Question

Collect the latest annual report of an ASX listed company for the last 2 financial years. Please read the financial statements (balance sheet, income statement, cash flow statement) and notes attached to financial statements on income tax issues very carefully. Please remember some aspects of your firm’s treatment of its tax – can be a very complicated area, particularly for some firms. Based on your understanding of the topic “accounting for income tax” and based on your reading of the collected annual reports, do the following tasks. QUESTION 1 . Briefly explain the recognition criteria of deferred tax assets and deferred tax liability.

Answer 1

After Reading the Annual Report and on the basic of my understanding of accounting for taxes , and the recognition principle of deferred tax assests and deffered tax liabilty, i frame my answer in two fold.

1. Deferrred Tax

As per the IFRS (international Financial Reporting Standards), Requires the application of IAS 12 Income from taxes, so the concept of Deferred Tax Assests is also defined as per the same ifrs,, for many finance executives the concept of deffered tax is not intutive,IAS 12 requires a mechanistic approach to the calculation of deferred tax

Let us consider a step model approach to understand the concept.

Step.

1.Establishing the accounting base of the asset or liability

2.Calculate the tax base of the asset or liability

3.If there is no difference between tax and accounting base, no deferred tax is required. Otherwise go to step 3.

4.Identify and calculate any exempt temporary differences

5.Identify the relevant tax rate and apply this to calculate deferred tax

6.Calculate the amount of any deferred tax asset that can be recognised

In a Nutsheel the concept of Deferred tax arises when the Tax as per the books of accounts and as per the tax Laws is different. giving rise to deffered tax asset or liablity