ACB 2491 Company Reporting
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Table of Contents
1.0 Introduction
Accounting Standard AASB 112 (Income Taxes) prescribe the accounting treatment for income taxes. As stated by Leo, Hoggett, & Sweeting (2012), transactions undertaken by an entity and other events affecting the entity have two separate effects, which are current and future tax consequences. This is because accrual principal is applied on accounting treatment whereas income tax treatment uses the cash flow method. For accounting treatment, accounting profit is profit or loss for a period before deducting tax expense whereas for income tax treatment, taxable income described as gross income minus any allowable deduction. Difference between accounting and tax treatments lead to taxable temporary differences and deductible temporary differences. Discussion was carried out to determine how exploration and development cost create a deferred tax liability, analyse the argument presented by the directors in view of the AASB 112 and discuss the infromation ultility to readers of annual report of including or excluding deferred tax liability.
It is important to the students to read following topics:
Essay on overview of accounting
Essay on management accounting
2.0 Discussion
2.1 Exploration and Development costs creates a Deferred Tax Liability
As stated by Leo, Hoggett, & Sweeting (2012), deferred tax liability is the amounts of income taxes payable in future periods in respect of taxable temporary differences. Taxable temporary difference are temporary differences that will result in the payment of taxes when the carrying amount of a liability settled or carrying amount of an asset is recovered (AASB 112 Income Taxes, 2012) According to Harrington, Smith, & Trippeer (2012), deferred tax liability is created when an expense is deductible for tax purposes in the current period. Taxable temporary differences give rise to deferred tax liabilities when the carrying amount of assets is greater than its tax bases and when carrying amount of liabilities is lesser than its tax base. There is a difference between accounting treatment and tax treatment, where accounting profit is based on accrual accounting and requirements of accounting standards while taxable income is based on cash accounting and requirement of Income Tax Assessment Act. According to International Accounting Standard 12 (2012), exploration and development cost may be capitalised and amortised over future period in determining accounting profit but deducted in determining taxable profit in the period in which they are incurred. This indicates different treatment applied to exploration and development cost. Furthermore development costs have a tax base equal to zero because they have been deducted from taxable profit. This will cause taxable temporary difference to arise when carrying amount of the development costs is greater than the tax base of zero, therefore result in deferred tax liabilities.
2.2 Analysis on arguments by directors
2.2.1 No Income Tax Expenses
The annual report of Gravatt Ltd has shown an accounting profit of $54 million, with no tax expense. As stated in AASB 1031 Materiality, information is material if its non-disclosure has the potential to influence economic decisions of users taken on the basis of the financial report. If including income tax expense in the annual report, the profit of company will reduce by $24.3 million. This is a significant reduction, therefore it is inappropriate for directors of Gravatt Ltd to ‘hide’ this information in order to show higher profit.
2.2.2 No deferred tax liability
It is invalid for directors of Gravatt Ltd to state that disclosure of deferred tax liability was not necessary. As according to AASB 112, the company need to make certain disclosure about income tax by recognising future tax consequences of transactions. Development cost is capitalised over future period in determining accounting profit but deducted in the period they are incurred when calculating taxable income (IAS 12, 2012). This will cause Gravatt Ltd to pay more taxes in the future. Moreover, the company actually had a deferred tax liability of $80million. This is considered material when comparing to equity of $570million. Thus, it should be disclosed in annual report as required by AASB 1031. 2.2.3 Tax losses
Directors believed that neither current tax liability nor a deferred tax liability was necessary as the company was making tax losses because of huge allowable deductions available for exploration and development costs. According to Leo, Hoggett, & Sweeting (2012), tax loss provides future deduction for the company, hence deductible temporary difference exists and deferred tax asset arises. In facts, Gravatt Ltd had an income tax expense of $24.3million instead of tax losses if it followed the accounting standard. This might be due to its taxable income was still more than tax deduction after considering the development costs. Therefore, argument of directors is invalid as according to AASB 112, tax loss arises when a company’s tax deductions exceeds its taxable income.
2.3 Information utility to users of financial report of deferred tax liabilities
AASB 112 provides disclosure requirement in relation to tax in general purpose of financial statement prepared for external users of information. This standard requires entity to disclose information that enables users of financial statement to evaluate the financial effect of current and deferred tax consequences (AASB 112, 2012) .For example disclose the amount of deferred tax liability in other comprehensive income. This standard also require deferred tax liability to disclose in financial report, except those arises from initial recognition of goodwill (AASB 112, 2012) The disclosure enables users of financial statements to understand the relationship between tax expense and accounting profit and to understand the significant factors that could affect that relationship in the future. To be practical, the standard encouraged entities to disclose the amount of unrecognised deferred tax liabilities because financial user may find these information useful (AASB 112, 2012) Besides that, if deferred tax liability is include or disclose in financial report, it is said to influence the decision making of user as stated in AASB 1031. Therefore, deferred tax liability should include in financial report as some investor rely these information for decision making.
you may also like Essay on goodwill
3.0 Conclusion
Discussion that have been carried out shows that deferred tax liability is recognised when the carrying amount of assets is greater than its tax base or when carrying amount of liability is lower than its tax base. Exploration and development have a tax base equal to zero give rise to deferred tax liability arises as the carrying amount is greater than the tax base. Moreover, it is inappropriate for the director of Gravatt Ltd to exclude income tax expense and deferred tax liability as it is prohibited by AASB 1031. Besides, the entity should include deferred tax liability in financial report as external user rely these information for making decision and allow the shareholder a better picture on how the entity operates.
(1036 words)
References
Compiled AASB Standard. (2012). Retrieved September 18, 2013, from http://www.aasb.gov.au/admin/file/content105/c9/AASB112_07-04_COMPsep11_07-12.pdf
Harrington, C., Smith, W., & Trippeer, D. (2012). Deferred tax assets and liabilities: Tax benefits, obligations and corporate debt policy. Journal of Finance and Accountancy, 11, 1-18. Retrieved from http://search.proquest.com/docview/1059655602?accountid=12528
International Accounting Standard 12 (2012). Income Taxes. Retrieved September 20, 2013, from http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias12_en.pdf
Leo, K., Hoggett, J., & Sweeting, J. (2012). Company Accounting (9th edition). Australia: John Wiley & Sons.
1.0 Introduction
Accounting Standard AASB 112 (Income Taxes) prescribe the accounting treatment for income taxes. As stated by Leo, Hoggett, & Sweeting (2012), transactions undertaken by an entity and other events affecting the entity have two separate effects, which are current and future tax consequences. This is because accrual principal is applied on accounting treatment whereas income tax treatment uses the cash flow method. For accounting treatment, accounting profit is profit or loss for a period before deducting tax expense whereas for income tax treatment, taxable income described as gross income minus any allowable deduction. Difference between accounting and tax treatments lead to taxable temporary differences and deductible temporary differences. Discussion was carried out to determine how exploration and development cost create a deferred tax liability, analyse the argument presented by the directors in view of the AASB 112 and discuss the infromation ultility to readers of annual report of including or excluding deferred tax liability.
It is important to the students to read following topics:
Essay on overview of accounting
Essay on management accounting
2.0 Discussion
2.1 Exploration and Development costs creates a Deferred Tax Liability
As stated by Leo, Hoggett, & Sweeting (2012), deferred tax liability is the amounts of income taxes payable in future periods in respect of taxable temporary differences. Taxable temporary difference are temporary differences that will result in the payment of taxes when the carrying amount of a liability settled or carrying amount of an asset is recovered (AASB 112 Income Taxes, 2012) According to Harrington, Smith, & Trippeer (2012), deferred tax liability is created when an expense is deductible for tax purposes in the current period. Taxable temporary differences give rise to deferred tax liabilities when the carrying amount of assets is greater than its tax bases and when carrying amount of liabilities is lesser than its tax base. There is a difference between accounting treatment and tax treatment, where accounting profit is based on accrual accounting and requirements of accounting standards while taxable income is based on cash accounting and requirement of Income Tax Assessment Act. According to International Accounting Standard 12 (2012), exploration and development cost may be capitalised and amortised over future period in determining accounting profit but deducted in determining taxable profit in the period in which they are incurred. This indicates different treatment applied to exploration and development cost. Furthermore development costs have a tax base equal to zero because they have been deducted from taxable profit. This will cause taxable temporary difference to arise when carrying amount of the development costs is greater than the tax base of zero, therefore result in deferred tax liabilities.
2.2 Analysis on arguments by directors
2.2.1 No Income Tax Expenses
The annual report of Gravatt Ltd has shown an accounting profit of $54 million, with no tax expense. As stated in AASB 1031 Materiality, information is material if its non-disclosure has the potential to influence economic decisions of users taken on the basis of the financial report. If including income tax expense in the annual report, the profit of company will reduce by $24.3 million. This is a significant reduction, therefore it is inappropriate for directors of Gravatt Ltd to ‘hide’ this information in order to show higher profit.
2.2.2 No deferred tax liability
It is invalid for directors of Gravatt Ltd to state that disclosure of deferred tax liability was not necessary. As according to AASB 112, the company need to make certain disclosure about income tax by recognising future tax consequences of transactions. Development cost is capitalised over future period in determining accounting profit but deducted in the period they are incurred when calculating taxable income (IAS 12, 2012). This will cause Gravatt Ltd to pay more taxes in the future. Moreover, the company actually had a deferred tax liability of $80million. This is considered material when comparing to equity of $570million. Thus, it should be disclosed in annual report as required by AASB 1031. 2.2.3 Tax losses
Directors believed that neither current tax liability nor a deferred tax liability was necessary as the company was making tax losses because of huge allowable deductions available for exploration and development costs. According to Leo, Hoggett, & Sweeting (2012), tax loss provides future deduction for the company, hence deductible temporary difference exists and deferred tax asset arises. In facts, Gravatt Ltd had an income tax expense of $24.3million instead of tax losses if it followed the accounting standard. This might be due to its taxable income was still more than tax deduction after considering the development costs. Therefore, argument of directors is invalid as according to AASB 112, tax loss arises when a company’s tax deductions exceeds its taxable income.
2.3 Information utility to users of financial report of deferred tax liabilities
AASB 112 provides disclosure requirement in relation to tax in general purpose of financial statement prepared for external users of information. This standard requires entity to disclose information that enables users of financial statement to evaluate the financial effect of current and deferred tax consequences (AASB 112, 2012) .For example disclose the amount of deferred tax liability in other comprehensive income. This standard also require deferred tax liability to disclose in financial report, except those arises from initial recognition of goodwill (AASB 112, 2012) The disclosure enables users of financial statements to understand the relationship between tax expense and accounting profit and to understand the significant factors that could affect that relationship in the future. To be practical, the standard encouraged entities to disclose the amount of unrecognised deferred tax liabilities because financial user may find these information useful (AASB 112, 2012) Besides that, if deferred tax liability is include or disclose in financial report, it is said to influence the decision making of user as stated in AASB 1031. Therefore, deferred tax liability should include in financial report as some investor rely these information for decision making.
you may also like Essay on goodwill
3.0 Conclusion
Discussion that have been carried out shows that deferred tax liability is recognised when the carrying amount of assets is greater than its tax base or when carrying amount of liability is lower than its tax base. Exploration and development have a tax base equal to zero give rise to deferred tax liability arises as the carrying amount is greater than the tax base. Moreover, it is inappropriate for the director of Gravatt Ltd to exclude income tax expense and deferred tax liability as it is prohibited by AASB 1031. Besides, the entity should include deferred tax liability in financial report as external user rely these information for making decision and allow the shareholder a better picture on how the entity operates.
(1036 words)
References
Compiled AASB Standard. (2012). Retrieved September 18, 2013, from http://www.aasb.gov.au/admin/file/content105/c9/AASB112_07-04_COMPsep11_07-12.pdf
Harrington, C., Smith, W., & Trippeer, D. (2012). Deferred tax assets and liabilities: Tax benefits, obligations and corporate debt policy. Journal of Finance and Accountancy, 11, 1-18. Retrieved from http://search.proquest.com/docview/1059655602?accountid=12528
International Accounting Standard 12 (2012). Income Taxes. Retrieved September 20, 2013, from http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias12_en.pdf
Leo, K., Hoggett, J., & Sweeting, J. (2012). Company Accounting (9th edition). Australia: John Wiley & Sons.
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