed by the tax authorities and it creates a tax burden in the form of deferred tax assets. TPG Telecom Limited has created the deferred tax assets of 0.4 million dollar in relation to various provisions (International Accounting Standard 12 Income Taxes, 2012). As per IAS 12 and AAS 112 if provisions on which tax has been paid is actually mature and paid in future date than such deferred tax asset created on such provisions will reversed and provide for income tax return and it can be use for paying any future tax liability (Annual report, 2015).

Conclusion

Conceptual framework defined by IAS and AAS makes mandatory for all entities to make recognition of all temporary differences arises in any current period of time. TPG Telecom Limited has followed all the provisions mentioned in the IAS 12 and AAS 112 in relation to accounting for taxes and has made deferred tax asset and deferred tax liabilities for reasonable temporary differences arise due to such tax accounting procedures.

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