Accounting for Income Tax: Concepts and Analysis

This report provides an analysis of accounting for income tax, focusing on concepts such as accounting profit, taxable profit, deferred tax assets, and liabilities. It examines the tax expenses in the financial statements of Angel Seafood Holdings Ltd. and identifies deferred tax assets and liabilities. The report also discusses the differences between income tax payable and income tax expenses. Additionally, it explains temporary and permanent differences and identifies possible permanent differences for the company.

Accounting for
Income Tax

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1. Explanation of the concepts of accounting profit, taxable profit, temporary difference,
taxable temporary difference, deductible temporary difference, deferred tax assets and
deferred tax liability.....................................................................................................................1
2. Explanation of the recognition criteria of the deferred tax assets and liabilities.....................3
3.Tax expenses in the latest financial statements........................................................................3
4. The figures of the company tax rates times to the firm’s accounting income.........................4
5. Identification of the deferred tax assets or liabilities that is reported in the balance sheet
articulated the possible reasons why they have been recorded....................................................4
6. Current tax assets or income tax payable recorded by the company and the reason for the
difference between the income tax payable and income tax expenses........................................5
7. The income tax expenses shown in the income statement is same as income tax paid shown
in cash flow statement. If not then the reason for the difference.................................................5
8. Brief explanation of the concepts of temporary differences and permanent difference.
Identification of the permanent differences that the company may have....................................5
9. The interesting, confusing, surprising or difficult to understand things about the treatment of
tax by the organisation.................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
Accounting can be defined as the process of recording all the transactions that were made
by an organisation during a financial year. It is very important for all the entities to record all of
them properly as it can facilitate to analyse actual performance and position of business.
Accounting for income tax can be defined as the procedure which is followed to analyse the
taxation liability of the entity for the incomes that are generated in the financial year. It is very
important for enterprises to follow all the specific guidelines of the accounting board so that all
the activities related to it could be performed systematically (Adapa, Rindfleish and Sheridan,
2016). Main of this report is to analyse the process which is followed by a listed company to
calculate the tax liabilities so that its knowledge could be enhanced. The enterprise which is
selected for this purpose is Angel Seafood Holdings Ltd. It is focused on producing farms clean,
organic, green, and sustainable oyster which are sold in Australia as well as different countries in
the world. It is listed on Australian Stock Exchange. This assignment covers various topics such
as discussion of different elements such as taxable profit, deferred tax liability, deductible
temporary difference, tax expenses of the firm, identification of deferred tax assets or liabilities,
current tax assets etc. Apart from this, discussion of temporary and permanent difference along
with interesting, surprising or difficult to understand elements in the annual report which are
analysed while treating the tax are also covered in this report.
MAIN BODY
1. Explanation of the concepts of accounting profit, taxable profit, temporary difference, taxable
temporary difference, deductible temporary difference, deferred tax assets and deferred tax
liability
Accounting profit: It can be defined as the total earnings of an organisation and in order
to calculate it regulation and principles of GAAP are required to be follows. All the costs that are
related to business are deducted from the total incomes so that accurate accounting profits could
be determined. Some of the costs are interest, tax, operating expenses, depreciation etc. All of
them are known as explicit costs on running a business venture so that all the long-term business
goals could be accomplished (Arnold, Ault and Cooper, 2019).
Taxable profit: The profit which is used for the purpose of calculation of tax for the
accounting year is known as taxable profit. All the calculation which are made for the purpose of
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analysing actual tax liability for the year are made with the help of this profit. When all the
deductions from the accounting profit are deducted then the remaining amount is treated as the
taxable profit. All the future calculations for determine the actual amount of tax which is
required to be paid by the company this profit is used.
Temporary difference: It can be defined as the difference between the carrying amount
of a liability of asset’s tax base and the value of them which is shown in the balance sheet. It may
take place due to recognition of business income and expenses in different period on the final
accounts than on the tax calculation. Some of the elements that are included in these differences
are expenses incurred but not yet paid, calculation of depreciation, revenue recognition etc. In
other words, it could be defined as the difference which may cause the higher or lower taxable
income than the accounting income in the financial year (Braithwaite, 2017).
Taxable temporary difference: It can be defined as the temporary difference which will
yield the taxable amount in the upcoming period when the taxable profit or loss will be
determined. This difference is settled when the carrying amount of the liability or asset is settled
or recovered by the organisation.
Deductible temporary difference: It can be defined as the temporary difference which
will yield the amount which can be deducted in the upcoming period when the profit or loss for
tax calculation will be determined. In order to settle the difference, the entities recover the
carrying amount of the liabilities or assets and when these are recovered the amount of
deductible temporary difference is settled (Casha, 2019).
Deferred tax assets: It is an item which is shows in the statement of financial position of
the company and it results from the advance or overpayment of the tax for the accounting year. It
is recorded as prepaid expenses so it is reflected under current assets head of balance sheet.
Apart from this, it is also deducted from the expenses for which advance payment is made. This
adjustment is made in the income statement of the organisation.
Deferred tax liability: When the income tax of an organisation is owed then it will be
shown as the deferred tax liability. It is reflected under the current liabilities head of the balance
sheet as all the outstanding expenses are shown under this head. In other words, it could be
defined as the tax which is assessed for the current year but not yet been paid by the enterprise. It
is based upon a fact that the enterprise will have to pay more income tax because its payment
was not made in the current year (Chen, 2017).
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2. Explanation of the recognition criteria of the deferred tax assets and liabilities
For all the organisations it is very important to recognise the deferred tax assets and
liabilities properly so that actual and accurate tax liability for the accounting period could be
determined. The recognition criteria for the deferred tax asset and liability is as follows:
 According to IAS 12 a deferred tax asset of an organisation is recognised for the carry
forward of unused taxation loss. This situation takes place when there are suitable
reversing temporary taxable different for the company’s expectations of future tax loss.
 According to IAS when the company is not able to pay the tax in current year then it will
be paid in upcoming period (Hoopes, Robinson and Slemrod, 2018). The amount of total
tax liability for the current will be treated as deferred tax liability and it will be paid in
upcoming year. This standard also states that as the payment will not be made during the
year so the entity will have to pay additional amount in the next year as a penalty for
delayed payment for the tax.
3.Tax expenses in the latest financial statements
Tax expenses can be defined the total amount of tax which is being paid by the
organisation for the accounting year. For all the companies it is very important to analyse the
actual tax which is required to be paid and make payment of the same so that all the future
operational activities could be performed systematically. By analysing the financial statement of
Angel Seafood Holdings Ltd. it has been determined that in the consolidated profit and loss
account no tax expenses are being shows for the year (Kabir and Rahman, 2016). In order to
justify it note 6 is created. According to this note the organisation is not having any type of tax
expense for 2019. The profits for the year were 305377 and the tax expense for the year
according to Australian tax rate which is 27.5% was 83979. There are various adjustments which
were made in it during the accounting year. The adjustments which were made in it are as
follows:
Particulars Amount
Tax expense for 2019 83979
Add:
Research and development tax incentives 130817
Other allowances 117955
Unrecognised losses for prior periods 448647
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Less:
Share based payments (240683)
Research and development expenses (154467)
Over provision in prior periods (218290)
Total tax expense for the year 0
All the above adjustments were made in the tax for year 2019 which has resulted in no
tax expense for the year.
4. The figures of the company tax rates times to the firm’s accounting income
The calculation of taxation for Angel Seafood Holdings Ltd. were made according to the
taxation laws for the company. The Australian tax rate for companies is 27.5% and the amount of
tax expense was calculated on the profit from continuing the operations before tax. Afterwards
some adjustments were made in the tax expenses according to the Australian taxation rules
which resulted in no tax for the year ending 30 June 2019. It shows that the company is
following all the rules and regulations which are required to be focused to calculate the taxation
liability and it has resulted in the right tax liability for the enterprise (Leigh, 2018).
5. Identification of the deferred tax assets or liabilities that is reported in the balance sheet
articulated the possible reasons why they have been recorded
While analysing the balance sheet of Angel Seafood Holdings Ltd. it was determined that
the company is not showing any deferred tax liability or asset in the balance sheet. When the
notes outside of the financial statements were analysed then it was determined that the company
is having deferred tax liabilities assets as well as assets. From the notes it has been analysed that
total deferred tax assets of the company for year 2019 were 1511726. It consists cost of different
elements which are finance lease liabilities, employee benefit provision, accruals, other
deductible allowances, tax losses etc. On the other hand, the deferred tax liabilities include
biological assets, property plant and equipment and the total amount of it was also same as the
assets which is 1511726 (Annual report of Angel Seafood Holdings Ltd., 2019). By analysing the
statement of financial position it has been determined that the company has not reflected the
deferred tax assets and liabilities in the balance sheet because value of both of them is same and
reflection of them will not make any difference.
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6. Current tax assets or income tax payable recorded by the company and the reason for the
difference between the income tax payable and income tax expenses
Current tax assets or income tax payable is not recorded by Angel Seafood Holdings Ltd.
According to the note 20 the current tax assets and liabilities are set off where a legally
enforceable right of set off exits. It is the main reason due to which the current tax assets or
income tax payable is not reflected in the financial statements. A legally enforceable right of set
off exists for the company so the amount of it was set off (Pfitzner and McLaren, 2018)
(Richardson, Taylor and Lanis, 2016).
On the other hand, no tax expenses were shown in the final accounts and it could be
estimated that the whole amount is written off and the income tax payable and tax expenses for
year ending 30th June 2019 was the same. It is the main reason why no tax payable as well as the
tax expenses for the year were not reflected in the financial statements of the company.
7. The income tax expenses shown in the income statement is same as income tax paid shown in
cash flow statement. If not then the reason for the difference
By analysing the income statement of Angel Seafood Holdings Ltd. it has been analysed
that the company has not paid any tax during the year 2019 as no tax expense is reflect in the
income statement for this period (Sakurai and Braithwaite, 2019. On her other hand, when cash
flow statement of the company was analysed then only one transaction related to tax was
identified which are research and development tax incentive which is an operating income not an
expense or payment.
It shows that the company has not paid any tax during year 2019 as the value of it was set
off with different other elements. It has been estimated that the amounts of tax payable in the
income statement and cash flow statement were same as no information regarding tax payment
or expenses is mentioned in both the final accounts. It also shows that the company has
formulated all the financial statements property by complying with essential principles of
Australian taxation authority. Due to this no error in the financial statement were identified while
analysing taxation liabilities, tax payable and expenses.
8. Brief explanation of the concepts of temporary differences and permanent difference.
Identification of the permanent differences that the company may have
Temporary difference: It can be defined as the difference between the balance sheet’s
value of an asset or liability and the tax of the same. When the incomes or the expenses of an
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organisation are identified or recognised in different periods on the final accounts than on the tax
returns. Some of the key elements due to which it may take place are depreciation, revenue
recognition and the expenses which has taken place but yet paid. In other words, temporary
difference can be defined as the element which results in future taxable income such as revenues
generated for the financial accounting purpose but deferred for the tax liability. It occurs when
there is a difference between the tax base and the carrying amount of elements of statement of
financial position) (Spies-Butcher and Stebbing, 2019).
Permanent difference: It can be defined as the business transaction which is reported
differently for the tax and financial reporting purpose and the difference for it will never be
eliminated. Sometimes companies show more or low profits in the final accounts and it results in
material misstatement. Due to this, the entity may also have to pay fine or penalty and the tax
will also be required to be paid on these expenses. These are the differences between the ta and
financial reporting of revenues of the expenditures which cannot be reversed and impact of them
cannot be reduced upon the final accounts. Some of the permanent differences are penalties,
fines, interest on municipal bonds, meals and entertainment, life insurance proceeds special
dividend received deduction etc.
Permanent differences that Angel Seafood Holdings Ltd may have: Permanent
differences affect the final accounts and the impact of them could not be reversed. There are
various types of permanent different which may take place for Angel Seafood Holdings Ltd. All
of them could be understood with the help of following discussion:
 If the company will have to pay any type of penalty or fine while reporting the financial
information then it may create the permanent difference for the enterprise.
 Meals and entertainment expenses are also considered as the elements which may result
in permanent difference. It is very difficult for the companies to estimate the actual cost
of meals for the staff members. If it will increase the predetermined budget then it will
result in permanent difference for the organisation.
 If an enterprise such as Angel Seafood Holdings Ltd have bought municipal bonds and
receives interest on the same then it may also result in the permanent difference in the
financial statements.
The above discussion shows some of the permanent differences that may take place for
Angel Seafood Holdings Ltd. It is very important for the management of the company to make
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sure that they are paying attention towards all the key elements so that possibility of permanent
difference could be reduced.
9. The interesting, confusing, surprising or difficult to understand things about the treatment of
tax by the organisation
While understanding the treatment of tax in the financial statements of Angel Seafood
Holdings Ltd various interesting, confusing, surprising and difficult to understand elements were
analysed. All of them are mentioned below:
 One of the interesting fact about the final accounts of the company is that the entity has
not paid any type of tax for year 2019 and the financial statements were formulated
according to the Australian Taxation laws. No tax expenditures were shown in the
income statements and cash flow statement. The main reason behind it was the
adjustments which were made in the total amount of tax which is calculated at 27.5% for
year 2019 (Li and Tran, 2016).
 Another fact which was analysed while understanding the tax treatment of the company
was no details of deferred tax liabilities and assets in the balance sheet. The information
of them was mentioned in note 6c. When the value of them was analysed it was same and
it is the main reason due to which the enterprise has not reflected both of them in the
balance sheet as it will not make any big difference.
By analysing the tax treatment of Angel Seafood Holdings Ltd knowledge about the way
in which companies account for income tax is analysed. While assessing the annual report of the
entity it has been understood that for all the organisations it is very important to follow the rules
and regulations imposed by the legal authorities it can help to analyse actual tax liability. If the
main rules or principles will not be followed for tax expense calculation then it may result in
errors in the annual report. In order to ignore the possibility of this situation it is essential for the
companies to make sure that they calculate tax accurately.
CONCLUSION
From the above project report it has been concluded that accounting for income tax is the
process which is followed to analyse the tax expense for the accounting year. While calculating
it, it is very important for all the companies to make sure that they understand the different
between the accounting as well as taxable profit. There are several other key aspects which are
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also required to be focused by the entities. These are temporary and permanent difference,
deductible and taxable temporary difference, deferred tax assets and liabilities etc. While
calculating the tax it is essential for companies to understand the recognition criteria for deferred
tax assets and liabilities as it can help to calculate accurate tax. Apart from this, it is also very
important for the entities to make sure that their tax expenses and tax payable are same and if
they are not then reason for the same should be identified.
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REFERENCES
Books and journals:
Adapa, S., Rindfleish, J. and Sheridan, A., 2016. ‘Doing gender’in a regional context: Explaining
women's absence from senior roles in regional accounting firms in Australia. Critical
Perspectives on Accounting. 35. pp.100-110.
Arnold, B. J., Ault, H. J. and Cooper, G. eds., 2019. Comparative income taxation: a structural
analysis. Kluwer Law International BV.
Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion.
Routledge.
Casha, A., 2019. Accounting for income tax revenue by the Maltese Government (Master's thesis,
University of Malta).
Chen, S., 2017. Do investors value corporate tax return information? Evidence from
Australia (Doctoral dissertation).
Hoopes, J. L., Robinson, L. and Slemrod, J., 2018. Public tax-return disclosure. Journal of
Accounting and Economics. 66(1). pp.142-162.
Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion
under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting &
Economics. 12(3). pp.290-308.
Leigh, A., 2018. Do firms that pay less company tax create more jobs?. Economic Analysis and
Policy. 59. pp.25-28.
Li, E. X. and Tran, A. V., 2016. An empirical analysis of the tax burden of mining firms versus
non-mining firms in Australia. Austl. Tax F. 31. p.167.
Pfitzner, D. M. and McLaren, J., 2018. Microbusinesses in Australia: a robust
definition. Australasian Accounting Business & Finance Journal. 12(3). pp.4-18.
Richardson, G., Taylor, G. and Lanis, R., 2016. Women on the board of directors and corporate
tax aggressiveness in Australia. Accounting Research Journal.
Sakurai, Y. and Braithwaite, V., 2019. Taxpayers' perceptions of the ideal tax adviser: Playing
safe or saving dollars?. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.
Spies-Butcher, B. and Stebbing, A., 2019. Mobilising alternative futures: generational
accounting and the fiscal politics of ageing in Australia. Ageing & Society. 39(7).
pp.1409-1435.
Online
Annual report of Angel Seafood Holdings Ltd. 2019. [Online]. Available through:
<https://angelseafood.com.au/wp-content/uploads/2019/10/Angel-Seafood-Holdings-
FY2019-Annual-Report.pdf >
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