Transcript tax effect accounting - University of Southern Queensland

Tax Effect
Accounting
(AASB 1020)
1
Objectives
 To
be able to complete
the entries necessary to apply
accounting standard
AASB 1020 - Tax Effect Accounting
2
AASB 1020
The standard sets out the accounting treatment of
a company’s income tax in general purpose
financial reports prepared by a reporting entity
 The standard uses the ‘balance sheet’ approach &
analyses the differences between the entity’s
balance sheet prepared for general purpose
financial reporting & the balance sheet for tax
purposes.

3
Basis of Tax Effect Accounting

as a result of differences between accounting profit
and taxable income
( Main difference because income tax treatment of some
transactions based on cash flows whereas accounting based on
accruals)

difference between accounting balance sheet and
taxation balance sheet
(Even though tax balance sheet not actually produced)

the difference leads to recognition of deferred tax
assets/liabilities in the accounting balance sheet)
4
Taxation vs Accounting Treatments
Accounting Profit
= revenue less expenses
Based on accrual accounting and requirements of
accounting standards

Taxable Income
= assessable income – allowable deductions
Based on requirements of Income Tax Assessment Act
Generally follows cash flows of transactions and events

5
Taxation vs Accounting Treatments

Assessable income  Accounting revenue
– Revenue not yet received is not assessable
– Some revenue is exempt from tax eg Government grants

Allowable deductions  Accounting expenses
– Accounting and taxation depreciation rates may differ
– Some expenses are not deductible eg entertainment
– Some expenses are not deductible until a future period eg
doubtful debts expense not deductible until debts are written off
by the company as bad & long service expense not allowed as a
deduction until actually paid
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Reasons for differences between
accounting & tax ‘Balance Sheets’
Item
Accounting Treatment
Tax Treatment
Depreciation
As per AASB 1021
Often accelerated
Doubt. debts
Expense when doubtful
Tax ded when written off
Long Service Leave Expense when accrued
Tax ded when paid
Rental Costs
Prepaid until used
Tax ded when paid
Rental Revenue
Liability if in advance
Taxed when received
Entertainment
Treated as expense
No deduction for tax
Research & Dev
Capitalised and expensed
Tax ded. when paid
Goodwill
Amoristed
No deduction for tax
Tax Loss
No treatment
Offset against future income
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Current Tax Liability



Accounting profit
(+) expenses not deductible for tax
(-) revenues not assessable for tax
+(-) differences between accounting and tax amounts*
* This is done by adding back expenses in books and subtracting
the tax deduction or subtracting revenue in the books and
adding the assessable amount
= Taxable income
Taxable income * tax rate = Current tax liability
Income tax expense Dr
$x
Current tax liability Cr
$x
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Determination of taxable income
Accounting Profit
Add Depreciation – building (non deductible)
Depreciation – plant
Doubtful debts expense
$300
20
50
40
410
Less
Government grant (non assessable)
Depreciation – plant (for tax purposes)
Taxable income
120
60
$230
9
Determination of taxable income
Accounting Profit
Add Depreciation – building (non deductible)
Depreciation – plant
Doubtful debts expense
$300
20
50
40
410
Less
Journal entry::
Government Assuming
grant (non
assessable)
30%
tax rate
Dr Income
Expense
69
Depreciation
– planttax
(for
tax purposes)
CR Current tax liability 69
Taxable income
120
60
$230
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0
Tax effect accounting
Focuses on the future tax consequences arising as a
result of the differences from the carrying amount
of an entity’s net assets and the tax base of those
assets.
 The differences are either- deductible or assessable
temporary differences DTD or ATD
 Deductible temporary differences lead to less tax in
the future creating a ‘deferred tax asset’
 Assessable temporary differences lead to more tax
in the future creating a ‘deferred tax liability’
 How do we calculate the ‘tax base’???

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Calculation of tax base : Assets
Carrying Amount= book value
less
Assessable Amount
(Expected cash flows either through use or saleassumed to be @ a maximum = to carrying
amount)
add
Deductible amount= allowable deductions
= Tax Base
TB= CA-AA+DA
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2
Depreciable Asset - example

Asset acquired on I Jul 2000 for $10 000. For
accounting purposes depreciation charged at 10%
straight line per annum but for tax purposes 15%
straight line.
1
3
Depreciable Asset - example
Asset acquired on I Jul 2000 for $10 000. For
accounting purposes depreciation charged at 10%
straight line per annum but for tax purposes 15%
straight line.
After 2 years:Accounting Tax
Cost
10 000
10 000
Accumulated depreciation 2 000
3 000
Carrying amount
8 000
7 000

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Depreciable Asset
Calculation of tax base :
TB=CA-AA+DA
= 8 000-8000(expected cash flows) +7000 ( allowable
deduction)
=7000 (from previous page do you have to calculate
the tax base or do you already know it?)
CA
Tax Base
ATD
DTD
-------------------------------------------------------------------8 000
7 000
1 000
Results in a deferred tax liability - because the future tax
deductions $7 000 are less than the future assessable income $8
000- Hence more tax in the future
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5
Accounts Receivable - example
As per accounts
Accounts Receivable
40 000
Allowance for doubtful debts 2 000
Carrying amount
38 000
For taxation purposes doubtful debts are not allowed as
a deduction until they are actually written off
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Accounts Receivable
Calculation of tax base :
TB= CA-AA+DA
= 3 8 000-0 (no cash inflows)+ 2000 (deduction for
bad debt)
= 40 000 (once again do you have to calculate this if tax does not
allow deduction until written off IE would they have put entry in
tax balance sheet?)
CV
Tax Base
ATD
DTD
-------------------------------------------------------------------38 000
40 000
2 000
Results in a deferred tax asset - because the future tax
deductions of $2 000 and hence less tax will be paid
in the future when written off .
1
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Rent or Interest receivable - example
Rent owed at end of the year $15 000 and recorded as
rent receivable.
Dr Rent receivable
Cr Rent Income
Not assessable for tax until received
1
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Rent receivable
Calculation of tax base :
TB=CA-AA+DA
= 15 000-15000 (assessable when received)+0
= 0 ( If not allowed until paid - the tax balance sheet would not
make the provision therefore Zero in tax Balance sheet)
CV
Tax Base
ATD
DTD
-------------------------------------------------------------------15 000
0
15 000
Results in a deferred tax liability - because will be
assessable in future when received
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Prepayments - example
Prepaid rental :
Signed and paid for 3 years rent $12 000.
current expense $3 000 and prepaid expense $9 000.
The taxation office allow a deduction for the amount
paid.
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0
Prepayments
Calculation of tax base :
TB=CA-AA+DA
= 9 000-9000(increase assessable income as next year
expensed but not allowable)+0
=0 (Once again prepaid expenses allowed for tax therefore tax balance
sheet would not record any prepayments)
CV
Tax Base
ATD
DTD
-------------------------------------------------------------------9 000
0
9 000
Results in a deferred tax liability - because the expense
claimed in the future will not be allowed for taxHence more tax in the future
2
1
Cash
Calculation of tax base :
TB=CA-AA+DA
= 20 000-0+0
= 20 000
No difference between carrying amount & tax base
2
2
Inventory
Calculation of tax base :
TB=CA+AA-DA
= 208 000+208000-208000
= 208 000
No difference between tax base and carrying amount
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3
Calculation of tax base : Liabilities
Carrying Amount
add
Assessable Amount
(Any further amounts expected to arise from settling
liability)
less
Deductible amount
(Any further deductible amount)
= Tax Base
TB=CA+AA-DA
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Provision for Employee Entitlements
Long Service Leave :
Provision for Long Service Leave $16 000
The taxation office allow a deduction for the amount
only when it is paid , however, accounting standards
state that the provision must be raised.
Dr Long Service Leave Expense
Cr Provision for Long Service Leave
2
5
Provisions for employee entitlements
Calculation of tax base :
TB=CA+AA-DA
= 16 000+0-16000
=0 (if not allowed until paid the tax balance sheet would not
record)
CV
Tax Base
ATD
DTD
-------------------------------------------------------------------(16 000)
0
16 000
Results in a deferred tax asset - because an additional
deduction will be allowed in the future decreasing
tax liability
2
6
Accounts & Loans Payable
Calculation of tax base :
TB=CA+AA-DA
(Assume $75 000 accounts payable)
=75 000+0-0
=75000
No difference between carrying amount & tax base
2
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Excluded temporary differences
 Goodwill
Goodwill would create a deferred tax liability as the
amortisation is not allowed as a tax deduction
however
as per para 6.1 of AASB 1020 not permitted
 Temporary Difference for buildings
– if non-depreciable for tax purposes these are also
excluded
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Worksheet
CA
Cash @ Bank
80 000
Receivables
38 000
Inventory
100 000
Prepayments
9 000
Rent Receivable
15 000
Plant
8 000
Buildings
70 000
Goodwill
5 000
Liabilities
20 000
Long Service Leave 16 000
Tax 30%
Beginning balances
Adjustment
TB
80 000
40 000
100 000
0
0
7 000
exempt
exempt
20 000
0
ATD
DTD
2 000
9 000
15 000
1 000
25 000
7 500
5 000
$2 500
16 000
18 000
5 400
5 000
$400
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Worksheet
CA
TB
ATD
Cash @ Bank
80 000
80 000
Receivables
38 000
40 000
Inventory
100 000
100 000
Prepayments
9 000
0
9 000
Tax effect journal
Rent Receivable
15 000
0
15 000
DR Deferred Tax Asset 400
Plant
8 000
7 000
1 000
CR Deferred Tax Liab
2 500
Buildings
70
000
exempt
Dr Income Tax Expense 2 100
Goodwill
5 000 to theexempt
(in addition
current tax lib entry)
Liabilities
20 000
20 000
Long Service Leave 16 000
0
25 000
Tax 30%
7 500
Beginning balances
5 000
Adjustment
$2 500
DTD
2 000
16 000
18 000
5 400
5 000
$400
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0
Tax base for transaction with future
tax consequences
Ie Transaction that have no recognition of asset or
liability in the balance sheet but an asset or liability
for tax
 Mining expenditure

– Treated as an expense in books but an asset for tax and an
allowable deduction in future periods.
Tax Base will = the expenditure carried forward
for tax purposes
 Ie CA=0 & the TB=10,000 therefore DTD which
creates a Deferred Tax Asset

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1
Tax Losses
 Tax
losses are allowed to be
carried forward to future years
– therefore they create a deferred tax
asset as they will reduce the tax
liability in future years
 The
size of the tax loss to be
carried forward depends on the
exempt income which must be
deducted from the loss forward.
3
2
Tax Losses- example
Determination of tax
Accty profit/(loss)
(15 000)
add
depn-plant books
34 000
less
depn plant allowable
(67 000)
Tax Loss
($48 000)
3
3
Tax Losses- example
Determination of tax
Accty profit/(loss)
(15 000)
Journal entry
add
Dr Deferred tax Asset 14 400
depn-plant
34tax000
Cr Income
Revenue
14 400
less
depn plant
(67 000)
Tax Loss
($48 000)
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4
Tax Losses recouped- example
Determination of tax- subsequent years
Accty profit/(loss)
148 000
less
Tax loss recovered
(48 000)
Taxable Income
$100 000
3
5
Tax Losses recouped- example
Determination of tax- subsequent years
Accty profit/(loss)
148 000
less
Tax loss recovered
(48 000)
Taxable Income
$100 000
Journal entry for recovery of tax loss :
Dr Tax Payable
14 400
Cr Deferred tax Asset
14 400
Dr Income Tax Exp 44 400
Cr Tax Payable
44 400
(note that the recouping of losses
are first used against exempt income )
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Recognition of Deferred Tax Assets
(AASB 1020, paragraph 4.3)

Deferred tax assets can be recognised only to the extent that it is
probable that future taxable income will be available against which
deductible temporary differences can be utilized.

If DTAs from tax losses exist this provides strong evidence that
ATDs may not exist or be sufficient to allow recognition of the asset

If the recognition criteria are not met then DTAs cannot be recognised
and any existing DTA balance which fails the test (applied each
reporting date) must be written off

Entry:
– Writedown expense DR
– Deferred tax asset Cr
$x
$x
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Offsetting tax assets and liabilities
(AASB 1020, paragraphs 12.3 and 12.4)

Both current and deferred tax assets and liabilities
are to be offset against each other and a net figure
shown in the statement of financial position for:
– Current tax
– Deferred tax
3
8
Changes in tax rates
(AASB 1020, paragraph 4.6.4)

When tax rates change during the period the
opening balances of DTAs and DTLs must be
adjusted eg
A DTA of $12 and a DTL of $30 were raised. Assume the tax
rate is increased to 35% in the next financial year from 30%
Step 1: Calculate adjustment
– $12 x (5)/30 = $2 (ie increase of $2)
– $30 x (5)/30 = $5 (ie increase of $5)
Step 2: Post journal entry
Deferred tax asset
Dr
$2
Expense on rate change
Dr
$3
Deferred tax liability
Cr
$5

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Tutorial Questions
 Problem
4.1
 Problem 4.2
 Problem 4.4A
 Problem 4.5A
 Exercise 4.8
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