Question

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 1

The most interesting thing about the tax treatment in the financial statements is that the companies report tax expense in spite of having a loss before tax. Infact the income tax expense for losses is reported for the financial years which is very intriguing to note. The insights gained through this tax treatment is that income tax expense is calculated for losses as well and more technically is a tax loss benefit. This benefit is allowed to be carried forward to the next year and can be reduced from the tax liability when the company makes a profit. This concept in taxation is known as carry forward of business loss and is shown as a deferred tax asset in the balance sheet. It is called a deferred tax asset since the company can utilize the balance to set off future tax liabilities when profits are made.