Question

Based on AUSTRALIAN PACIFIC COAL LIMITED company annual report answer the question given below:

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.

Answer 1

i) ACCOUNTING PROFIT:-

ACCOUNTING PROFIT IS A COMPANY'S TOTAL EARNINGS CALCULATED ACCORDING TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.SIMPLY MEANS, IS THE REVENUE OF A COMPANY MINUS THE EXPLICIT COSTS OF A COMPANY. THE GENERAL FORMULA MOST OFTEN USED IN THE FOLLOWING :-

WHICH IS THE PROFIT BEFORE REAL TAX REPORTED TO SHAREHOLDERS IN THE PUBLISH ACCOUNTS.

TAXABLE PROFIT:-

TAXABLE PROFIT IS THE PROFIT (OR LOSS) UPON WHICH INCOME TAXES ARE PAYABLE.THE COMPOSITION OF TAXABLE PROFIT VARIES BY TAXATION AUTHORITY, SO IT WILL VARY DEPENDING UPON THE RULES OF THE TAXATION AUTHORITIES WITHIN WHICH AN ENTITY IS LOCATED OR DOES BUSINESS.

TEMPORARY DIFFERENCE:-

A TEMPORARY DIFFERENCE IS THE DIFFERENCE BETWEEN THE CARRYING AMOUNT OF AN ASSET OR LIABILITY IN THE BALANCE SHEET AND ITS TAX BASE

TAXABLE TEMPORARY DIFFERENCE:-

A TAXABLE TEMPORARY DIFFERENCE IS A TEMPORARY DIFFERENCE THAT WILL YIELD TAXABLE AMOUNTS IN THE FUTURE WHEN DETERMINING TAXABLE PROFIT OR LOSS.

DEDUCTIBLE TEMPORARY DIFFERENCE:-

A DEDUCTIBLE TEMPORARY DIFFERENCE IS A TEMPORARY DIFFERENCE THAT WILL YIELD AMOUNTS THAT CAN BE DEDUCTED IN THE FUTURE WHEN DETERMINING TAXABLE PROFIT OR LOSS.

DEFERRED TAX ASSETS:-

AN ASSET WHICH IS AVAILABLE ON THE COMPANY'S BALANCE SHEET AND IS USED TO DECREASE THE TAXABLE INCOME , IS CALLED A DEFERRED TAX ASSET.SIMPLY MEANS THIS IS THE PREPAID TAX THAT IS PAYING THE TAX IN ADVANCE.

DEFERRED TAX LIABILITIES:-

DEFERRED TAX LIABILITIES IS THE LIABILITY WHICH ARISES TO THE COMPANY DUE TO THE TIMING DIFFERENCE BETWEEN THE ACCRUAL OF THE TAX AND THE DATE WHEN THE TAXES ARE ACTUALLY PAID BY THE COMPANY TO THE TAX AUTHORITIES. SIMPLY MEANS TAXES GET DUE IN ONE ACCOUNTING PERIOD BUT ARE NOT PAID IN THAT PERIOD.

ii) RECOGNITION CRITERIA OF DEFERRED TAX ASSETS:-

IN ORDER TO RECOGNISE A DEFERRED TAX ASSET, THERE MUST BE AN EXPECTATION OF SUFFICIENT FUTURE TAXABLE PROFITS TO UTILISE THE DEDUCTIBLE TEMPORARY DIFFERENCES..

AN ENTITY TO RECOGNISE A DEFERRED TAX ASSET FOR ALL DEDUCTIBLE TEMPORARY DIFFERENCES ARISING FROM INVESTMENTS IN SUBSIDIARIES,BRANCHES AND ASSOCIATES ,AND INTERESTS IN JOINT ARRANGEMENTS , TO THE EXTENT THAT, AND ONLY TO THE EXTENT THAT , IT IS PROBABLE THAT:-

THE TEMPORARY DIFFERENCE WILL RESERVE IN THE FORESEEABLE FUTURE AND TAXABLE PROFIT WILL BE AVAILABLE AGAINST WHICH THE TEMPORARY DIFFERENCE CAN BE UTILISED.

RECOGNITION CRITERIA OF DEFERRED TAX LIABILITY:-

AN ENTITY TO RECOGNISE A DEFERRED TAX LIABILITY FOR ALL TAXABLE TEMPORARY DIFFERENCES ASSOCIATED WITH INVESTMENTS IN SUBSIDIARIES ,BRANCHES AND ASSOCIATES,AND INTERESTS IN JOINT ARRANGEMENTS ,EXCEPT TO THE EXTENT THAT BOTH THE FOLLOWING CONDITIONS ARE SATISFIED:-

THE PARENT,INVESTOR,JOINT VENTURER IS ABLE TO CONTROL THE TIMING OF THE REVERSAL OF THE TEMPORARY DIFFERENCE AND IT IS PROBABLE THAT THE TEMPORARY DIFFERENCE WILL NOT REVERSE IN THE FORESEEABLE FUTURE

iii) THE TAX EXPENSE IS WHAT AN ENTITY HAS DETERMINED IS OWED IN TAXES BASED ON STANDARD BUSINESS ACCOUNTING RULES.THIS CHARGE IS REPORTED ON THE INCOME STATEMENT.

iv) A COMPANY'S ACCOUNTING PROFIT AND TAXABLE INCOME CAN BE DIFFERENT IN CERTAIN REPORTING PERIODS BECAUSE OF THE DIFFERENCE IN FINANCIAL REPORTING AND TAX FILING.THE ACCOUNTING PROFIT NEEEDS TO BE ADJUSTED FOR TAX PURPOSES.AS IN MANY CONTRIES THEY ARE DIFFERENCE BETWEEN WHAT THE ACCOUNTING STANDARD ALLOW YOU TO SHOW AS AN INCOME OR EXPENSE AND WHAT TAX SYSTEM DEEMS TO BE THE INCOME OR EXPENSE.