ACCT3103 Lectures 1-3 PDF

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A detailed version of the lecture ppt for lectures 1-3...

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ACCT3103 Lecture 1:

 Basis (Timing) of Recognition: Accounting System: timing of transactions (Accrual basis) Tax System: timing of cash flow payment/receipt (Cash basis)

Essentially two ways to account for income tax expense (1) Tax payable method: •

Recognises income tax expense as the amount expected to be payable during the year (i.e. based on assessable income and allowable deductions) Dr Income tax expense Cr

Current tax payable

Criticisms of tax payable method: •

Results in misleading financial statements

•

Changes in profit after tax may not be caused by changes in performance but by vagaries of the income tax legislation (results in more volatile after-tax profits)

Advantages of tax payable method: •

Common sense simplicity

•

Similar treatment of tax expense compared with many other costs which are recognised as expenses in the period in which they are incurred

(2) Tax-allocation method: •

AASB 112 adopts the ‘balance sheet approach’ or ‘statement of financial position approach’

•

Concept: focus on differences between accounting carrying amount of assets/liabilities and their balance sheet values using rules in the tax act.

•

Differences can lead to recognition of

deferred tax assets and deferred tax liabilities We focus on this approach, called the Balance Sheet Method or Tax Effect Accounting Criticisms of tax-allocation method: •

Complexity and required for detailed internal record keeping.

Advantages of tax-allocation method: •

Allows smoothing of after-tax reported profits in a conceptually justifiable manner.

Balance Sheet Method: Permanent differences: Arise when amounts recognised as part of accounting profit are not recognised as part of taxable profit (or vice versa). e.g. entertainment expenses, government grants Temporary differences: Arise when the period in which revenues and expenses are recognised for accounting purposes is different from the period in which such revenues and expenses are treated as taxable income and allowable deductions for tax purposes. CA – TB = Temporary Difference

General Principles of Tax Effect Accounting

The tax consequences of accounting transactions should be recognised as income or expense during the current period, regardless of when the tax effects will occur. This requires identifying the current and future tax consequences of items recognised in the balance sheet. The Balance Sheet method requires 2 separate calculations each year: 1.

Current tax liability (Step 1) a)

Current income tax expenses

b) Current tax liability 2.

Movements in deferred tax balances (Step 2) a)

Deferred income tax expense

b) Deferred Tax Assets (DTAs)/ Deferred Tax Liabilities (DTLs)

Example 1:

Example 2: Step 2



END OF EXAMPLE 2 STEP 2:

Tax base of Assets: Where the asset will have an amount that will be deductible in future through sale or consumption e.g.: Depreciation on PPE, Sale of PPE, Allowance for DD → TB = future deductible amount (TB=FDA) 

Where there are no taxable economic benefits flowing from recovery in the future. eg: Accounts receivable (gross)

→ TB = CA Mathematically, this means:

→ TB = CA + FDA – FTA

Example 3: Tax Base of Assets Step 1: Interest Received

Step 2: Net Accounts Received

Example 4: Tax Base of Liabilities Company Y has the following liabilities in its balance sheet as at 31 December 2018: Revenue received in advance of $100 000. This has been taxed on receipt. Accrued expenses of $50 000. This amount will be deductible when actually paid. Remember from previous slide: In the case of revenue which is received in advance, the tax base of the resulting liability is it’s carrying amount, less any amount of the revenue that will not be taxable in future periods. Revenue received in advance: CA

-

Amount not subject to tax in future periods = TB

$100 000

-

$100 000

= $0

Remember from previous slide: The tax base of a liability is it’s carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. Accrued expenses: CA

-

FDA

$50 000 - 50 000

= =

TB $0

Deferred Tax Liabilities [AASB 112.15]: 

Must recognise DTL for all taxable temporary differences that are not excluded

Deferred Tax Assets [AASB 112.24]: 

Must recognise DTA for all deductible temporary differences that are not excluded



Recognise only to the extent that it is: 

Probable that entity will earn future taxable profits



To allow deductible temporary differences to be used...