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Question:

Purpose:

This assignment aims at developing a clear understanding of students on corporate accounting for income tax issues. Students will develop an understanding on different concepts used in accounting for income taxes. They will also develop an understanding on how different concepts of accounting for income tax are used by companies in the practical setting.

Assessment task:

Collect the latest annual report of an ASX listed company for the last 2 financial years. Please read the financial statements (balance sheet, income statement, cash flow statement) and notes attached to financial statements on income tax issues very carefully. Please remember some aspects of your firm’s treatment of its tax – can be a very complicated area, particularly for some firms. Based on your understanding of the topic “accounting for income tax” and based on your reading of the collected annual reports, do the following tasks.

i Briefly explain the concepts of accounting profit, taxable profit, temporary difference, taxable temporary difference, deductible temporary difference, deferred tax assets and deferred tax liability.

ii Briefly explain the recognition criteria of deferred tax assets and deferred tax liability.

iii What is your firm’s tax expense in its latest financial statements?

iv Is this figure the same as the company tax rate times your firm’s accounting income? Explain why this is, or is not, the case for your firm highlighting the reasons for differences.

v Identify the deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded.

vi Is there any current tax assets or income tax payable recorded by your company? Why is the income tax payable not the same as income tax expense?

vii Is the income tax expense shown in the income statement same as the income tax paid shown in the cash flow statement? If not, why is the difference?

viii Briefly explain the concepts of temporary difference and permanent difference. Identify any permanent differences that your company may have.

ix What do you find interesting, confusing, surprising or difficult to understand about the treatment of tax in your firm’s financial statements? What new insights, if any, have you gained about how companies account for income tax as a result of examining your firm’s tax expense in its accounts?

 

Answer:

Introduction

The focus of the assessment is to formulate a detailed analysis on the reporting process of a business mainly focusing on reporting for taxes. The company which is selected for the analysis is CSL ltd which is engaged in providing pharmaceutical solutions to the people. The company is known for its 9innovative approaches for development of new medicines (Csl.com. 2020).. The annual report for the company would be considered for 2019 so that the most current practices of the business can be ascertained. The assessment would be showing key concepts which are closely related to accounting for taxes and the guidelines which are suggested by AASB 112 Income Taxes. The analysis further shows key items which are reported in the balance sheet and income statement of the business. The analysis would further differentiate between the concepts of temporary difference and permanent difference (Hanlon, Navissi and Soepriyanto 2014). In addition to this, the analysis would be showing how such differences create deferred tax items in the balance sheet. Further, the analysis would also be identifying some key aspects which are either confusing or relevant for understanding. These aspects would be discussed so that a level of transparency is maintained in the reporting framework of the business.

Key Accounting Concepts

The concept of accounting profits basically refers to the earnings which is available to the management of the company after all expenses are deducted from the same. The accounting profits are computed following all the principles which are generally applicable in accounting. The accounting profit for a business is used to judge the financial performance of the business during the period.

The concept of taxable profit refers to the profits which is available to the business after making all appropriation of expenses and finance costs. The amount which is remaining with the senior officials of the business is known as taxable profits for the business. The business are usually required to pay up[ a certain percentage of their profits as taxes to the government.

The concept of temporary difference can be defined as the situation where there is a difference between the carrying value of the asset and the tax base of the concerned asset. The temporary differences are further bifurcated into two types which are taxable temporary differences and deductible temporary differences. The term taxable temporary differences arises when there is a difference in timings which results in taxable income of the business to be lower than the pre-taxed  income which was considered by the management of the company. On the other hand, Deductible temporary differences is the amount which can be effectively be deducted from future taxable incomes so that proper taxes can be computed and reported in the financial statements of the business (Mullinova and Simonyants 2016). These concepts are considered to be important from the perspective of taxation and proper assessment needs to be made regarding the same aspects in an appropriate manner.

In simple words, deferred tax assets are tax based assets which allows the management to reduce the future payments of taxes by setting off the same. The benefit which it causes to the business from future perspective is the reason that such an asset is presented in the asset section of the balance sheet. Deferred tax liabilities on the other hands are payments which are due for the current year partially or fully and the same have not been paid by the business. The deferred tax liabilities are appropriately projected in the financial statements of the business under the head of liability and the same is done so that appropriate presentation of liabilities can be ensured (Kasipillai and Mahenthiran 2013). The deferred tax assets and liabilities forms part of key financial treatments and therefore the same should be presented in a proper form as far as reporting framework for the business is concerned.

 

Recognition Criteria

The deferred tax assets and liabilities are required to be presented in the balance sheet of a company but in order to do so, the first step is to primarily recognise the assets and liabilities. In order to follow proper recognition criteria, the provisions of AASB 112 income taxes are to be followed. The recognition criteria has undergone slight changes after the amendment which was brought about by AASB 2016-1. The recognition of deferred tax assets would be done based on all temporary differences subjected to the fact that the business has appropriate profits generated from the perspective of future. In the similar manner, changes have also been made to the reporting framework of deferred tax liabilities, which would also be recognised for all temporary differences and appropriate disclosures regarding the differences needs to be projected in the notes section of the financial reports (Vu?kovi?-Milutinovi?, and Luki? 2013). Once the amounts of the deferred tax asset and liabilities are identified by the management the same needs to be reported in the financial report. It is also anticipated that the business would be providing appropriate disclosures in relation to the items. The annual report of CSL ltd shows that the business has followed appropriate guidelines relating to reporting for taxes in the business and also provided appropriate disclosures in the books of accounts (Badenhorst and Ferreira 2016). In addition to this, the notes to accounts section reveal that the management of the company has followed proper recognition process and the same is consistent with AASB 112.

Tax Expenses 

The income statement for 2019 for CSL ltd shows the tax expenses which is associated with the business. The figure of income tax expenses for the period of 2019 is shown to be $ 422.4 million which has slightly declined from previous year which may be due to the fall in profitability of the business.

Tax Rate Charged by the Company

The amount of tax expenses for the business depends on the profits which are generated by the business during the period. Further, it is to be noted that the profit which is before tax figure is considered for the purpose of assessing the taxes of the business. It is also to be noted that the tax rate which is applicable on corporate houses is 30% under normal circumstances. The annual report for the business of CSL ltd shows that the profit before tax figure is shown to be $ 2,341.1 million on which a rate of 30% should be applied to get appropriate tax expenses figure during the period. However, the taxes expenses which can be computed using the tax rate is not consistent with the figure which is presented in the income statement. There can be several reason for the difference in the tax charged and actual tax which is computed. One of the reason which can be identified is the presence of deferred tax assets and liabilities which are required to be set off against the taxes of the current period which is the reason the amount of tax expenses for the business is shown to be lower. The treatment of taxes for the business of CSL is therefore appropriate and the difference which is identified is due to the presence of deferred tax assets and liabilities for the business (Ladas, Negkakis and Samara 2017). It can further be stated that the management of the company has followed appropriate regulations which are stated by the ATO in maintaining tax related entries in the financial reporting framework.

 

Deferred Tax Assets and Liabilities

The annual report of CSL ltd for the year 2019 shows that the management has shown both deferred tax assets and liabilities which is a sign that temporary differences have arisen in the past for the business. Deferred tax assets allow the management to claim deductions or set off for the taxes which were paid in excess in previous periods. The set off therefore allows the business some relief which is the reason due to which the item is presented as assets for the business. In the balance sheet of CSL ltd of the year 2019, the deferred tax assets are portrayed as $ 378.7 million. The deferred tax assets of the business arise due to temporary differences between the items which are recorded between two different reporting periods (Bakker, van den Berg and Janssen 2015). Another reason for the deferred tax assets and liabilities is due to the expense which is recurring in the financial statements of previous years which have been carried forward from previous year. The business has also portrayed deferred tax liabilities for the business and the same is reflected to be $ 168.7 which has also declined from previous year. The liabilities are also properly presented and the management of the company always needs to keep in mind that such an item needs to be set off against deferred tax assets (Juhandi and Fahlevi 2019). The management of the company needs to pay special consideration while treating the deferred tax items of a business.

Current Taxes for the Business

The annual report for the company shows that the business has both current tax assets and current tax liabilities. These represent items which need to be settled this period so that proper quality of information is available in all aspects. The current tax of the business is shown to be $ 21.4 million while on the other hand, the current tax liabilities is shown to be $ 162.2 million. Both the figures of current tax assets and liabilities are shown to have declined. The recording of such current items are done in the financial statement which is only because such items are required to be settled during the period (Chytis, Koumanakos and Goumas 2015). The current tax assets and liabilities might also include taxes which are from previous year. This is one of the main reasons that the differed items should be portrayed appropriately in the financial reports of the business. The management of CSL ltd has succeeded in presenting all relevant financial information in the annual report of the business,

Difference in Income Tax paid and Income Tax Expenses

The income tax expenses represent the overall tax liability for the business which needs to be incurred by the company in order to meet compliance requirements. The income tax expenses are presented in the income statement so that a level of liability can be created on the management regarding the payment of taxes. The cash flow statement for the business portrays the actual cash which is paid by the business in respect to the taxes which is applicable on the company (Widiatmoko and Mayangsari 2016). The income tax paid is the actual outflow of cash for the business. The income statement shows that the income tax expenses which is applicable to the company during the period is shown to be $ 22.1 million and the actual amount which is paid by the business is shown to be $ 527.5 million. This shows that the management of the company is paying more in terms of sustainability progress. The difference between the two amounts is because of deferred tax assets and deferred tax liabilities of the business which is required to be settled in order to get to the amount which is to be paid during the period. The difference in the timing of charging the tax for the business might be another reason for the difference between income tax expenses recorded and income tax paid as per the financial statements of the business. In addition to this, there management of the company might have only paid a part of the taxes during the period and the rest might have been carried forward for future period as deferred tax liabilities.

 

Distinction between Temporary Difference and Permanent Difference

Permanent Differences are transactions which cannot be changed by the by the business and the effect for the same is permanent. However, one aspect fo such kind of transaction is that it is only related to a particular period and cannot be carried forward to the next period. In the similar manner, temporary differences create a much different effect in the financial statement of the company and the same are considered to be a bit complex I nature as well. If a temporary difference causes pre-tax book income to be higher than actual taxable income, then a deferred tax liability is created.  This situation arises because of the fact that the companies are required to file tax returns and sometimes the same is done on estimation basis. Therefore, in situation where the business earns more revenue than portrayed in the tax returns filed, the taxable income for the company is bound to increase further  This is one of the reasons due to which the there is a difference between the estimated taxable income and the actual taxable income for the business. However, if lower profits are made than what is filed by the business than it would result in creation of deferred tax assets for the business (Ebrahim 2014). In the case of CSL ltd, the permanent differences are not present in the financial statements as permanent differences closely associated with the transaction which is undertaken by the management of the company. On the other hand, an example of temporary difference which can be provided is the deferred tax assets and liabilities which is portrayed in the financial reports of the business. The management of the company needs to consider such permanent and temporary differences in an appropriate manner so that proper transparency is maintained in the reporting framework of the business.

 

Review of the Tax policy of the business.

 The tax policies which are followed by the business of CSL ltd are consistent with the rules and regulations which are established in the market and also follow the compliance procedures which are set by the ATO so that proper transparency is maintained in the reporting framework of the business. The business has also been consistent with the practice of recognizing deferred tax assets and liabilities which is clear from the comparison which can be made from previous year estimates for the business. The business has appropriately showing the current tax liabilities and assets for the company which is further consistent with the reporting framework which is followed by the business during the period. In an overall estimation, it can be said that the business of CSL ltd has formulated proper financial statements showing all relevant information regarding the tax treatments for the business, In addition to this, financial reports of the business further reveals information regarding the tax trends of the company and the policy which is adopted by the business for setting off deferred tax assets and liabilities.

Conclusion

The above discussion shows a detailed analysis of the tax structure for the business of CSL ltd for the year 2019 and also shows how different component are reported in the financial reports so that proper transparency principle is followed. The discussion further shows key concepts which are associated with the activities of taxation and also how the same are used for assessing the tax liability for the business during the period. In addition to this, the assessment investigates the main causes for the identification of deferred tax assets and liabilities and what are the reasons for the same to be created. The assessment makes proper review of the balance sheet of CSL ltd and identifies how the current tax assets and current tax liabilities reported and whether proper disclosures are provided in respect of the same in the financial reports of the business.

 

References

Badenhorst, W.M. and Ferreira, P.H., 2016. The Financial Crisis and the Value?relevance of Recognised Deferred Tax Assets. Australian Accounting Review, 26(3), pp.291-300.

Bakker, A., van den Berg, T. and Janssen, B. eds., 2015. Tax accounting: unravelling the mystery of income taxes. IBFD.

Chytis, E., Koumanakos, E. and Goumas, S., 2015. Deferred Tax Positions under the prism of financial crisis and the effects of a corporate tax reform. International Journal of Corporate Finance and Accounting (IJCFA), 2(2), pp.21-58.

Csl.com. (2020). [online] Available at: https://www.csl.com/-/media/csl/documents/annual-report-docs/csl-ltd-annual-report-2019-full.pdf?la=en-us&hash=AC57DA1C6E85B66162B25238509C47596E1CA401 [Accessed 30 May 2020].

Ebrahim, A., 2014. IFRS compliance and audit quality in developing countries: The case of income tax accounting in Egypt. Journal of International Business Research, 13(2), p.19.

Hanlon, D., Navissi, F. and Soepriyanto, G., 2014. The value relevance of deferred tax attributed to asset revaluations. Journal of Contemporary Accounting & Economics, 10(2), pp.87-99.

Juhandi, N. and Fahlevi, M., 2019. TAX POLICY AND FISCAL CONSOLIDATION ON CORPORATE INCOME TAX. Journal of Business, Management, and Accounting, 1(1), pp.21-33.

Kasipillai, J. and Mahenthiran, S., 2013. Deferred taxes, earnings management, and corporate governance: Malaysian evidence. Journal of Contemporary Accounting & Economics, 9(1), pp.1-18.

Ladas, A.C., Negkakis, C.I. and Samara, A.D., 2017. Accounting quality deferred tax and risk in the banking industry. International Journal of Banking, Accounting and Finance, 8(1), pp.1-19.

Mullinova, S. and Simonyants, N., 2016. Reflection of a deferred tax liability in the credit union reporting according to IFRS (IAS) 12" Income taxes". Modern European Researches, (1), pp.83-88.

Vu?kovi?-Milutinovi?, S. and Luki?, R., 2013. Analysis of deferred taxes in the business environment in Serbia. Economia. Seria Management, 16(1), pp.25-37.

Widiatmoko, J. and Mayangsari, I., 2016. The Impact of Deferred Tax Assets, Discretionary Accrual, Leverage, Company Size and Tax Planning Onearnings Management Practices. Jurnal Dinamika Manajemen, 7(1), pp.22-31.

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