Deferred Tax Assets & Liabilities: Importance in Financial Statements

This report examines the importance of recognizing Deferred Tax Assets (DTA) and Liabilities (DTL) in financial accounting, focusing on AASB 112 (Income Taxes) and its alignment with IAS 12. The report discusses the nature of temporary differences, the creation of DTA and DTL, and their impact on financial statements, emphasizing the role of DTA and DTL in providing a true and fair view of a company's financial position. It analyzes the financial statements of Telstra Corporation Limited and TPG Telecom Limited, comparing their DTA and DTL recognition and the impact on their financial ratios. The analysis highlights how changes in effective tax rates and profit margins affect investor understanding and the overall financial performance of the companies. The report concludes with a discussion on the importance of understanding the impact of DTA and DTL on future tax obligations and the transparency of financial reporting, supported by references to relevant literature and annual reports.

Running Head: Importance of DTA & DTL Recognition
ACCOUNTING FOR TAXES
ON INCOME

Importance of DTA & DTL Recognition 1
AASB 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 the
differences 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.The
temporary 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 to
the 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 Recognition 2
reliable 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 Corporation TPG Group
2016 2015 2016 2015
DTL recognised in the
Balance Sheet of
respective companies. (A)
1493 1588 62.7 17.1
(DTA) recognised in the
Balance Sheet of
respective companies. (B)
54 66 0 0
Net DTL/ (DTA)
recognised in the Balance
Sheet of respective
companies. (A-B)
1439 1492 62.7 17.1

Importance of DTA & DTL Recognition 3
Analysis:
The annual report of Telstra Ltd is showing that effective income tax rate has decreased from
29.3% in 2015 to 23.5% in 2016 which resulted in decrease of DTL for the year that also has
the positive impact on the current net income and investor’s equity.
The TPG Group of which TPG telecom is the head entity, has recognised the DTL on the
basis of effective rate at 30% for both years but due to the reason that its profit before tax has
increased from 319$m to 514.1$m in current year, it has increased the DTL of the company.
Therefore, despite the fact that Profit before taxes has increased for both the companies,
Telstra Corporation’s liability has decreased because it has reduced its effective tax rate from
2015 to 2016 but TPG group has recognised it on the same rate.
Impact on User’s understanding:
DTL arises due to the fact that income tax to be paid on the profits as per the financial
statements is less than the profits computed under the tax return. The tax liabilities on such
income or expenses that has incurred today will arise in the future and when that occurs,
balances of previous year will get extinguished. The user should also consider that if the
company has made any change in its effective tax rate for the future years because it might
decrease stockholder’s equity and have a negative impact on its current income.
Therefore, it becomes important for the user to understand the fact what’s the impact of such
liabilities on the company’s operation in the future years and company’s ability to meet out
its future tax obligations.
Financial Ratios of both companies:

Importance of DTA & DTL Recognition 4
Telstra Corporation TPG Group
2016 2015 Differe
nce
Differ
ence
%
2016 2015 Differe
nce
Differ
ence
%
Profit Before Taxes*
Current Tax Expenses
Deferred Tax
Expenses/(Benefit)
Profit after Current
Tax Expenses(a)
5600.0
1768.0
16.0
3832.0
5860.0
1746.0
67.0
4114.0
(260.0)
22.0
(51.0)
(282.0)
4.4%
1.3%
76.1%
6.8%
514.1
135.3
(5.8)
378.8
319.0
107.7
(12.8)
211.3
195.1
27.6
7.0
167.5
61.2%
25.6%
54.7%
79.2%
Profit after Deferred
Tax Expenses &
Benefit (b)
3816.0 4047.0 (231) 5.7% 384.6 224.1 160.5 71.6
%
Total Turnover (c) 27050.0 26112.0 938.0 3.6% 2387.8 1270.6 1117.2 87.9
%
*Note: Profits are taken from Continued Operations to make it more comparable.
Without Deferred Tax:
Telstra Corporation TPG Group
2016 2015 Difference 2016 2015 Difference
(a) Profit Margin
Ratio.(a/c)
14.17% 15.75% (1.58%) 15.86% 14.99% (0.77%)
With Deferred Tax:
Telstra Corporation TPG Group
2016 2015 Difference 2016 2015 Difference
(a) Profit Margin
Ratio.(b/c)
14.10% 15.50% (1.40%) 17.63% 14.37% (3.26%)
Analysis:
From the above table it can be concluded that deferred tax expense do not make any material
impact on the profit statements and so on the profitability ratios of the company. But due to

Importance of DTA & DTL Recognition 5
deferred tax benefit TPG Group’s Profit margin ratio has increased considerably from
15.86% to 17.63% if considered with it.

Importance of DTA & DTL Recognition 6
REFERENCES:
Bentwood, S. and Lee, P., 2012. Benchmark management during Australia's transition to
international accounting standards. Abacus, 48(1), pp.59-85.
Hanlon, D., Navissi, F. and Soepriyanto, G., 2014. The value relevance of deferred tax
attributed to asset revaluations. Journal of Contemporary Accounting & Economics, 10(2),
pp.87-99.
Herbohn, K., Tutticci, I. and Khor, P.S., 2010. Changes in Unrecognised Deferred Tax
Accruals from Carry‐Forward Losses: Earnings Management or Signalling?. Journal of
Business Finance & Accounting, 37(7‐8), pp.763-791.
Nethercott, L., 2012. The Tax Accounting Interface in the Mining Industry in the Context of
IFRS. Contemporary Issues in Mining: Leading Practice in Australia, p.100.
Note: For annual reports refer to the links given below:
TELSTRA LTD AUDIT REPORT
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/FY16-Annual-Report-single-pages.pdf
TPG GROUP
https://www.tpg.com.au/about/pdfs/FY16%20Annual%20Report.pdf

Importance of DTA & DTL Recognition 7