The purpose of this essay is to identify the differences between the current tax-effect accounting with the new method purposed for tax accounting as part of Australia’s move towards international accounting standards.
To write up this essay I have researched various accounting web sites. I have also studied tax-effect accounting thoroughly in various textbooks, articles and journals.
In my research I have found that there are significant differences between the conceptual basis of tax-effect accounting adopted in the revised and superseded Standards. ...
The tax-effect time bomb has been ticking away since December 1999 when the Australian Accounting Standards Board (AASB) made the standard that has thrown out an old income statement approach of tax effect accounting and replaced it with what is known as balance sheet method. ...
This essay concludes that the comprehensive balance sheet liability method is more consistent with the conceptual framework underlying all accounting standards. This is supported by a research done by the Australian Accounting research Foundation. ...
INTRODUCTION
The current practice of accounting for company income tax is known as ‘tax-effect accounting’. It relies on the basic premise that profit from ordinary activities determines income tax expense and taxable income determines tax payable. ... 314) states that ‘AASB 1020 Accounting for Income Tax (Tax-Effect Accounting) was issued in 1989’. It changed the way companies considered and recorded their income tax expense for any financial period. This method also reflects the premise that the calculation of income tax expense should be based on the accounting profit and loss earned for the period and that income tax liability represented the tax payable on taxable income. This practice requires reconciliation between the amount of tax expense calculated in the company’s accounting records and the estimate of the company’s liability for tax payable made in accordance with rules of income tax legislation. ... 315) go on to state that ‘as part of the International Harmonisation project of the Australian accounting standard setters, the principles underlying the method of accounting for company income tax will change in the financial year of 2003’. ...
Keyes of AARF (online) outlines that:
In consistent with the proposals in Exposure Draft ED 87 ‘Income Taxes’ and the requirements in the International Accounting Standards Committee’s Standard IAS 12 ‘Income Taxes’ (and the US’s equivalent Standard SFAS 109 ‘Accounting for Income Taxes’), the revised Standards adopt a comprehensive balance sheet liability method of tax-effect accounting. That method is based on the general principle that the current and future income tax consequences of all transactions and other events recognised in an entity’s statement of financial position give rise to current and deferred tax liabilities and assets. It adopts the notions of ‘tax base’ and ‘temporary difference’, using the following formulae:
Carrying amounts of assets or liabilities - Tax bases of assets or liabilities = Assessable or deductible temporary differences
Assessable or deductible temporary differences x Tax rates = Deferred tax liabilities or assets.
This essay will look into the new tax-effect accounting and then identify the significant differences between the conceptual basis of tax-effect accounting adopted in the revised and superseded Standards.
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