chapter 24 application of tax-effect accounting to consolidated financial statements
TRANSCRIPT
Chapter 24Chapter 24
Application of Tax-effect Application of Tax-effect
Accounting to Consolidated Accounting to Consolidated
Financial StatementsFinancial Statements
Chapter 24Chapter 24
Application of Tax-effect Application of Tax-effect
Accounting to Consolidated Accounting to Consolidated
Financial StatementsFinancial Statements
Lecture TopicsLecture Topics
• Assessable Entities• Calculation of group tax• Tax-effect accounting and consolidation
under AASB 1020• Tax-effect accounting and intercompany
transfers
Lecture TopicsLecture Topics
• Tax effects and consolidation concepts• Tax loss transfers
Lecture ReferencesLecture References
• Text - Chapter 24• AASB - 1020
Key ConceptsKey Concepts
• Accounting profit• Taxable income• Income tax expense• Income tax payable• Assessable entities• Deferred tax assets• Deferred tax liabilities
Assessable EntitiesAssessable Entities
• Income tax levied on single companies• Possible move to a group assessment
basis– Losses offset– Consolidated accounts
Calculation of Group TaxCalculation of Group Tax
• Simple aggregation• Tax-effect accounting
– Group income tax expense– Consolidated pre-tax accounting profit– Consolidation difference amortisation– Dividends– Eliminations of unrealised profits– Group tax payable
Tax-effect Accounting and Tax-effect Accounting and Consolidation Under AASB 1020Consolidation Under AASB 1020
• Tax effect of obtaining control– Impact of fair value adjustments on temporary
differences• Individual entities• Consolidated entity• Exceptions to the recognition of DTLs• Exceptions to the recognition of DTAs
Tax-effect Accounting and Tax-effect Accounting and Consolidation Under AASB 1020Consolidation Under AASB 1020
• Tax effect of obtaining control– DTLs and DTAs and the calculation of
goodwill or discount• Acquisition of another entity or operation• AASB 1013 – Accounting for Goodwill• AASB 1015 – Acquisition of Assets• Included in determining consolidation difference
Tax-effect Accounting and Tax-effect Accounting and Consolidation Under AASB 1020Consolidation Under AASB 1020
• Tax effect of obtaining control– Applying tax effect at control date– Set-off of DTAs and DTLs
• Generally prohibited• Required when:
– Legal right of set-off– Same entity– Different entity where net basis or simultaneous
settlement
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransfersIntercompany Transfers
– Impact recognised through assessable/deductible temporary differences arising when the carrying amount in the individual statements of financial position differs from the carrying amount in the consolidated statement of financial position
Tax-effect Accounting and Intercompany Transfers of Inventory: Tax-effect Accounting and Intercompany Transfers of Inventory:
ExampleExample
• Company sells an asset for $2000• Cost of asset $1500• Therefore – profit of $500• If sold within the group, profit would be
eliminated therefore consolidated carrying amount of $1500
• Tax base to new owner of $2000
• Company sells an asset for $2000• Cost of asset $1500• Therefore – profit of $500• If sold within the group, profit would be
eliminated therefore consolidated carrying amount of $1500
• Tax base to new owner of $2000
Tax-effect Accounting and Intercompany Transfers of Inventory: Tax-effect Accounting and Intercompany Transfers of Inventory:
ExampleExample
• Tax base now $500 greater than consolidated carrying amount -> $500 deductible temporary difference
• At tax rate of 30% -> DTA of $150
• Tax base now $500 greater than consolidated carrying amount -> $500 deductible temporary difference
• At tax rate of 30% -> DTA of $150
Dr Deferred tax asset 150Cr Deferred tax revenue 150
Tax effects of Inventory Transfers - PeriodicTax effects of Inventory Transfers - Periodic
Dr Sales 880Cr Purchases 880Elimination of intercompany sale of goods
Dr Cost of Sales (Closing inventory) 180Cr Inventory (asset) 180Elimination of unrealised profit on intercompany sale
Dr Deferred tax asset 54Cr Deferred tax revenue 5430% (tax rate) of $180
Dr Sales 880Cr Purchases 880Elimination of intercompany sale of goods
Dr Cost of Sales (Closing inventory) 180Cr Inventory (asset) 180Elimination of unrealised profit on intercompany sale
Dr Deferred tax asset 54Cr Deferred tax revenue 5430% (tax rate) of $180
Tax effects of Inventory Transfers - PerpetualTax effects of Inventory Transfers - Perpetual
Dr Sales 880Cr Cost of Sales 880Elimination of intercompany sale of goods
Dr Cost of Sales 180Cr Inventory 180Elimination of unrealised profit on intercompany sale
Dr Deferred tax asset 54Cr Deferred tax revenue 5430% (tax rate) of $180
Dr Sales 880Cr Cost of Sales 880Elimination of intercompany sale of goods
Dr Cost of Sales 180Cr Inventory 180Elimination of unrealised profit on intercompany sale
Dr Deferred tax asset 54Cr Deferred tax revenue 5430% (tax rate) of $180
Tax-effect of Unrealised Profit in Opening Tax-effect of Unrealised Profit in Opening and Closing Inventoryand Closing Inventory
Dr Retained profits (SOP) xxxCr Cost of Sales (SOP Inventory) xxxElimination of unrealised profit in opening inventory
Dr Deferred tax asset xxCr Retained Profits (SOP) xxRecognition of DTA (consolidation carrying amount less than tax base)
Dr Retained profits (SOP) xxxCr Cost of Sales (SOP Inventory) xxxElimination of unrealised profit in opening inventory
Dr Deferred tax asset xxCr Retained Profits (SOP) xxRecognition of DTA (consolidation carrying amount less than tax base)
Tax-effect of Unrealised Profit in Opening Tax-effect of Unrealised Profit in Opening and Closing Inventoryand Closing Inventory
Dr Sales xxxCr Purchases xxxElimination of intercompany sales of inventory
Dr Cost of Sales (EOP inventory) xxCr Inventory (statement of FP) xxElimination of unrealised profit in carrying amount of inventory)
Dr Sales xxxCr Purchases xxxElimination of intercompany sales of inventory
Dr Cost of Sales (EOP inventory) xxCr Inventory (statement of FP) xxElimination of unrealised profit in carrying amount of inventory)
Tax-effect of Unrealised Profit in Opening Tax-effect of Unrealised Profit in Opening and Closing Inventoryand Closing Inventory
Dr Deferred tax expense xxCr Deferred tax asset xxDecrease during reporting period of existing DTA due to reduced excess of tax base over consolidation carrying amount (less unrealised profit in inventory balance)
Dr Deferred tax expense xxCr Deferred tax asset xxDecrease during reporting period of existing DTA due to reduced excess of tax base over consolidation carrying amount (less unrealised profit in inventory balance)
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransactionsIntercompany Transactions
• Non Depreciable Assets– Reporting period in which sale takes place
Dr Revenue – gain on sale of asset xCr Non-current assetx
Dr Deferred tax asset xCr Deferred tax revenuex
Dr Revenue – gain on sale of asset xCr Non-current assetx
Dr Deferred tax asset xCr Deferred tax revenuex
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransactionsIntercompany Transactions
• Non Depreciable Assets– Reporting period in which sale takes place
Dr Non-current asset xCr Expense – loss on sale of assetx
Dr Deferred tax expense xCr Deferred tax liabilityx
Dr Non-current asset xCr Expense – loss on sale of assetx
Dr Deferred tax expense xCr Deferred tax liabilityx
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransactionsIntercompany Transactions
• Non Depreciable Assets– Reporting period in which sale takes place
Dr Non-current asset xCr Expense – loss on sale of assetx
Dr Deferred tax expense xCr Deferred tax liabilityx
Dr Non-current asset xCr Expense – loss on sale of assetx
Dr Deferred tax expense xCr Deferred tax liabilityx
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransactionsIntercompany Transactions
• Non Depreciable Assets– Reporting period in which sale takes place
• Transfer reflects fair value• Transfer does not reflect fair value
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransactionsIntercompany Transactions
• Non Depreciable Assets– Subsequent reporting periods: profit on sale
Dr Retained profits (SOP) xCr Non-current assetx
Dr Deferred tax asset xCr Retained profits (SOP)x
Dr Retained profits (SOP) xCr Non-current assetx
Dr Deferred tax asset xCr Retained profits (SOP)x
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransactionsIntercompany Transactions
• Non Depreciable Assets– Subsequent reporting periods: loss on sale
Dr Non-current asset xCr Retained profits (SOP)x
Dr Retained profits (SOP) xCr Deferred tax liabilityx
Dr Non-current asset xCr Retained profits (SOP)x
Dr Retained profits (SOP) xCr Deferred tax liabilityx
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransactionsIntercompany Transactions
• Depreciable Assets– Reporting period in which sale takes place
Dr Accumulated depreciation xCr Depreciation expense x
Dr Deferred tax expense xCr Deferred tax liabilityx
Dr Accumulated depreciation xCr Depreciation expense x
Dr Deferred tax expense xCr Deferred tax liabilityx
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransactionsIntercompany Transactions
• Non Depreciable Assets– Subsequent reporting periods: gain on sale
Dr Accumulated depreciation xCr Retained profits (SOP) x
Dr Retained profits (SOP) xCr Deferred tax assetx
Dr Accumulated depreciation xCr Retained profits (SOP) x
Dr Retained profits (SOP) xCr Deferred tax assetx
Tax-effect Accounting and Tax-effect Accounting and Intercompany TransactionsIntercompany Transactions
• Non Depreciable Assets– Subsequent reporting periods: gain on sale
Dr Accumulated depreciation xCr Depreciation expense x
Dr Deferred tax expense xCr Deferred tax assetx
Dr Accumulated depreciation xCr Depreciation expense x
Dr Deferred tax expense xCr Deferred tax assetx
Tax Effects and Consolidation Tax Effects and Consolidation ConceptsConcepts
• Entity concept– Elimination of profit on intercompany transfers
100%• Parent entity concept
– Elimination 100% for upstream transfers only• Proprietary concept
– Notional OEI share of partly owned subsidiary not admitted as consolidation data
Tax Loss TransfersTax Loss Transfers
• Not addressed by AASB 1020• Does not give rise to unrealised gains or
losses• No consolidation adjustments required• OEI allocation not an issue
Where to get more informationWhere to get more information
• Other courses• List books, articles, electronic sources