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Case Study:
Background:Deferred tax liabilities and assets should be measure using a discounted cash flow model. The deferred tax is paid or refunded in the future that could be years away so the time value of money should be taken into account.
Answer the following in the report:Refer to AASB 112 and comment on this argument.
Identify other assets and liabilities where discounting is required in measurement approach.
Note: Presentation of the case study whilst you must carefully base your analysis on relevant accounting standards bear in mind that the report are to be presented in a professional manner intended to be understood by your clients.
Assessment criteria for this case study:
The benefit of information on current and deferred taxThe recognition of current tax and deferred tax provides more complete/relevant information for economic decision making than current tax aloneCurrent tax = income tax payable for current period
Deferred tax = future tax consequencesRecognising deferred tax as required by AASB 112accounts for the future tax consequences
for the assets and liabilities shown in the statement of financial position at the end of the reporting periodAccounting for income taxes general principlesAASB 112 requires companies to account for the current and future tax consequences of:Current transactions and events
The recovery and settlement of assets and liabilitiesCurrent tax consequences = current tax liability/asset
Future tax consequences = deferred tax liability/asset
Income tax expense for period is comprised of:Current tax liability
Movement in deferred tax liability and deferred tax assetMovement in deferred tax liability/asset included in other comprehensive income for periodAASB 112: Accounting for income taxes General principles of Tax Effect AccountingThe tax consequences of accounting transactions should be recognised as income or expense during the current period regardless of when the tax effects will occur
This requires identifying the current and future tax consequences of items recognised in the balance sheet
Two separate calcultions are performed each year:current tax liability (Step 1)Current income tax expenses
Current tax liabilitymovements in deferred tax balances (Step 2)Deferred income tax expenseAASB 112 defines temporary differences as:
The differences between the carrying amount of an asset or liability in the statement of financial position and its tax base.
Deductible temporary differences (DTD) (para 5)
result in amounts that are deductible in determining taxable profit (tax loss) of future periods . when carrying amount of the asset or liability is recovered or settled.
Taxable temporary differences (TTD) (para 5)
result in taxable amounts in determining taxable profit (tax loss) of future periods .when carrying amount of the asset or liability is recovered or settled.
Certain temporary differences are excluded from being recognised
AASB 112 prohibits temporary differences from being recognised (eg Goodwill)
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