week 5 Flashcards
accounting profit and taxable profit
accounting income less accounting expenses
assessable income less allowable deductions
requirements accounting profit and taxable profit is based on
accounting profit:requirements of accounting standards and general accrual accounting rules.
Taxable profit: requirements of accounting standards and general accrual accounting rules.
Accounting profit and taxable profit recognise
Generally recognises the income earned and expenses incurred.
Generally follows cash flows of transactions and events.
assessable income does not equal to accounting profit
permanent and temporary differences
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).
Allowable deductions does not equal to Accounting expenses
Permanent differences and temporary differences
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).
generally accepted accounting rule v tax rule
government grant
treated as a revenue
Not taxed (exempt income) in current or subsequent periods
generally accepted accounting rule v tax rule
sales revenue
Treated as a revenue when sale is made
Typically taxed when sale is made, no matter when the cash is received
generally accepted accounting rule v tax rule
all over accrued revenue
Treated as a revenue when earned
Typically taxed when received
generally accepted accounting rule v tax rule
all over accrued revenue
Treated as a revenue when earned
Typically taxed when received
Accounting profit vs taxable profit
Entertainment, fines, goodwill
impairment
Treated as an expense
Not a tax deduction in current or subsequent periods
Accounting profit vs taxable profit
many accrued expenses
An expense when accrued
A tax deduction when paid
Accounting profit vs taxable profit
bad/doubtful debts
Treated as an expense when recognised
A tax deduction when debt is actually written off
Accounting profit vs taxable profit
many prepaid expenses
Initially an asset — expensed when economic benefits used
Typically a tax deduction when paid
Accounting profit vs taxable profit
Depreciation
An expense based on the useful life of the asset
A tax deduction based on predetermined rates
Accounting profit vs taxable profit
Development expenditure
Often capitalised and subsequently amortised
A tax deduction when paid for
deferred tax liabilities, under paragraph 16 of AASB 112/IAS
recognition criteria
all deferred tax liabilities must be recognised; that is, there are no recognition criteria to be applied.
recognition criteria for deferred tax assets
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.
recognition criterion for
deferred tax assets arising from tax losses
DTAs need to be reviewed at each reporting date
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.
Tax losses can generate benefits
in the form of tax payments saved in future profitable periods. In that case, a DTA can be recognised.
tax loss recognition criteria
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.
deferred tax assets
The amount of income tax recoverable in future reporting periods in respect of taxable temporary differences.
deferred tax liabilities
The amount of income tax to be settled in future reporting periods in respect of taxable temporary differences.
deductible temporary differences
Amounts that are deductible in determining taxable income in future periods
and arising when:
CA< TB and Liability > TB
taxable temporary differences
Amounts that are taxable in determining taxable income in future periods, and arising when:
CA> TB
Liability < TB
temporary differences
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.
The tax effect of current tax consequences
The tax effect of current tax consequences is recognised in income tax expense and current tax liabilities and assets
The tax effect of future tax consequences
is recognised in income tax expense and deferred tax assets and liabilities.
Taxable temporary differences give rise to
Deductible temporary differences give rise to
deferred tax liabilities
deferred tax assets.
Future tax consequences arise as a result of
Future tax consequences arise as a result of transactions occurring in the current period that affect the future amounts to be paid for tax
Tax losses occur when
allowable deductions exceed taxable income.
In Australia, tax losses can be
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.
