Tax Income Be Estimate from Financial Report - Myassignmenthelp.Com

Question: Discuss about the Tax Income Be Estimate from Financial Report. Answer: Introduction According to the Australian Accounting Standard Board, the income tax accounting is a tool which completes the balance sheet in order to identify both the current tax penalty of dealings and the future tax penalty of the coming settlement of the carrying sum of all the assets and liabilities of the company. The current report is focused on describing the objective of accounting in relation to the income tax, which also helps to identify the deferred tax assets and liabilities and compare them with the unused tax losses. Further, it includes the comparison of the income tax of selected companies and impact on decision making of the stakeholders in a situation where deferred tax assets and liabilities are not recorded in the financial statements of the company. Objectives of Accounting for the purpose of Income Tax The purpose of bookkeeping for income tax is to identify the sum of tax to be paid or refundable in the current year and also identify the deferred tax assets and liabilities for the events of tax penalty in future in the financial statements of the company (Dudin et al. 2015).The main objective is to maintain the balance sheet of accounts for deferred taxes more consequential for the company. According to the Australian Accounting Standards Board bookkeeping is used to measure the amount of income tax for current and future events. The accounting is needed because the tax penalty for most events identified in the statements is incorporated in calculating the income tax to be paid in a current year. But the laws related to tax always differ from the detection and calculation requirements of the accounting standards. The differences occur in the sum of income taxable and before tax income for the year, and also between the bases of tax of assets and liabilities and their recorded sum in the statements. It helps to identify the amount of settlement of the carrying sum of the assets that are recorded in the statements of finance of the company. Another objective of accounting in income tax is that it also records the transactions about the deferred tax and liabilities of the current year in the financial report of the company. Hence it will affect the total goodwill increasing in the business (Tran, 2015). The bookkeeping also deal with the identification of the tax assets which are arising from the unused tax credits or losses, the presentation of the taxable income and the disclosure of the data associated with the income tax in financial statements. The accounting for the tax is the greatest specialization in the field of accounting. By considering aspects of corporate accounting and reporting; there are various objectives of accounting for income tax and evaluating a companys operations. The other objectives of bookkeeping for the purpose of income tax are as follows: Period of Payments: Accounting for income tax allows the company to control is a flow of cash and reduce its tax amount to be paid on cash transactions. For a company, it is profitable to pay the taxes today in spite of paying them in future. Funding Considerations: The tax accounting permits the company to manage its financial flexibility. There are several effects of funding for the operation of the company with equity and debt. It will help the company to plan according to it and maintain the same flexibility in future events. Identification of deferred tax assets and liabilities A deferred tax asset or liability should be identified for all the temporary differences which are taxable. It excludes the extent, from which the tax liabilities arise, such as The preliminary identification of goodwill, or Goodwill for which paying the tax back is not deductible The preliminary identification of assets and liabilities in the deal, which is not a combination of business at the time of dealing and also neither affects the profits before tax nor the profit after tax (Badenhorst and Ferreira,2016) According to the Australian Accounting Standard Board, the temporary variation of tax which is linked to the investment in branches, associates and subsidiaries and also holds an interest in joint venture, identifies a deferred tax responsibility (Australian Accounting Standard Board, 2017). Comparison of deferred tax assets with tax losses Deferred tax assets are inbuilt in the identification of assets whose carrying sum will be retained in the form of benefits of economic which flow through the company in coming years. In case if the carrying some of the asset is more than the tax payable, the sum of economic benefits will be even more than the amount allowed as a tax deduction (FASB.org, 2017). This is termed as temporary variation and is a compulsion to pay the income tax in future years as a deferred liability tax. As soon as the company regains the carrying sum of the assets, the temporary variation will reserve, and the company will have payable revenues (Australian Accounting Standard Board, 2017). This will make it feasible that the profitable benefits will flow through the company in the shape of tax payments. For instance, when an asset is being carried at the fair value without any equal adjustment made for tax purposes, a temporary deductible variation will occur in the form of deferred tax expenses. A deferred asset should be identified for further carrying the losses and credits of unused tax to the level that it is feasible that the future payable profit will be accessible against which the losses and credits of the unexploited tax can be utilized (Fischer and Gallmeyer (2016). The standard for distinguishing the overdue tax assets occurring from carrying forward the losses and credits of the unused tax is similar to the standard for identifying the overdue tax asset occurring from temporary deductible variation. On the other hand, the subsistence of unexploited tax losses is strong confirmation that prospect payable income may not be accessible. Thus, when a business has a record of current losses, the company identifies an overdue tax asset occurring from the unused tax credits (Rutledge, Karim Kim, 2016). It has a limited scope that the company has enough payable temporary variation and also they have a persuasive proof that adequate payable income will be accessible against which the unexploited tax credits can be exploited by the company (Tomlinson,2018). In such conditions, it is essential to disclose the level of overdue tax assets and the nature of confirmation supporting its identification. Comparing the information relating to Income tax in the financial statements of selected companies Herein, this part of report comparison is made in relation to the income tax expense information between ADAMS Limited and EAGERS Limited. This comparison will show the differences between disclosure practices in both the companies and how these companies account for tax expenses as current and deferred in their financial statements. All the figures below are as per the year 2016. The basis of this comparison is: Income tax expenses accounted for profit and loss According to the annual report of both the companies, it has been determined that income tax expenses are inclusive in the statement of profit and loss of the company. The amount of income tax expense in EAGERS Ltd was $35879 while the amount of income tax expense in ADAMS Ltd was $11651. It is clear from these figures that income tax expenses of EAGERS Ltd are more than that of the ADAIRS Ltd. This shows that the income of EAGERS Ltd after deduction of all the direct and indirect expenses, i.e. net income is more than that of the ADAIRS Ltd. Income tax included in other comprehensive income Other Comprehensive income is that part of revenues, gains, expenses, and losses that are excluded from net income in the income statement because of not being realized till date (Other comprehensive income, 2018). An expense or income is realized when the underlying transaction is said to be completed rather another comprehensive form of income are listed after the net income. The income tax expenses in other comprehensive income so stated in its financial statements of EAGERS Ltd amounted to $3253. On the other hand, according to the financial statements of ADAMS Ltd, there were no income tax expenses in other comprehensive income. However, there was income tax benefit amounted to $531. This shows that there is some part of income that company will realize as income tax benefit in future after the completion of underlying transactions. Deferred and current tax components of income tax expense In ADAIRS Ltd components of current tax in income tax expenses were: Income tax of current year was $10900 Adjustment of current tax for previous year was $23 Components of Deferred tax: Reversal and origination of temporal difference was $728 In EAGERS Ltd Current tax amounted to $26885, and deferred tax amounted to $8994 (Annual Report EAGERS Ltd, 2016). Components of deferred tax in income tax expenses are: In respect to the current year $8407 Reclassified from equity $587 From the above figures it has been analyzed that, in EAGERS Ltd, there is no adjustment regarding the current tax of previous year while the same is included in ADAIRS Ltd. Disclosure of deferred tax assets and liabilities in statements of financial position EAGERS Ltd has made disclosure of only deferred tax liability in its statement of financial position. Deferred tax liability disclosed is amounted to $7447. On the other hand, ADAIRS Ltd had made disclosures about both deferred tax assets and deferred tax liability in its statement of financial position. Deferred tax assets amount to $6725, and deferred tax liability amounts to $12453 (Annual Report ADAIRS Ltd, 2016). This shows that policies of disclosure of deferred tax assets and deferred tax liabilities in the financial statements are more clear and transparent in ADAIRS Ltd than that of EAGERS Ltd. However, deferred tax liability is created when accelerated depreciation is used for tax purpose and not for financial reporting purposes (Deferred Tax Liability, 2018). This means both the companies use accelerated depreciation for tax purpose and not for reporting purpose. Impact on decision making of stakeholders when deferred asset and liabilities are not recorded. The deferred tax assets and liabilities can directly affect the cash flow of the company for subsequent years if they are not recorded in the financial statements. In the situation, if the company has not taken into account the deferred tax asset and liabilities companies will not be able to determine the calculation for the assumption of sales (Szbilir, Kula Baykut, 2015). According to the annual report of the ADAIRSlimited the deferred tax liability is around $12395000 in the current year. If this is eliminated from the income statement, it will not present a viable picture of the companys financial position. elimination of this information and related notes will not offer the temporary variation on the bases of tax assets and liabilities and the carrying sum which will not complete the purpose of reporting the financial accounting. It will also affect the decision-making process of the stakeholders as they will not proper and complete information about the deferred tax assets and liabilities. Nonrecording of this will lead to the inaccurate calculation of the companys earning and its equity position. (Annual Report ADAIRS Ltd, 2016) The recording of deferred tax assets and liabilities is important for a company because the assets are valued at the fair market price, and increase in their value creates valuation equity. By considering annual report of both the companies it can be noticed that without accounting and deferred assets and liabilities accounting for tax, the level of equity is being overstated this will affect the decision of the investors. If the deferred tax is added, it reflects the rise in the value of the assets, and then a correct image of companys operation is presented (Annual Report EAGERS Ltd, 2016). Conclusion From the above report, it can be concluded that accounting of tax treatment is important to ensure appropriate presentation of financial statements. It also helps the company to identify its deferred tax assets and liabilities. Companies are essential to provide an appropriate presentation of deferred tax liabilities and assets to provide viable information to stakeholders so they can make informed decisions. With the absence of this information; transaction of income tax in financial statements will showcase true picture and inter, and intra comparison will not be viable. References Dudin, M., Prokofev, M., Fedorova, I., Frygin, A., Kucuri, G. (2015). International Practice of Generation of the National Budget Income on the Basis of the Generally Accepted Financial Reporting Standards (IFRS). Tran, A. (2015). Can Taxable Income Be Estimated from Financial Reports of Listed Companies in Australia.Austl. Tax F.,30, 569. Badenhorst, W. M., Ferreira, P. H. (2016). The Financial Crisis and the Value?relevance of Recognised Deferred Tax Assets.Australian Accounting Review,26(3), 291-300. Fasb.org. Summary of Statement No. 109. (2018).Retrieved from https://www.fasb.org/summary/stsum109.shtml? 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