Financial Accounting and Reporting: Income Tax Analysis Report

This report provides a detailed analysis of income tax accounting and financial reporting, addressing key objectives such as identifying current and deferred tax liabilities and assets. It explores the role of accounting standards in this process, highlighting the differences between tax laws and accounting standards. The report then delves into the identification and comparison of deferred tax assets and liabilities, including their relationship with unused tax losses. A significant portion of the report compares the income tax information from the financial statements of two selected companies, ADAMS Limited and EAGERS Limited, focusing on income tax expenses, comprehensive income, and the disclosure of deferred tax assets and liabilities. Finally, the report assesses the impact on stakeholder decision-making when deferred tax assets and liabilities are not accurately recorded. The report concludes by summarizing the key findings and their implications for financial accounting and decision-making processes. This report is contributed by a student to be published on Desklib, a platform which provides all the necessary AI based study tools for students.

Financial Accounting and Reporting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Part A...............................................................................................................................................1
Objectives of Accounting for the purpose of Income Tax..........................................................1
Part B...............................................................................................................................................2
Identification of deferred tax assets and liabilities......................................................................2
Comparison of deferred tax assets with tax losses......................................................................2
Part C...............................................................................................................................................3
Comparing the information relating to Income tax in the financial statements of selected
companies....................................................................................................................................3
Income tax expenses accounted for profit and loss...........................................................4
Income tax included in other comprehensive income.......................................................4
Deferred and current tax components of income tax expense...........................................4
Disclosure of deferred tax assets and liabilities in statements of financial position.........5
Part D...............................................................................................................................................5
Impact on decision making of stakeholders when deferred asset and liabilities are not
recorded.......................................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................1

Introduction
According to the Australian Accounting Standard Board, the income tax accounting is a tool
which completes the balance sheet in order to identify both the current tax penalty of dealings
and the future tax penalty of the coming settlement of the carrying sum of all the assets and
liabilities of the company. The current report is focused on describing the objective of
accounting in relation to the income tax, which also helps to identify the deferred tax assets and
liabilities and compare them with the unused tax losses. Further, it includes the comparison of
the income tax of selected companies and impact on decision making of the stakeholders in a
situation where deferred tax assets and liabilities are not recorded in the financial statements of
the company.
Part A
Objectives of Accounting for the purpose of Income Tax
The purpose of bookkeeping for income tax is to identify the sum of tax to be paid or refundable
in the current year and also identify the deferred tax assets and liabilities for the events of tax
penalty in future in the financial statements of the company (Dudin et al. 2015).The main
objective is to maintain the balance sheet of accounts for deferred taxes more consequential for
the company.
According to the Australian Accounting Standards Board bookkeeping is used to measure the
amount of income tax for current and future events. The accounting is needed because the tax
penalty for most events identified in the statements is incorporated in calculating the income tax
to be paid in a current year. But the laws related to tax always differ from the detection and
calculation requirements of the accounting standards. The differences occur in the sum of income
taxable and before tax income for the year, and also between the bases of tax of assets and
liabilities and their recorded sum in the statements.
It helps to identify the amount of settlement of the carrying sum of the assets that are recorded in
the statements of finance of the company. Another objective of accounting in income tax is that

it also records the transactions about the deferred tax and liabilities of the current year in the
financial report of the company. Hence it will affect the total goodwill increasing in the business
(Tran, 2015). The bookkeeping also deal with the identification of the tax assets which are
arising from the unused tax credits or losses, the presentation of the taxable income and the
disclosure of the data associated with the income tax in financial statements.
The accounting for the tax is the greatest specialization in the field of accounting. By considering
aspects of corporate accounting and reporting; there are various objectives of accounting for
income tax and evaluating a company’s operations. The other objectives of bookkeeping for the
purpose of income tax are as follows:
 Period of Payments: Accounting for income tax allows the company to control is a
flow of cash and reduce its tax amount to be paid on cash transactions. For a company,
it is profitable to pay the taxes today in spite of paying them in future.
 Funding Considerations: The tax accounting permits the company to manage its
financial flexibility. There are several effects of funding for the operation of the
company with equity and debt. It will help the company to plan according to it and
maintain the same flexibility in future events.
Part B
Identification of deferred tax assets and liabilities
A deferred tax asset or liability should be identified for all the temporary differences which are
taxable. It excludes the extent, from which the tax liabilities arise, such as
• The preliminary identification of goodwill, or
• Goodwill for which paying the tax back is not deductible
• The preliminary identification of assets and liabilities in the deal, which is not a
combination of business at the time of dealing and also neither affects the profits before
tax nor the profit after tax (Badenhorst and Ferreira,2016)

According to the Australian Accounting Standard Board, the temporary variation of tax which is
linked to the investment in branches, associates and subsidiaries and also holds an interest in
joint venture, identifies a deferred tax responsibility (Australian Accounting Standard Board,
2017).
Comparison of deferred tax assets with tax losses
Deferred tax assets are inbuilt in the identification of assets whose carrying sum will be retained
in the form of benefits of economic which flow through the company in coming years. In case if
the carrying some of the asset is more than the tax payable, the sum of economic benefits will be
even more than the amount allowed as a tax deduction (FASB.org, 2017). This is termed as
temporary variation and is a compulsion to pay the income tax in future years as a deferred
liability tax. As soon as the company regains the carrying sum of the assets, the temporary
variation will reserve, and the company will have payable revenues (Australian Accounting
Standard Board, 2017). This will make it feasible that the profitable benefits will flow through
the company in the shape of tax payments. For instance, when an asset is being carried at the fair
value without any equal adjustment made for tax purposes, a temporary deductible variation will
occur in the form of deferred tax expenses.
A deferred asset should be identified for further carrying the losses and credits of unused tax to
the level that it is feasible that the future payable profit will be accessible against which the
losses and credits of the unexploited tax can be utilized (Fischer and Gallmeyer (2016). The
standard for distinguishing the overdue tax assets occurring from carrying forward the losses and
credits of the unused tax is similar to the standard for identifying the overdue tax asset occurring
from temporary deductible variation.
On the other hand, the subsistence of unexploited tax losses is strong confirmation that prospect
payable income may not be accessible. Thus, when a business has a record of current losses, the
company identifies an overdue tax asset occurring from the unused tax credits (Rutledge, Karim
& Kim, 2016). It has a limited scope that the company has enough payable temporary variation
and also they have a persuasive proof that adequate payable income will be accessible against

which the unexploited tax credits can be exploited by the company (Tomlinson,2018). In such
conditions, it is essential to disclose the level of overdue tax assets and the nature of
confirmation supporting its identification.
Part C
Comparing the information relating to Income tax in the financial statements of selected
companies
Herein, this part of report comparison is made in relation to the income tax expense information
between ADAMS Limited and EAGERS Limited. This comparison will show the differences
between disclosure practices in both the companies and how these companies account for tax
expenses as current and deferred in their financial statements. All the figures below are as per the
year 2016. The basis of this comparison is:
Income tax expenses accounted for profit and loss
According to the annual report of both the companies, it has been determined that income tax
expenses are inclusive in the statement of profit and loss of the company. The amount of income
tax expense in EAGERS Ltd was $35879 while the amount of income tax expense in ADAMS
Ltd was $11651. It is clear from these figures that income tax expenses of EAGERS Ltd are
more than that of the ADAIRS Ltd. This shows that the income of EAGERS Ltd after deduction
of all the direct and indirect expenses, i.e. net income is more than that of the ADAIRS Ltd.
Income tax included in other comprehensive income
Other Comprehensive income is that part of revenues, gains, expenses, and losses that are
excluded from net income in the income statement because of not being realized till date (Other
comprehensive income, 2018). An expense or income is realized when the underlying transaction
is said to be completed rather another comprehensive form of income are listed after the net
income. The income tax expenses in other comprehensive income so stated in its financial
statements of EAGERS Ltd amounted to $3253. On the other hand, according to the financial
statements of ADAMS Ltd, there were no income tax expenses in other comprehensive income.

However, there was income tax benefit amounted to $531. This shows that there is some part of
income that company will realize as income tax benefit in future after the completion of
underlying transactions.
Deferred and current tax components of income tax expense
In ADAIRS Ltd components of current tax in income tax expenses were:
• Income tax of current year was $10900
• Adjustment of current tax for previous year was $23
Components of Deferred tax:
• Reversal and origination of temporal difference was $728
In EAGERS Ltd Current tax amounted to $26885, and deferred tax amounted to $8994 (Annual
Report EAGERS Ltd, 2016). Components of deferred tax in income tax expenses are:
• In respect to the current year $8407
• Reclassified from equity $587
From the above figures it has been analyzed that, in EAGERS Ltd, there is no adjustment
regarding the current tax of previous year while the same is included in ADAIRS Ltd.
Disclosure of deferred tax assets and liabilities in statements of financial position
EAGERS Ltd has made disclosure of only deferred tax liability in its statement of financial
position. Deferred tax liability disclosed is amounted to $7447. On the other hand, ADAIRS Ltd
had made disclosures about both deferred tax assets and deferred tax liability in its statement of
financial position. Deferred tax assets amount to $6725, and deferred tax liability amounts to
$12453 (Annual Report ADAIRS Ltd, 2016). This shows that policies of disclosure of deferred
tax assets and deferred tax liabilities in the financial statements are more clear and transparent in
ADAIRS Ltd than that of EAGERS Ltd. However, deferred tax liability is created when
accelerated depreciation is used for tax purpose and not for financial reporting purposes

(Deferred Tax Liability, 2018). This means both the companies use accelerated depreciation for
tax purpose and not for reporting purpose.
Part D
Impact on decision making of stakeholders when deferred asset and liabilities are not recorded.
The deferred tax assets and liabilities can directly affect the cash flow of the company for
subsequent years if they are not recorded in the financial statements. In the situation, if the
company has not taken into account the deferred tax asset and liabilities companies will not be
able to determine the calculation for the assumption of sales (Sözbilir, Kula & Baykut, 2015).
According to the annual report of the ADAIRS limited the deferred tax liability is around
$12395000 in the current year. If this is eliminated from the income statement, it will not present
a viable picture of the company’s financial position. elimination of this information and related
notes will not offer the temporary variation on the bases of tax assets and liabilities and the
carrying sum which will not complete the purpose of reporting the financial accounting. It will
also affect the decision-making process of the stakeholders as they will not proper and complete
information about the deferred tax assets and liabilities. Nonrecording of this will lead to the
inaccurate calculation of the company’s earning and its equity position. (Annual Report
ADAIRS Ltd, 2016)
The recording of deferred tax assets and liabilities is important for a company because the assets
are valued at the fair market price, and increase in their value creates valuation equity. By
considering annual report of both the companies it can be noticed that without accounting and
deferred assets and liabilities accounting for tax, the level of equity is being overstated this will
affect the decision of the investors. If the deferred tax is added, it reflects the rise in the value of
the assets, and then a correct image of company’s operation is presented (Annual Report
EAGERS Ltd, 2016).

Conclusion
From the above report, it can be concluded that accounting of tax treatment is important to
ensure appropriate presentation of financial statements. It also helps the company to identify its
deferred tax assets and liabilities. Companies are essential to provide an appropriate presentation
of deferred tax liabilities and assets to provide viable information to stakeholders so they can
make informed decisions. With the absence of this information; transaction of income tax in
financial statements will showcase true picture and inter, and intra comparison will not be viable.

References
Dudin, M., Prokofev, M., Fedorova, I., Frygin, A., & Kucuri, G. (2015). International Practice of
Generation of the National Budget Income on the Basis of the Generally Accepted
Financial Reporting Standards (IFRS).
Tran, A. (2015). Can Taxable Income Be Estimated from Financial Reports of Listed Companies
in Australia. Austl. Tax F., 30, 569.
Badenhorst, W. M., & Ferreira, P. H. (2016). The Financial Crisis and the Value‐relevance of
Recognised Deferred Tax Assets. Australian Accounting Review, 26(3), 291-300.
Fasb.org. Summary of Statement No. 109. (2018). Retrieved from
<http://www.fasb.org/summary/stsum109.shtml?> [Accessed on 29th January 2018].
Fischer, M., & Gallmeyer, M. (2016). Taxable and tax-deferred investing with the limited use of
losses. Review of Finance, 21(5), 1847-1873.
Tomlinson, S. (2018). Deferred tax assets on unrealised losses. KPMG. Retrieved from
<https://home.kpmg.com/xx/en/home/insights/2016/01/ifrs-deferred-tax-assets-
unrealised-losses-amendments-ias12-290116.html>.[Accessed on 29th January 2018].
Annual Report ADAIRS Ltd, 2017. [Online] Retrieved from
<https://www.asx.com.au/asxpdf/20170928/pdf/43mq1z3ptp183t.pdf>. [Accessed on 29th
January 2018].
Annual Report EAGERS Ltd, 2017. [Online] Retrieved from
<https://www.asx.com.au/asxpdf/20170421/pdf/43hnhpdy4hgyfk.pdf>.[Accessed on 29th
January 2018].
Deferred Tax Liability, 2018. [Online] Retrieved from <https://www.investopedia.com/exam-
guide/cfa-level-1/liabilities/tax-deferred-liabilities.asp>. [Accessed on 29th January 2018].
Other comprehensive income, 2018. [Online] Retrieved from
<https://www.accountingtools.com/articles/what-is-other-comprehensive-income.html>.
[Accessed on 29th January 2018].
Sözbilir, H., Kula, V., & Baykut, L. E. (2015). A Research on Deferred Taxes: A Case Study of
BIST Listed Banks in Turkey. European Journal of Business and Management, 7(2), 1-
10.