Question 1: What is the main principle of tax-effect accounting as outlined in AASB 112?
Answer 1: The main principle of AASB 112 is concerned with the issue related to the accounting for income taxes. The principle is how to account for the current and future taxes in the books of accounts. The two main consequences are as under:
AASB112 is based on the same principle that current and future tax events and other events related to this, recognised in the firm’s balance sheet give rise to tax accounting in the form of current and deferred tax assets and liabilities. The principle base to calculate the tax liabilities or assets totally depend upon the temporary difference and tax base. According to this standard there is need to account for the tax consequences of all the transactions related to tax effect in the same manner as the transactions. It means that current and future tax impacts of the transactions passing through the income statement must be accounted for profit and loss.
Question 2: Explain the meaning of a temporary difference as it relates to deferred tax calculations and give three examples?
Answer 2: Temporary difference is type of tax accounting difference between the tax basis of asset or liabilities. Temporary difference is reported in the balance sheet and this will result in taxable amounts or amount to deductible in the future years when assets is recovered and liabilities is settled. Basically taxable amount increase the amount of tax whereas deductible amounts helps in reducing the taxable income. Following are three examples of timing difference:
Question 3: Explain how accounting profit and taxable profit differ and how each is treated when accounting for income taxes?
Answer 3: In general accounting profit is the amount of income or expense in the particular period and it is computed after deducting the tax expense of that period. On the other hand taxable profit or loss is the amount of profit or loss in the above said period that is calculated according to rules framed by the Australian taxation authority (International Accounting Standard 12: Income Taxes, n.d.). Taxable profit or loss is the base for calculating amount of actual tax liability during the taxable period.
Question 4: In tax-effect accounting, creation of temporary differences between the carrying amount and the tax base for assets and liabilities leads to the establishment of deferred tax assets and liabilities in the accounting records. List examples of temporary differences that create:
Answer 4: Examples of deferred tax assets are as under:
Examples of deferred tax liabilities are as under:
Question 5: In AASB 112 criteria are established for the recognition of a deferred tax asset and a deferred tax liability. Identify these criteria and discuss any differences between those criteria for assets and liabilities?
Answer 5: Deferred tax liability must be recognised for all the taxable temporary differences that arise during the course of different activities. There are some exceptions to this rule. These are
In case temporary difference related to investment in subsidiaries, interests in joint ventures, and branches and associates occurred than deferred tax liability is recognised as per para 39. In order to recognise the deferred tax asset it is compulsory that carrying amount of asset will be recovered in the form of economic benefits in the future period. Major difference between the recognition of deferred tax asst and liability is that more difficult to prove the future economic benefits of deferred tax assets as compare to recognition of deferred tax liabilities. Some of the temporary difference is recognised when income or expense is corporate in the accounting profit for one period but included in the taxable profit of another year.
Question 6: What is a “Tax Loss” and how is it accounted for?
Answer 6: Tax loss is the amount of loss recognised for a period and it is determined in accordance with the rules and section made or established by the taxation authorities. This amount is the base to calculate the taxes recoverable from the taxation authorities. Any tax is accounted as the deferred tax asset as it is the amount of tax which is going to be receive in future year if there is surety that there will some amount of profit from the continuing business activity or any other activity.
Question 7: Despite the fact that deferred tax liabilities and assets are recognised in respect to certain assets and liabilities the income tax expense (benefit) of such items is always recognised in the current year. Is this statement true? Discuss
Answer 7: On the plain reading of the standard it is said that the above statement is true as it is clearly mention in the standard that if there is any temporary difference in the current period that give rise to certain deferred tax asset and liability then it is compulsory to recognised income tax expense or befit in the current itself. But it is also true that in case of recognition of deferred tax asset if is not sure that there is any income in the future year than it is advised to firm for not to recognise the deferred tax asset in the current period (AASB 112: Income Taxes, n.d.) In case tax holidays (Period for which tax is levied) it is not compulsory to recognise any deferred tax asset or liability if it is sure that this amount is going to reverse in the period of tax holidays. So it can be said that this statement is partially correct and partially incorrect.
Question 8: What action should be taken when a tax rate or tax rule changes? Why?
Answer 8: In general deferred tax assets and liabilities are measured at the tax rates that are to be applied to the period when asset is realised or liability is settled at the tax rate that has to be enacted at the end of current reporting period. When there is change in tax rate, deferred tax assets and liabilities are calculated using average rates and these rates are expected to be apply to the taxable profit (tax loss) for the periods in which the temporary timing difference are expected to be incurred.
Question 9: Are all temporary differences that exist at the end of reporting period recognised as deferred tax assets or deferred tax liabilities?
Answer 9: No it is not compulsory to recognise all the taxable temporary difference as deferred tax assets or liabilities that exist at the end of current accounting. Below are the cases where there is no need to recognise any deferred tax liability or asset:
Question 10: In determining whether deferred tax assets relating to tax losses are to be recognised what factors should be taken into consideration?
Answer 10: While determining the deferred tax asset relating to tax losses following factors must be considered:
Question 11: What is the impact of exempt income on the determination and recovery of a tax loss?
Answer 11: When entity incurs a tax loss in the certain period it will give rise to creation of deferred tax asset subject to some conditions. There must probability that company will have some future taxable profit from same taxable company that will have created tax loss. But in case when there is not certain that company will have taxable profit in future years then it is advised to create the deferred tax asset for tax loss (Dagwell, Wines and Lambert, 2007). Therefore when entity earns exempt income in future years then it must not create deferred tax asset for tax loss in current year.
AASB 112: Income Taxes. n.d. [Online]. Available at: http://www.aasb.gov.au/admin/file/content105/c9/AASB112_07-04_COMPoct09_07-09.pdf [Accessed on: 4 January 2014].
Dagwell, R., Wines, G.L. and Lambert, C. 2007. Corporate Accounting in Australia. UNSW Press.
International Accounting Standard 12: Income Taxes. n.d. [Online]. Available at: http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias12_en.pdf [Accessed on: 4 January 2014].