Course Code Essay Example
AASB 112 is set with the purpose of setting down the application of income taxes treatment. This principle highlights the practices which are followed when accounting for current and future tax consequences (Pratt et al, 2010). It explains how the accountant accounts for future recovery of carrying amount of assets that the company has been identified in the books of accounts. It also meant to show how other transactions of current period found in the financial statements are treated. AASB 112 is defined as the total amount which is used to determine the income of the company for a given financial year due to current and deferred tax.
Calculation of tax base for assets
To determine the tax base of an asset, it is important to add carrying amount to future deductible amount less future assessable amount. The asset might be thought to have future assessable amount which is more than carrying amount, AASB 112 require the company to recover the asset to only to the extent of the carrying amount. This is to ensure that the company gets deferred tax liability or deferred tax asset (Dan, 2008). Deferred tax liability is determined when the amount of asset is more than tax base while deferred tax asset is when carrying amount is less than tax base. The provision for doubtful debts is not considered as deferred tax but it can be treated for tax purposes when the account receivable is written off. This results into the difference between carrying amount and tax base and increase deferred tax asset.
Calculation of tax base for liabilities
This is determined by subtracting future deductible amount from carrying amount and adding future assessable amounts. There are some exceptional rules for the case a tax base of a liability for revenue received in advance and those that result from tax losses. Deferred tax asset produced by temporary differences, unused tax losses must qualify for a probable test before they are confirmed as assets (Pratt et al, 2010). This rule in very important in the confirmation of the true assets thta qualifies for deferred tax. There is also a very important rule that all deferred tax assets can only be reviewed at the end of a financial period top avoid overstatement of assets. There is also another rule which require for the transfer of tax losses within the same group. The current legislation needs the incorporation of tax consolidated group so that it can be used as one entity for the sake of income and capital gain. It is an accounting rule under this principle that the company is not allowed to transfer funds of any value which is the same as account balance when it has deferred tax liability. It can only be done in future dates but when the company has received high revenues.
Deferred tax assets vs the IASB/AASB Conceptual Framework
The deferred tax asset meets the requirement of conceptual framework definition of assets (Dan, 2008). This is because require the use of GAAP which ensure that books of accounts are prepared in accordance with the law and also reflect true status of the company. It meets the requirement of conceptual framework as it as its treatment conforms to the requirement of accounting principles which other companies use (Dan, 2008). Since there is a procedure for treating deferred tax liability and assets, it therefore follows that it uses accounting principles which are made on a consistent concept. Deferred tax liability is also accounted for in a consistent manner following the use of accounting policies in a case where accounting standards does not apply. Its treatment is also capable of giving someone an opportunity to interpret and understand its application.
Dan, S 2008. Using the Tax Expense to Achieve Earnings Targets. SSRN-Last Chance Earnings Management
Pratt, W., et al. 2010. Federal Taxation, updated periodically (cited as Pratt & Kulsrud) edition ISBN 978-1-4240-6986-6.
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