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Importance of DTA & DTL Recognition | Assignment

   

Added on  2020-03-16

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Running Head: Importance of DTA & DTL RecognitionACCOUNTING FOR TAXESON INCOME

Importance of DTA & DTL Recognition1AASB 112 Income taxes is the standard on accounting issued by Accounting Standard Board of Australia and is mandatorily applied on the entities listed on the Australian stock exchanges. This standard was introduced to deal with the accounting treatment of deferred tax assets (DTA) and liabilities (DTL). AASB 112 has been amended to make its provisions in line with those of international accounting standard 12 (IAS 12), Income taxes. The accounting for DTA and DTL is done with the intention to incorporate the effect of timing differences arising due to the changed accounting treatment as per generally accepted accounting principles and the income tax act of the particular country.According to Nethercott(2012) the timing difference are generally classified in two categories. Some of thedifferences are permanent and others are temporary. Both AASB 112 and IAS 12 prescribes the creation of deferred tax assets and liabilities only in the case of temporary differences.Thetemporary differences arises in the accounting of taxes in one period and are reversible in the subsequent years.According to Bentwood & Lee(2012) the practice of measuring and recognising the DTA’s and DTL’s promotes the true and fair view of the financial statement of the company by exhibiting to the users of financial reports the exact picture of company’s financial position. DTA’s are created when the firm has paid excessive taxes in advance as a result of following the rules announced by the tax regulators,but it is anticipated that there will be a reduction in the tax in the future years. However, DTL’s are created when the company pays lesser taxes in earlier year due to the provisions of income tax act but it is anticipated that there would be arising the demand of higher taxes in future. According to Herbohn, Tutticci&Khor (2010) although the accounting treatment in relation tothe deferred tax assets and liabilities is quite complex to implement in the financial statement and also it may add to the confusion for the intended users of the financial statements while interpreting the financial information contained in the annual reports but yet it is necessary to incorporate these elements in the financial statements so to make the information more

Importance of DTA & DTL Recognition2reliable and comparable. Accounting to Hanlon, Navissi&Soepriyanto (2014) if the deferred taxes are not accounted for in the financial statements of the reporting entity it would impair the representation of current financial position of the company resulting in misleading the readers of the annual reports. As the providers of finance invests huge amount of funds in the company for its functioning, they expect the company to maintain greater transparency in the company’s performance. Therefore, it would be unfair to say that the current accounting treatment in relation to income tax hinders the users. Rather, it helps in achieving the desired level of transparency by making true and appropriate disclosures of its financial situation in the reports. But yes the complications of the methods of recognising such taxes may generate confusion among the users of financial reports as not all the readers possess the adequate amount of accounting knowledge in such areas.Analysis of two companies:The two companies which are chosen for comparison is Telstra Corporation Limited and TPG Telecom Limited which are engaged in Telecommunication Services and are listed on Australian Securities Exchange.Comparison Table Amounts In Millions $Telstra CorporationTPG Group2016201520162015DTL recognised in the Balance Sheet of respective companies. (A)1493158862.717.1 (DTA) recognised in the Balance Sheet of respective companies. (B)546600Net DTL/ (DTA) recognised in the Balance Sheet of respective companies. (A-B)1439149262.717.1

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