company accounting - powerpoint presentation

8/11/2019 Company Accounting - Powerpoint Presentation

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Chapter 6

Accounting for company

income tax

Prepared by

Emma Holmes


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Accounting income vs tax treatments

Accounting profit does not equal taxable profit

Difference caused by different rules used for accounting vs

tax purposes

ACCOUNTING TAX

Basis of

accounting

Equations

Accruals basis Principally cash basis

Revenue Expenses

= Accounting profit

Taxable income (TI) tax

deductions (TD) =Taxable profit

AASBs and the

Corporations Act are key

sources that determine

the appropriate

accounting treatment oftransactions

The Income Tax Assessment Act

determines the tax treatment of

transactions

Some exceptions to this


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ITEM ACCOUNTING TAX

Passiverevenuereceived in

arrears

Depreciation(acceleratedfor tax)

R&D costs

Prepaidexpenses

Recognised as revenue,with corresponding

asset (receivable) when

earned

Recognised as TI whencash received

Recognised as expensebased on useful life ofasset

Recognised as TD basedon predetermined rates

Capitalised and

amortised

Recognised as TD when

paid

Recorded as an assetand expensed asincurred

Recognised as TD when

paid

Rent, interest, royalties etc

Common for assets to be depreciated over a shorter life for tax purposes than for accounting purposes


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ITEM ACCOUNTING TAX

Passive revenuereceived inadvance

Depreciation(accelerated foracctg)

Bad/doubtful debts

Employee benefitseg annual leave

Recorded as liability .Recognised as revenuewhen earned.

Recognised as TI whencash received

Recognised as expensebased on useful life ofasset

Recognised as TD

based on predeterminedrates

Allowance raised andexpense recorded whendebt considered doubtful

Recognised as a TD

when debt physically

written off

Liability raised andexpense recorded when

debt owing to employee

Recognised as TD whenpayment made to

employee

Possible for accounting useful life to be shorter than tax useful life

Provisions (eg for warranties) are treated in the same way as employee benefits


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Accounting for income taxes

general principles

The tax consequences of transactions that occur foraccounting purposes during a period should berecognised as income or expense during the currentperiod, regardless of when the tax effects will occur

This requires identifying the current and future taxconsequences of items recognised in the balancesheet

Two separate calculations are performed each year:

1. current tax liability

2. movements in deferred tax balances


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Calculation of current tax liability -

example

Profit before tax for ABC Ltd forthe year to 30 June 2012 is asfollows:

Sales 1,000

Interest revenue 40

Government grant 80

COGS (450)

Depreciation (50)

Goodwill impairment (20)

Bad debts (30)

Annual leave (10)

Other expenses (260)

PBT 300

$60 allowed as a taxdeduction for plant.

Interest has not yet beenreceived.

Bad debts of $20 were writtenoff during the year.

Payments of $30 were madeto employees in relation toannual leave taken during the

year. The tax rate is 30%

Required:

Calculate the current taxliability of ABC Ltd for 2012


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Calculation of current tax - example

Accounting profit before tax

Taxable profit

Current tax liability (CTL) (30%)

300

Government grant (80)Goodwill impairment 20

Interest not yet received (40)Adjustment for plant depreciation (10)Adjustment for bad debt write-offs 10Adjustment for annual leave paid (20)

180

54

exempt income

not deductible

Acctg depn 50

Tax depn (60)

Adj req (10)

B/debts expense-acctg 30

B/debts w/off- tax (20)

Adj req 10

A/L expense- acctg 10

Paid- tax (30)

Adj req (20)


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Recording current tax liability

In the previous example the CTL would be recorded as:

Dr Income tax expense (current) 54

Cr Current tax liability 54


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Deferred tax liabilities and assets

Arise when the period in which revenue andexpenses are recognised for accounting is differentfrom the period in which items are recognised for tax

Arise principally due to the accruals vs cash basis ofrecognising transactions. Differences either result in:

1. The company paying more tax in the future

Taxable temporary differences (TTDs)

Result in deferred tax liabilities (DTLs)

2. The company paying less tax in the future

Deductible temporary differences (DTDs)

Result in deferred tax assets (DTAs)


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Calculation of deferred tax

The existence of temporary differences results in thecarrying amounts of an entitys assets and liabilitiesbeing different from the amounts that would arise if abalance sheet was prepared for tax authorities

Carrying amount (CA)-

Tax base (TB)- asset and liability balances that would

appear in a tax balance sheet.

Temporary differences are calculated as follows:

asset and liability balances (netof accumulated depreciation, allowances etc) based onaccounting balance sheet.

CATB = TTD/(DTD)


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Calculating the tax base

Calculating the tax base for an asset

CA

future taxable amounts

+ future deductible amounts= TB

Calculating the tax base for a liability

CA

+ future taxable amounts

- future deductible amounts

= TB


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Calculating the tax base - examples

CA FTA FDA TB

Prepayment: $3,000

Interest receivable:$1,000

Plant: cost $10,000,acctg a/depn $4,600,

tax a/depn $6,500

Trade receivables: $52,000

Allowance for b/debts:$2,000

Trade payables: $30,000

Annual leave liability: $3,900

3,000 - 3,000 + - = -

1,000 - 1,000 + - = -

5,400 - 5,400 + 3,500 = 3,500

50,000 - - + 2,000 = 52,000

30,000 + - - - = 30,000

3,900 + - - 3,900 = -


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Calculating the tax base examples

Notes to worksheet:

Prepayments- deductible when paid for tax purposes-therefore no balance would appear as an asset in the taxbalance sheet.

Interest receivable- assessable when received- thereforeno balance would appear as a receivable asset in the taxbalance sheet.

Plant- WDV for tax purposes = $10,000 - $6,500 = $3,500. Trade receivables- bad debts not deductible for tax until

physically written off- therefore the gross trade receivables

amount would appear in the tax balance sheet. Payables- no differences in the treatment of trade payables

for tax and accounting purposes- therefore CA = TB. Annual leave liability - deductible when paid for tax

purposes- therefore no balance would appear as a liability

in the tax balance sheet.


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Excluded taxable temporary

differences

Certain temporary differences are excluded frombeing recognised.

AASB 112 prohibits temporary differences frombeing recognised in relation to:

Goodwill

The initial recognition of assets and liabilities thatdo not arise from a business combination.

Providing certain recognition criteria are met,deductible temporary differences arising from taxlosses can lead to the recognition of DTAs.


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Recognition of DTLs and DTAs

Deferred tax liabilities

Deferred tax liabilities must be recognised in full

Deferred tax assets

Deferred tax assets relating to temporary differencesand tax losses are recognised only if:

there are sufficient taxable temporary differences for

the entity to use against the deductible temporarydifferences; OR

if it is probable that the entity will have sufficientfuture taxable profit (against which the tax benefitcan be offset)


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Deferred tax assets and liabilities

Calculating a deferred tax asset (DTA)

DTD x tax rate % = DTA

Calculating a deferred tax liability (DTL)

TTD x tax rate % = DTL

Recording a DTA/DTL

Dr Deferred tax assetDr/Cr Income tax expense

Cr Deferred tax liability

The tax rate % is that

which is expected to

apply when the asset

will be realised or the

liability settled

BALANCING ITEM


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example

The balance sheet of ABC Ltd at 30 June 2012 is as follows:

Assets Liabilities

Cash 260 Trade payables 296

Trade receivables 300 Loan 485

Allowance for b/debts (30) 270 A/L liability 15

Interest receivable 40 Deferred tax liability 9

Inventory 100 805

Plant 500 Equity

Accum depn (300) 200 Share capital 700

Goodwill 800 R/earnings 175

Deferred tax asset 10 875

1,680


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example

The balances in the deferred tax asset and liabilityaccounts are the carried forward closing balances fromthe prior year

Accumulated depreciation of plant for tax purposes is$360

Required:

Complete the deferred tax worksheet on the followingpage and prepare the journal to record deferred taxmovements for the 30 June 2012 year.


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example

Relevant assets &

liabilities

CA FTA FDA TB TTD DTD

Trade receivables

Interest receivable

Plant

Goodwill

A/L liability

Total temporary differences

Less: excluded differences

Temporary differences

DTL/DTA (@ 30%)

Less: opening balances

Adjustment

270 - 30 300 30

40 40 - - 40

200 200 140 140 60

800 800 - - 800

15 - 15 - 15

900 45

(800) -

100 45

30 13

9 10

21 3


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example

Notes to worksheet:

1. Items where the CA = TB have been omitted fromworksheet (eg cash, payables, loan)

2. AASB 112 does not permit the recognition of aDTL relating to goodwill. The TTD arising isreferred to as an excluded temporary difference

3. Negative figures in the adjustment section woulddenote decreases in the DTA/DTL balances duringthe year


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Offsetting tax assets and liabilities

Both current and deferred tax assets and liabilitiesare to be offset against each other and a net figureshown in the balance sheet position for:

Current tax

Deferred tax


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Change in tax rates

When a new tax rate is enacted, that new rateshould be applied:

when calculating current tax liability

when calculating adjustments to deferred taxaccounts

to carried forward deferred tax balances from

previous years


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Tax Losses

Tax losses are created when allowable deductionsexceed assessable income

The tax act allows losses to be carried forward and

used as a deduction against future taxable income

Tax losses provide future deductions and (subject torecognition criteria) create deferred tax assets

Exempt income cannot contribute to carry forwardlosses If prima facie tax loss is $(10 000) but there is

exempt income of $2 000 the allowable carryforward loss would be $(8 000)


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Disclosure

Tax assets & liabilities must be classified ascurrent or non-current on the face of the statementof financial position

Current and deferred tax assets and liabilities canbe offset in most cases

Tax expense on the statement of profit or loss andother comprehensive income


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Payment of income tax

Company income tax is paid under the PAYG (pay asyou go) system in quarterly instalments

Companies must lodge quarterly business activitystatements (BAS) and pay tax calculated as:

Instalment income x instalment rate (suppliedannually by the taxation department)

Current tax liability represents the last quarterly paymentand any adjustments necessary to reflect the fact thatannual taxable income may differ from the sum of thequarterly returns


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