week 5

Question 1

accounting profit and taxable profit

Answer 1

accounting income less accounting expenses

assessable income less allowable deductions

Question 2

requirements accounting profit and taxable profit is based on

Answer 2

accounting profit:requirements of accounting standards and general accrual accounting rules.

Taxable profit: requirements of accounting standards and general accrual accounting rules.

Question 3

Accounting profit and taxable profit recognise

Answer 3

Generally recognises the income earned and expenses incurred.

Generally follows cash flows of transactions and events.

Question 4

assessable income does not equal to accounting profit

permanent and temporary differences

Answer 4

permanent differences: some revenues are exempt from tax,

e.g. Government grants.

temporary differences: some revenues not yet received are not assessable until a future period (e.g. accrued revenues) or some received revenues are not yet earned (e.g. unearned revenues).

Question 5

Allowable deductions does not equal to Accounting expenses

Permanent differences and temporary differences

Answer 5

permanent differences: some expenses are not tax deductible,

e.g. entertainment.

– temporary differences: some expenses not yet paid are not deductible until a future period (e.g. accrued expenses) or paid expenses are not yet incurred (e.g. prepaid expenses).

Question 6

generally accepted accounting rule v tax rule

government grant

Answer 6

treated as a revenue

Not taxed (exempt income) in current or subsequent periods

Question 7

generally accepted accounting rule v tax rule

sales revenue

Answer 7

Treated as a revenue when sale is made

Typically taxed when sale is made, no matter when the cash is received

Question 8

generally accepted accounting rule v tax rule

all over accrued revenue

Answer 8

Treated as a revenue when earned

Typically taxed when received

Question 9

generally accepted accounting rule v tax rule

all over accrued revenue

Answer 9

Treated as a revenue when earned

Typically taxed when received

Question 10

Accounting profit vs taxable profit

Entertainment, fines, goodwill

impairment

Answer 10

Treated as an expense

Not a tax deduction in current or subsequent periods

Question 11

Accounting profit vs taxable profit

many accrued expenses

Answer 11

An expense when accrued

A tax deduction when paid

Question 12

Accounting profit vs taxable profit

bad/doubtful debts

Answer 12

Treated as an expense when recognised

A tax deduction when debt is actually written off

Question 13

Accounting profit vs taxable profit

many prepaid expenses

Answer 13

Initially an asset — expensed when economic benefits used

Typically a tax deduction when paid

Question 14

Accounting profit vs taxable profit

Depreciation

Answer 14

An expense based on the useful life of the asset

A tax deduction based on predetermined rates

Question 15

Accounting profit vs taxable profit

Development expenditure

Answer 15

Often capitalised and subsequently amortised

A tax deduction when paid for

Question 16

deferred tax liabilities, under paragraph 16 of AASB 112/IAS

recognition criteria

Answer 16

all deferred tax liabilities must be recognised; that is, there are no recognition criteria to be applied.

Question 17

recognition criteria for deferred tax assets

Answer 17

there are sufficient taxable temporary differences for the entity to use against the deductible temporary difference

OR

Under paragraph 28 of AASB 112/IAS 12, if it is probable that the entity will have sufficient future taxable profit (against which the deductions can be offset)

If an entity makes only tax losses in the future then tax deductions are of no benefit.

Hence the recognition criterion for deferred tax assets is based on the probability of an entity earning sufficient taxable income in the future.

Question 18

recognition criterion for

deferred tax assets arising from tax losses

Question 19

DTAs need to be reviewed at each reporting date

Answer 19

If at the end of a period, the recognition criteria are not met, then DTA cannot be recognised and any existing DTA balance which fails the test (applied each reporting date) must be written off.

Question 20

Tax losses can generate benefits

Answer 20

in the form of tax payments saved in future profitable periods. In that case, a DTA can be recognised.

Question 21

tax loss recognition criteria

Answer 21

A DTA shall be recognised arising from the carry- forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised.

Question 22

deferred tax assets

Answer 22

The amount of income tax recoverable in future reporting periods in respect of taxable temporary differences.

Question 23

deferred tax liabilities

Answer 23

The amount of income tax to be settled in future reporting periods in respect of taxable temporary differences.

Question 24

deductible temporary differences

Answer 24

Amounts that are deductible in determining taxable income in future periods

and arising when:

CA< TB and Liability > TB

Question 25

taxable temporary differences

Answer 25

Amounts that are taxable in determining taxable income in future periods, and arising when:

CA> TB

Liability < TB

Question 26

temporary differences

Answer 26

Differences between the carrying amount of an asset or liability in the statement of financial position and the asset’s or liability’s tax base.

Question 27

The tax effect of current tax consequences

Answer 27

The tax effect of current tax consequences is recognised in income tax expense and current tax liabilities and assets

Question 28

The tax effect of future tax consequences

Answer 28

is recognised in income tax expense and deferred tax assets and liabilities.

Question 29

Taxable temporary differences give rise to

Deductible temporary differences give rise to

Answer 29

deferred tax liabilities

deferred tax assets.

Question 30

Future tax consequences arise as a result of

Answer 30

Future tax consequences arise as a result of transactions occurring in the current period that affect the future amounts to be paid for tax

Question 31

Tax losses occur when

Answer 31

allowable deductions exceed taxable income.

Question 32

In Australia, tax losses can be

Answer 32

In Australia, tax losses can be carried forward and deducted against future taxable profits. This means that an entity that incurs a tax loss has a future tax benefit: it will pay less tax in the future providing it earns taxable income in the future.