Question

1)MFRS112 indicates that a deferred tax asset is recognized only when there is evidence of probable taxable profits that can be used against the deductible temporary difference in the future. Identify the situations in which there is no evidence of such probable taxable profits that would lead to companies having unrecognized tax benefits.

2) Often in the early years of incorporations, companies have negative taxable income, possibly due to not having enough taxable revenues but incurring huge taxable expenses. Tax losses that are recognized during those years can later be used as a carryback or carry forward. Differentiate the accounting treatment for loss carryback and carry forward for deferred taxes.

3) The Malaysian national budget, which is tabled in Parliament every year, contains relevant information that affects corporate income tax. Aside from the rate of tax, incentives that are intended to prosper the Malaysian economy are tabled. In Budget 2015, for example, deductions are granted in training expenses incurred by companies for the employees, to obtain industry-recognized certifications and professional qualifications such as in the field of accounting, finance and project management. Discuss the effect of tax rates or tax rule changes on accounting for deferred taxes.

4) In one financial reporting period, companies will occasionally have multiple temporary differences, resulting in several items with deferred tax assets and several items with deferred tax liabilities. How are these deferred tax assets and deferred tax liabilities reported in a Statement of Financial Position?

5) Information about taxes is relevant to users of financial statements as taxes indicate not only expenses, but also the cash outflow of the companies. To assist users of financial statements in understanding the tax obligations of a company, suggest two disclosure notes pertaining to deferred tax account in the Statement of Financial Position.

6) During a management meeting, Mr Katsuki, a director from Japan, indicates that never in his past experiences in Japan had he encountered any discussions involving the need to make any adjustment for tax in the preparation of a company’s account. He argues that the tax paid by the company to the tax authorities will be similar to its expenses presented by the financial statements. Explain to him the differences between tax rules and financial accounting and reporting standards that might cause the tax calculated for tax purposes and accounting purposes to differ, especially in the context of Malaysian tax and accounting systems.

Answer 1

1. A deferred tax asset is an asset to the Company that usually arises when either the Company has overpaid taxes or paid advance tax. Such taxes are recorded as an asset on the balance sheet and are eventually paid back to the Company or deducted from future taxes.

Situations of Unrecongnized tax benefits:

• A decision to not file a tax return (i.e. state tax return)
• An allocation or a shift in income between jurisdictions (i.e. transfer pricing)
• The characterization of income or a decision to exclude reporting taxable income in a tax return (i.e. deferred revenue)
• A decision to classify a transaction, entity or other position in a tax return as tax exempt

2. Tax loss carryback is when a corporation retrospectively adjusts its tax returns for prior periods if it incurs a net operating loss (NOL) in current period. Tax carryforward is when a corporation subtracts net operating loss from future period income.

NOL carryforwards are recorded as an asset on the company's general ledger. They offer a benefit to the company in the form of future tax liability savings. A deferred tax asset is created for the NOL carryforward, which is offset against net income in future years.

3.  If firms defer taxes, the taxes paid in the current period will be at a rate lower than the marginal tax rate. In a later period, however, when the firm pays the deferred taxes, the effective tax rate will be higher than the marginal tax rate. Yes the effect of tax rates or tax rule changes on accounting for deferred taxes.

4. Deferred tax liabilities, and deferred tax assets. Both will appear as entries on a balance sheet and represent the negative and positive amounts of tax owed. Note that there can be one without the other - a company can have only deferred tax liability or deferred tax assets. So after all adjustment there can be positive deferred tax(Asset) or Negative Deferred tax(Liability). Hence after considering both it wil appear net impact of deferred tax on statement of Financial position.

5. Deferred Tax Asset Attributable to Excess Stock Option Deductions & Changes in tax Laws affecting Future Periods we have to disclose notes for the above.

6. There is always difference between tax rules & accounting reporting standards. some expenses is not allowable as per tax rules but that is allowable as per accounting standard then that differences will arise for deferred taxes. So there is always provision of deferred taxes is there.

Financial accounting is mostly known as accrual-based accounting. Under the accrual method, companies record sales revenues and purchase expenses when they are earned and incurred, regardless of whether cash from sales has been collected and cash for purchases has been paid. To determine a sale or purchase transaction date for recording, companies need to ascertain the completeness of a sale or purchase. Unfinished delivery of goods or services and partially receiving from a purchase don't account for an earned revenue and incurred expense. Recording doesn't take place until the completion of the sale or purchase orders.

Tax accounting often is referred to as cash-based accounting, and thus focuses primarily on actual cash receipts and cash payments, rather than their related sale or purchase transactions. Companies don't record a sale or purchase transaction at the time of the transaction until cash is received or paid later. Small businesses with annual sales of $5 million or less may elect to use the tax accounting to help them better manage their cash positions, which hold more significance to a small business's survival than a larger company