HI5020 Income Tax Accounting of IRESS Limited Assessment Answer
Answer
INCOME TAX ACCOUNTING
Introduction
In the case of the Income Statement of an entity, one of the most significant items is Tax expense. The matching concept is very much different in case of income tax in many cases as Income reported in Financial statement may vary from the actual income tax because of different treatment is given to certain items under Taxation laws and its presentation in accounts. IRESS LIMITED, a listed company on ASX is selected and analysis is carried out for the year 2019 and 2018 to understand the concept relating to Accounting and Taxation Laws (Detzen, Stork genannt Wersborg, and Zülch, 2016).
Basic Concepts
| Accounting Profit | Accounting Profit/ (loss) is the reported net profit in the income statement which is prepared as per the applicable financial reporting framework governing the entity. It is Computed by taking Total revenue and profits which are then reduced by total expenses and losses excluding income tax expense or income tax saving. Total revenue is the total of operating as well as non-operating revenue however total expense includes expense from primary and secondary operations. Profit before Income Tax Expense Reported by Iress Limited is ((Brumm, and Liu, 2019). $ 88,451,000 in 2019 and $ 84,969,000 in 2018. | ||||||||||||
| Taxable Profit | This is the profit that is taxable under Taxation law and is computed to determine the amount of tax a person owes to the central government in a year. It is normally referred to as Gross total income (GTI) or Total Income (TI). To compute the total profit, deductions, or any exemptions available in a year are considered. | ||||||||||||
| Temporary Differences | When the accounting base of a particular asset or liability and the tax base of the same asset or liability are different, this difference is termed as a temporary difference. To understand this term let us take an example of a PPE Item:
| ||||||||||||
| Taxable – Temporary differences | A taxable temporary difference means a temporary difference which results in an amount, taxable while determining the taxable profit or loss in future years when carrying amount of recovered assets. For instance Iress limited has a PPE say commercial Building having the carrying value of $ 100,000 whose tax base is $ 70,000 on the date of reporting. Here a temporary difference of $ 30,000 exists. The deductions available in the future are lower than the carrying value of Building, therefore, it is a taxable-temporary difference (Furner, and Dickins, 2019). | ||||||||||||
| Deductible-Temporary Differences | The temporary differences which results in the amount of determining taxable profit in future years. The determining the taxable profit or loss in future years when the carrying amount of a particular liability or asset is settled or recovered. For instance: Iress Limited contributes to the scheme of defined contribution pension. At the end of the year Iress limited has recognized $ 7,500 on an accrual basis. In Australia where Iress Limited is registered, a cash base is used to tax the contribution in a scheme whose tax base is nil. The difference is $ 7,500. In the future, the tax deduction will be given when actual payment is paid in the scheme, this difference amounts to deductive-temporary difference. In addition to this, carrying amount of assets and recorded liabilities is lower or low as compared to the base then there is recording of the deductible temporary differences is found in context with the increment of the deferred tax assets | ||||||||||||
| Deferred tax asset | When the company has to pay taxes in the current tax year on account of deductible timing difference, whose benefit will be received in the foreseeable future then deferred tax asset (DTA) is accounted for. DTA arises when the tax base of a liability is lower than its carrying value or when the tax base of an asset is higher than its carrying value (Purnamasari, Hadi, and Sukmawati, 2020). | ||||||||||||
| Deferred tax Liability | Whenever the company avails any deduction in the current tax year as per the tax laws and due to such deduction total taxable income of the company is lower in the current year but in the future it has to pay, then Deferred tax liability (DTL) is recorded. DTL arises when the tax base of a liability is higher than its carrying value of when the tax base of an asset is low as given to ts carrying value (Brumm, and Liu, 2019). |
Recognised criteria set for the deferred tax (DT) assets and liabilities and deferred tax assets
Deferred Tax means the increase or decrease of deferred tax (liability) as re-recognized during the accounting year and that is related to the amount recognized in the income statement of the company in the current financial year and the previous year as well. Deferred tax liability and deferred tax assets are derived from the temporary timing difference in tax liability and asset recognized for the purpose of tax and the carrying value of liability and assets recognized for financial reporting (Detzen, Stork genannt Wersborg, and Zülch, 2016).
| Recognition criteria for Deferred Tax Asset (DTA) | There should be a reasonable expectation of sufficient taxable profit in the future to utilize the amount of deductible temporary difference for the purpose of recognizing a DTA. An entity will have a reduction in the payment of taxes in the form of economic benefit only when it generated sufficient taxable profit to offset the deduction available. Hence, the company will recognize Deferred tax assets when there is a probability that sufficient taxable profit will be generated against which could record the in the deducible differences in the financial (Guia, and Dantas, 2020). |
| Recognition criteria for deferred tax Liability | Deferred tax liability occurs when a temporary difference exists because the accounting profit reported in the income statement is higher than the profit offered of taxation purposes. Since lower payment of tax will be paid in the current period and higher payment of tax will be paid in the future which results in the creation of liability subject to virtual certainty of reversal shortly and hence deferred tax liability is recognized. |
Tax Expense Recognised In Financial Statements Year 2019
According to Note number 4.1 to the financial statement of Iress Limited (Taxation) the company has recognized $ 23,323,000 as total income tax expense recognized in the statement of profit and loss for the year 2019 as compared to $20,873,000 in the year 2018. This is more by $ 2,450,000 on account of an increase in total revenue (Wicker, 2018).
In year 2019, Tax expense in total consists of current income tax expense of $ 28,235,000 and deferred income tax expense of ($ 4,912,000). And in year 2018, current income tax expense of $21,655,000 and deferred tax expense of ($ 782,000) is recognised (Van der Vossen, 2018).
Comparison – Actual tax rate and corporate tax rate
| Particulars | 2019 $’000 | 2018 $’000 |
| Net profit | 88,451 | 84,969 |
| Australian tax rate of 30% | 26,535 | 25,491 |
| Adjusted income tax: | ||
| Differences in the adjusted rate of the foreign | (3,441) | (2,806) |
| Effect on expenses which are not deducted | (617) | 1,727 |
| Adjusted deferred given tax | (811) | (3,079 |
| Employee share plan | 127 | (637) |
| Recognised tax | 1,530 | 177 |
| Income Tax Expense | 23,323 | 20,873 |
Source: - (Irees Limited, 2020)
Deferred Tax Liability and Asset
According to Note 4.1 (c) referring to “Deferred income tax assets and liabilities” recognized in the Statement of Financial position, Iress Limited has reported a Total deferred tax asset of $ 22,479,000 and total deferred tax liability of $ (9,789,000) in the year 2019. The above Deferred tax Asset or liability is created due to the following differences (Irees Limited, 2020). However, the company avails any deduction in the current tax year as per the tax laws and due to such deduction total taxable income of the company is lower in the current year but in the future it has to pay, then Deferred tax liability (DTL) is recorded.
(Irees Limited, 2020).
At each date of the balance sheet, deferred tax asset a deferred tax liability of last year needs to be re-evaluated (Rajath, 2020). If any such balance requires de-recognition or recognition then the liability of tax should be adjusted in the final financial statement of the entity. Following adjustment is made by the company in this respect: (Irees Limited, 2020).
| Particulars | 2019 $’000 | 2018 $’000 |
| Singapore (Tax Rate 17%) | 1,539 | 1,143 |
| Hong Kong (Tax Rate 16.5%) | 135 | 128 |
| France (Tax Rate 28%) | 66,707 | - |
| Potential tax benefit | 18,962 | 215 |
Source: - (Irees Limited, 2020).
Deferred tax liability is recorded as temporary difference exists because the accounting profit reported in the income statement is higher than the profit offered of taxation purposes.
Recorded comparison sets between income tax expenses and income tax payable
“Statutory income tax cost is recorded under the head "Income Tax Expense" in profit account (Caban-Garcia, Choi, and Kim, 2020). We show expenses in the year in which it has occurred rather than the year in which it is paid, according to the concept of Accrual. Therefore, income tax expense is recorded in the year which it relates, not in the year it is actually paid. While recording the above adjustment, we will debit the income tax expense account since we are increasing the expenses. In a statement of profit or loss income tax expense is shown just before net income/ (Loss). However, company follow company different recognition and the temporary differences and what accounting treatment is given in its financial statement as per the accounting standard issued (Irees Limited, 2020). Deferred tax liability occurs when a temporary difference exists because the accounting profit reported in the income statement is higher than the profit offered of taxation purposes.
On the other hand "Income tax payable" is treated as a liability and is shown on the face of the balance sheet (de Souza Costa, et al. 2019). Balance in this account will depict that we owe the above-stated amount to the taxation authority and have not been paid until the balance sheet date. While posting adjusting entry as mentioned above, a credit will be made to income tax payable accounts. And when we actually pay the liability for income tax, we will then debit Income tax payable account and credit Bank/ Cash. Sometimes, taxable income reported in the income tax return does not equal to net income as reported as per the financial reporting framework. Normally, this situation is not permanent as it gets rectified over the period. Till then we will record these differences on deferred tax account (Asset or liability). The income tax payable is recorded in the balance sheet of the company as liability and income tax charged is recorded in the recorded statement of company.
Under the heading “Current Liabilities”, Iress Limited has reported Current tax payable of $ 5,253,000 balance sheet. Whereas income tax expense reported is $ 23,323,000 in the statement of profit or loss (Irees Limited, 2020).
Comparison between Income Tax charged in the given income statement and Income Tax Paid in Cash Flow Statement
Iress Limited has reported Income Tax expense of $ 23,323,000 for the year 2019 and $ 20,873,000 for the year 2018 in its statement of profit and loss. Whereas it has included Income tax paid of $ 21,696,000 for the year 2019 and $ 23,104,000 for the year 2018 in its cash flow statement (Irees Limited, 2020). The tax will be paid in the current period and higher payment of tax will be paid in the future which results in the creation of liability subject to virtual certainty of reversal shortly and hence deferred tax liability is recognized.
The major issue is relate to the compliance of the tax policies and laws and recording of the accounting entries as per the IFRS rules and regulations and both contradict with each other’s (Irees Limited, 2020). There is need to set up proper compliance program and strengthen the reporting framework which would help in setting up the strong work program.
Temporary Difference and Permanent Difference
1. Temporary difference
With the changes in the value of the recorded assets and in context with the recorded assets and liabilities in the balance sheet, the temporary differences is the amount of total different among the recorded carrying value of the assets and liabilities in the financial position of the company and their corresponding. It is analysed that the when the carrying value of the recorded amount of liabilities and asses is greater than the recorded tax base then the total taxable temporary differences in the given amount rises the deferred tax liability. In addition to this, carrying amount of assets and recorded liabilities is lower or low as compared to the base then there is recording of the deductible temporary differences is found in context with the increment of the deferred tax assets (Irees Limited, 2020).
Tax base of an asset or liability is the amount attributable to that asset or liability for tax purpose. The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods (Irees Limited, 2020).
2. Permanent difference
This is the amount of the permanent amount of differences between the overall financial profit amount of taxable profit which arise when the total income is not showing or allowed. It is analysed that computed tax for the given period is determined with the impact of the transactions and further accounting is needed and no deferred the assets and liabilities which will be recorded (Irees Limited, 2020).
. The tax computation for the period will calculate the impact of these transactions.no further accounting is needed and no deferred asset or liability will be recorded (Kiaupaite-Grušniene, and Alver, 2019).
Accounting to note no. 4.1.b to financial statement, Iress Limited has reported permanent difference for non-assessable income and non-deductible expenses of $ 617,000 in the year 2019 and $ 1,727,000 in the year 2018. The above permanent difference has aroused due to non-deductible losses from foreign branches and controlled entities (Irees Limited, 2020).
The total reason of the differences in the different tax expenses is the total amount of actual which his computed as tax based on the standard accounting rules which is based on the accrual method of the accounting and total amount of the income tax paid which is owned by the company as per the statutory provisions of the income tax code (Irees Limited, 2020).
Difficulties/ Understanding Gained Through Examining Tax Expense in Accounts
While analysing the accounting treatment of taxes on income in the financial statement of the given company, the determination of temporary difference and permanent difference, in some cases, were difficult to assess. Since the detailed tax treatment of a particular transaction can only be understood through reading the computation of income tax which was not available and is not included in the annual report. Also in-depth knowledge of income tax law is required to understand certain adjustments in financial statements (Irees Limited, 2020).
While examining the firm’s tax expense in its books of accounts, in-depth knowledge of various concepts relating to tax accounting, and its practical aspect in the corporate world was obtained. It was very interesting to understand how the company determines and recognizes the temporary differences and what accounting treatment is given in its financial statement as per the accounting standard issued (Irees Limited, 2020).
Conclusion
From the above-detailed assessment and analysis it is imperative to say that matching income tax and revenue during the period results in certain problems which are due to the reason that in many situations, accounting income may be different from taxable income significantly. Firstly, there may be differences between the items that are considered as expenses, revenue, deductions for the purpose of taxation, and the items of expense and revenue as reflecting in the income statement, termed as permanent differences. Secondly, differences given in the carrying value of liability or asset in financial statement and the tax base of the same and amount which is recognized for the purpose of taxable income computation, termed as temporary differences. There is no accounting treatment of permanent difference in financial statements however temporary difference requires adjustments in the books of accounts as prescribed by the financial reporting framework. It is the duty of the management to correctly and fairly present the above adjustment in the recorded data given in the financial books of the company.
Customer Testimonials
