l4.2 : taxation

Question 1

what is corporation tax?

Answer 1

limited companies pay tax on profits. corp. tax figure not wholly based on figures in FS

Question 2

what does current tax show in financial statements?

Answer 2

shows current tax expense for a period. contains adjustments for over / under provisions from prior periods. eg. opening balance of 15k, made overprovision for tax last period

Question 3

describe linkways scandal with the mistreatment of expenses.

Answer 3

moved expense for lavish family wedding from operating expenses to cost of sales, by treating as unspecified tax deductible.

Question 4

state the two factors that cause accounting and taxable profit to be different.

Answer 4

permanent differences
temporary differences

Question 5

explain how permanent differences cause differences between taxable and accounting profits.

Answer 5

expenses like client entertainment costs and political donations are deducted in accounting profits, but not in the case of calculating taxable profits as they are specifically disallowable. perm diff dont give rise to deferred tax

Question 6

explain how timing differences cause differences between taxable and accounting profits.

Answer 6

expenses originate in one period but eventually reverse out. accruals concept so payments havent come through or receipts not received. differences settle over time. eg. exec bonuses accrued, cap. allowances at diff rates to dep. gives rise to creation of deferred tax

Question 7

define deferred tax.

Answer 7

tax attributable to the existence of timing differences. difference between carrying value of asset or liability in SOFP and its tax base

Question 8

state the two methods used to recognise deferreed tax.

Answer 8

• deferral method
• liability method (IAS12)

Question 9

describe the deferral method in recognising deferred tax.

Answer 9

recognise at time of origination when entry takes place. tax rate based on rate at time of entry made to provisions.

Question 10

describe the liability method in recognising deferred tax.

Answer 10

accounts for when tax is actually payable. deferred tax recalculated every year based on rate in force in year. adjust provisions accordingly

Question 11

what is the deferred tax account?

Answer 11

recognises tax effects of timing differences. has no cash effect just adjustments. if capital allowances > depreciation, Dr tax expense, Cr provision for deferred tax

Question 12

what does IAS12 state about deferred tax disclosures?

Answer 12

• must be disclosed separately from current tax. (IS has tax expense note, SOFP has separate A/L for dt)
• can only offset current tax liabilities & assets if in same period under same authority
• detailed disclosures (temp. diffs. & how dt charge is comprised)
• no discounting of dt liabilities

Question 13

what are deferred tax assets?

Answer 13

losses are treated as deferred tax assets as create tax relief for future. offset CY loss against future prof, reducing tax liability

Question 14

state the arguments for deferred tax.

Answer 14

• agrees with accrual concept
• makes situation more realistic at end of period
• failing to use dt could cause profit overstatement (distortion of EPS & P/E, SHs misled, overpay divs)

Question 15

state the arguments against deferred tax.

Answer 15

• if keep buying assets, diff. keeps getting bigger (as can keep claiming CA)
• income smoothing
• confuses investors

Question 16

what is the OECDS BEPS project?

Answer 16

set minimum tax rate to 15% to countries part of G20 OECD project