Tax Accounting

Question 2

Going Concern (convention) | Definition

Answer 2

• assumption that the business will continue the operations for a foreseeable future

Question 3

Continuity Convention | Definition

Answer 3

the opening balance sheet of a period must be identical to the closing balance sheet of the previous period

Question 4

Conservatism, i.e. prudence

1.
2.

Answer 4

• caution when making accounting judgements (preference for pessimsitc valuation in case of unvertainty)
• expressed in the application of the following principles: realization principle, imparity, valued at the higher of cost or market, valued at the lower of cost or market

Question 5

Conservatism -> realization principle | Definiton

1.
2.
3.

Answer 5

• value increases exceeding the acquisition costs may only be recognized as income when they have been realized through sales
• bc of this principle, value increases do not become tax effective until asset sold or distributed
• any difference between book value and market value is called hidden reserve

(e.g. B leases land to C. the land´s value was not increased a lot, but as long as it is not sold, the increase in value may not be recorded as income)

Question 6

What is a hidden reserve?

Answer 6

• acc to realization principle
• any difference between the book value and the market value of an asset

Question 7

Conservatism - Imparity principle / recognition of loss principle

1.
2.

Answer 7

unequal treatment of unrealized profits and losses

• mandatory loss anticipation
• prohibition of profit anticipation

(cannot revalue sth up, only down)

Question 8

Conservatism prudence -> highest value principle

Answer 8

liabilites must be valued at the historical value or the market value (higher one)

Question 9

Conservatism -> lowest value principle

Answer 9

assets must be valued at the historical value or market value, whichever is the lower

Question 10

Matching principle

Answer 10

expenses and income shall be included in the financial statement of the year in which they are incurred, regardless of the date of payment

Question 11

Historical cost convention

Answer 11

the costs of acquisition or production form the upper limit of the valuation

(eg buy shares in jan for 1000. value rises throughout the year to 2000. still report as 1000 in B/S)

Question 12

What does the principle of congruence state?

Answer 12

Congruence: The provisions of commercial law shall apply also for the determination of taxable income….

Breach of congruence: …unless seperate tax rules exist for the recognition or valuation of balance sheet items

Question 13

What is the reason for breaches of the principe of congruence?

Answer 13

• conflicting interests between commercial balance sheet and tax balance sheet
• commercial: function to protect creditors; providing relevant information for external readers of BS
• tax BS function: to objectively measure income. i.e. tax capacity, fiscal interests, steering functions

Question 14

What is an example for breaches of congruence?

Answer 14

Commercial Balance sheet: capitalization option for internally produced intangible fixed assets / provisions for threatened losses have to be recognized

Tax Balance Sheet: Prohibition of capitalization for internally producted intangible fixed assets / prohibition of recognizing provisions for threatened losses

Question 15

Whats the effect of differences in recognition/ valuation in the commercial and Tax balance sheet on the profit?

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2.
3.

Answer 15

• differences dont affect overall profit, there is only a shift between periods
• in tax BS income is usually recorded EARLIER and expenses recorded LATER than in commercial
• its good to keep a tax BS especially when discrepancies become big -> bc the subsequent reversal effects can be tracked better