Accounting for Corporate Income Tax: Theory and Applications

This report explores the theory and applications of accounting for corporate income tax, focusing on deferred tax assets and liabilities. It discusses the circumstances in which these assets and liabilities arise, the implications for the company, and the differences between the balance sheet method and the conceptual framework. The report also examines the scenarios in which deferred tax assets can be offset against liabilities.

ACCOUNTING FOR
CORPORATE INCOME TAX
THEORY AND APPLICATIONS

ABSTRACT
From the above report the conceptual understanding of the deferred tax asset and the deferred tax
liability is gained, the circumstances in which it arises like the timing difference in the book
profits and losses of the company. Apart from that it is shown in the balance sheet and the
deferred tax asset can be utilised as the unused tax losses or credits which can be used to set off
the future taxable profits of the company. Further it can also be assessed that the assets and
liabilities as derived by the balance sheet method and the conceptual framework are significantly
different as the standards followed do vary.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
QUESTION- 1.................................................................................................................................1
QUESTION- 2.................................................................................................................................2
QUESTION- 3.................................................................................................................................3
QUESTION 4...................................................................................................................................4
QUESTION 5...................................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Corporate tax is the levied on the income of organization which is charged at particular
rate. In current era, it is essential for the firm to give emphasis on fair taxpaying practices in
order to avoid legal obligations and actions. Present report will give emphasis on DTA and
DTL. Existence of unused tax loss lead to recognition of deferred tax assets will be included in
current report. Balance sheet method of consisting accounting framework will be comprised in
the report. The current case study will explain the situations in which company can offset
deferred tax assets against liability. Insurance Australia Group Ltd. Have been selected which is
listed on ASX for fulfilling the requirements of current case study.
MAIN BODY
QUESTION- 1
The deferred tax asset and liabilities are arises due to the differences between the book
profits and the income tax profits that are there in the books of accounts. There are some major
transactions that shall be leading to the differences in these profits of the company and due to
these the income tax payable shall differ and the differed tax asset and differed tax liability shall
be booked in the balance sheet. This difference pertains to the timing difference which can either
be for temporary or permanent basis, the temporary ones are those that can be reversed in the
coming time and the permanent ones do not get reversed in the coming time period.
The deferred tax assets in the company are created when the book profits of the company
are less than the calculated taxable profit of the company (Guia and Dantas, 2020). This happens
in the case when the book profits is after accounting for all the incomes and losses of the
company but on the contrary it can be assessed that all the deductions are not provided in the
case of taxable profits of the company. In this case the tax paid in the current year shall be high
and in the future it shall be low due to the reversing effect in the company. In the future these
taxes paid shall be low due to the fact that the losses shall be carry forward and will be reversed
in the future, but only up to the certainty of the future taxable income.
The deferred tax liabilities on the other hand is the completely opposite case in the
company. This arises in case of a situation when the book profits of the entity are higher as
compared to the taxable profit that is estimated on which the current year tax liability is to be
paid by the company. In this case the current year tax liability of the company shall be lower
maximizing the future tax liability of the company. This happens in the circumstances when the
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expenses as recorded in the financial statements are comparatively lower and the deduction as
available while calculating the taxable profit is higher as compared to the prior.
One of the most significant example of deferred tax assets that are created in the financial
statements of the business are due to the provisions that are set aside for the bad and doubtful
debts and any uncertain contingent liabilities of the entity. The book profits of the company that
could be ascertained post the preparation of income statement of the business shall be including
these provisions in the form of non operating expenses. But on the contrary it can be analysed
that while calculating the taxable profit for the company such provisions for the doubtful debts
shall not be provided and so will increase the taxable profits over the book profits. This is the
reason that deferred tax assets are created in the business which are depicted at the asset side of
the balance sheet in the form of non current assets. It can be assessed that this provision is not
provided because of the reason that this shall be provided as deduction when the bad debts are
written off in the company.
Another example for the deferred tax liability that occurs in real life for the company is
the difference between the depreciation rates as permitted by the company and the depreciation
rates as allowed by the income tax department. It is generally observed that the depreciation rate
of the income tax is higher than that which is charged by the company. In this case the income
tax payable shall be lower for the company as the taxable profits shall be low. In the future
respectively the tax payable shall be higher. So this is one of the reason the deferred tax
liabilities are created in the business and they are recorded on the liability side as the non current
liabilities.
QUESTION- 2
No, it cannot be assured that the unused tax losses or the unused credits with the
company shall be recognizing the deferred tax assets at all the times. The recognition of this
deferred tax asset can only be done proportionately up-to the amount that shall be available in the
form of taxable profits in the coming year (Oxner, Oxner and Phillips, 2018). The sufficient
amount of taxable profits for the company is required to be ascertained such that against which
the unused tax losses or the unused credits can be set off and on the basis of this only the
deferred tax assets of the entity can be recognized. It is also mandatory for the organization to
support the argument related to the future taxable profits with the decent evidences that proves
that the deferred tax assets shall be recognized and the capacity to be set off before the expiry.
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The evidences in the favour of the statement that there shall be future profits for the
company to set off the unused tax losses are to be collected and are disclosed in the financial
statements and this only gives the right to the business to recognize the deferred tax assets and
use against the taxable profits that are to be arises in the future of the company. It shall be
recognized in terms of the all the temporary deductible amounts against which the future profits
of the entity can be set off for the company. The main issue is related to the justification that is
required to disclose the probability of the future earnings and on the basis of that the disclosures
shall be undertaken in the financial statements. These disclosures shall be deciding upon the
permissible limit and this is the reason we cannot certify that all the unused tax losses or the
credits shall be recognized in the form of deferred tax assets.
QUESTION- 3
The balances of the assets and liabilities that are being recorded in the financial
statements of the company shall for sure be varying in both the cases one is through the balance
sheet method and the other is through the conceptual framework that is proposed by the
International Financial Reporting Standards. There cannot be always the consistency in the
valuation of the assets and liabilities of the company for the tax purpose that is assessed by the
business.
In the balance sheet method that is applied by the company the assets and liabilities of the
business are being valued through the different types of valuations. The valuations are like these
assets and liabilities of the business can either be recorded at the book value, adjusted book value
and the liquidation value. On the contrary it can be analysed that as per the conceptual
framework of accounting as stated by the IFRS applies all the necessary accounting standards,
principles, policies, rules and regulations and accordingly the accounting is being conducted by
the business.
As per the recognition concept of the conceptual framework it can be assessed that there
are different concepts for the recognition of the assets, liabilities, expenses and the income. The
assets are recorded in the books of account based on the fact that those which shall be providing
some economic benefit to the entity and also that their cost shall be reliably be measured or
valued in the business. Apart from that the liabilities of the business are realized in the manner
that the economic benefit that is provided shall be fulfilling the current obligation of the business
towards the external or the third party (Silva, Souto and Pereira, 2021). The income in the
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business is recorded in the case that there is future probability of the economic benefit for the
company and in that respect the assets of the company are increasing or simultaneously the
liabilities have decreased in the entity. Also, the expenses are being recognised in the entity but
this is when in the company it can be ascertained that the future economic benefits for the
company has decreased significantly or the assets are also simultaneously decreasing and the rise
in the liabilities of the business. All these concepts of the recognition are only applicable when
the company shall be reliably and efficiently be able to measure and value the assets, liabilities,
incomes and expenses of the business. It can be ascertained that this way there are differences
pertaining to the assets and liabilities as disclosed under the balance sheet method that is applied
and in the conceptual framework as specified by IFRS.
QUESTION 4
Income tax comprises both current and deferred tax it requires the deep knowledge
regarding relatable laws. A Deferred Tax Asset (DTA) refers to the advance payment of taxes
and it is outcome shown on the balance sheet. It arises due to difference between the accounting
and tax rules & regulations (Sulistianingsih, 2019). In addition to this, a Deferred Tax Liability
(DTL) arises due to difference in time of tax accrued and when it is paid. There are various
conditions in which DTA can be offset against DTL which need to take into consideration.
Deferred tax assets and liabilities are required to be equalizing in only restricted
situations. These are some certain scenario which needs to be given emphasis in planned manner
so that it can comply with tax regulations and norms. Company determines its profits from the
financial statements according to the regulations of companies act. In addition to this DTA and
DTL must be identified as gross in the statement of monetary position unless. The company can
offset the this deferred tax assets in place of liabilities when the organization has been legally
enforceable right to utilized this as option in regards to off-set current tax assets against
liabilities. With respect to this, both should be levied by same tax authority (Edwards, 2018). It
should be on similar tax entity and varying companies that have intention to do sane or sell assets
for meeting its obligations in form of current liabilities.
The one of the most important scenario that need to be taken into consideration when
firm has enforceable right for offsetting. In consolidated financial statements current tax assets
and liabilities of one organization can be used by other firm when they are permitted legally to
use this course of action by tax authority. Company can receive net payment for assets so that
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paying off liability can become possible for the specified organization. In addition to this,
jurisdiction allows the groups relief. This offsetting is prohibited in case of different jurisdiction
because there are no legal rights for it. For instance company X has identified the 90000 which
has subsidiary fir Y with recognized deferred tax liability of 125000. In such a case organization
X has the enforceable right to pay the liabilities with help of assets. The reason behind this
course of action taken by enterprise X is that firm Y and it are both related to same tax authority.
There is limitation of time or value for offsetting unless the firms are of different
characters (Finley and Ribal, 2019). In case of capital losses for carrying forward can be utilizes
to decline future gain. This is particular situation where DTA cannot counteract DTL from the
duration variation which is outcome of unrealized capital gains. There are some jurisdictions
where tax losses may be offset against a specified percentage of taxable profits. In such
particular situation deferred tax asset for tax loss may only be counterbalance to DTL to that
mentioned percentage. These are the situation which allows firms do offsetting.
QUESTION 5
i. The income tax expense $363 million is shown in the statements of organization.
It ahs been calculated by adopting 27.3% for computing the particular cost to
organization. The reason behind selecting this specified arte is accomplish its
objective of foreign business operations
ii. Deferred tax and liability shown in the balance sheet of the IAG (Insurance
Australia Group Ltd.)The DTA of the company for the period 2019and 2018 are
453 & 544$m. from the previous year the current period it has been decreased.
There is no disclosure of DTL in the balance sheet and other financial statements
(Mear, Bradbury and Hooks, 2021).
iii. The total income tax in the note of financials statement give 1187 for the
mentioned year. The group’s net profit after tax shown in the note is $1,173
million it is also presented that there is 13% decrease in pre insurance profit. The
effective tax rate is 27.3% which has resulted in expense of $363 million. The
Australian corporate tax rate is 30% and difference is found due to its foreign
operations. The amount of income tax that has been charged on profit is 363
which have resulted in positive net profit of Insurance Australia Group Ltd. The
note has summarized that there is timing difference in accounting treatment of
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taxable expenses or income which is disclosed by the balance sheet. Income tax
for the year 2019 has been computed as per Australian corporate tax rate of 30%.
These are the some of the information obtained from the notes of financial
statement of IAG.
iv. The assumption adopted by organization for presenting the deferred tax asset
which is variation in the time for implementing accounting treatment of taxable
income and expenses.
v. The income tax expense 363 which has been calculated by adding all mentioned
figure. In addition to this, current tax (242) + deferred tax (109)+ portion to prior
year (12). From this it can be analyzed 109 and 12 has been originated in the
current year.
vi. It is adopting the same accounting policies as past year some changes that has
been made for accomplishing objective of compliance with accounting standards
(Soliman, and Ali, 2020). AASB 9 and 139 is followed to formulate e and
calculate the essential documents and figures.
CONCLUSION
It can be summarized from the above project that deferred tax asset and the deferred tax
liability are recorded in the balance sheet which are the carried forward tax losses and the unused
taxes to the other period. These are due to the timing differences in the company that can either
be temporary or permanent in nature. The carry forward and unused amount of these are also
used as per the proportion that is fixed and the rest can be waived. Also, the prior to all the other
calculations the major concern is to determine the taxable profit that is to be there in the future
times. The temporary and permanent timing differences also matter and accordingly only it can
be assessed that what is to be treated as the deferred tax assets and liabilities.
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REFERENCES
Books and Journals
Silva, J. M., Souto, N. and Pereira, J. E. A., 2021. Closed form solution for the valuation of
deferred tax assets. Journal of Accounting and Taxation. 13(1). pp.1-15.
Oxner, K. M., Oxner, T. H. and Phillips, A. D., 2018. Impact of the Tax Cuts and Jobs Act on
accounting for deferred income taxes. Journal of Corporate Accounting &
Finance. 29(2). pp.12-21.
Guia, L. D. and Dantas, J. A., 2020. Value relevance of deferred tax assets in the Brazilian
banking industry. Revista Contabilidade & Finanças. 31(82). pp.33-49.
Sulistianingsih, R. D. P., 2019. How the effect of deferred tax expenses and tax planning on
earning management?. International Journal of Scientific and Technology Research.
8(2). pp.78-83.
Edwards, A., 2018. The deferred tax asset valuation allowance and firm creditworthiness. The
Journal of the American Taxation Association. 40(1). pp.57-80.
Finley, A. R. and Ribal, A., 2019. The information content from releases of the deferred tax
valuation allowance. The Journal of the American Taxation Association. 41(2). pp.83-
101.
Mear, K., Bradbury, M. and Hooks, J., 2021. The ability of deferred tax to predict future
tax. Accounting & Finance. 61(1). pp.241-264.
Soliman, W. S. M. K. and Ali, K. M., 2020. An investigation of the value relevance of deferred
tax: the mediating effect of earnings management. Investment Management & Financial
Innovations. 17(1). p.317.
Online
Deferred Tax Asset and Deferred Tax Liability. 2021. [Online] Available through:
<https://cleartax.in/s/deferred-tax-asset-deferred-tax-liability-dta-dtl>
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