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Taxes Accounting Assignment help

Taxes Accounting Assignment help

Abstract

With the business reporting and tax compliance program, every organization needs to adopt the accounting and taxation reporting framework in its business process. The taxes are imposed by every country to acquire a revenue for running the country (Arnold et al, 2019). After assessing the accounting and taxation rules, it is found that company cannot have deferred tax assets and liability at the same in its books of accounts and one needs to be set off from another while recording in the balance sheet. Company needs to set up proper harmonization in its accounting and taxation rules to set up proper transparent and strong corporate governance in its reporting framework.

i. Introduction

With the changes in time, company needs to set up strong corporate governance and reporting framework to sustain the business in long run. There are two types of taxes are levied by the government of the country namely direct and indirect taxes. Direct tax are those taxes that are paid by the same entity on which the tax is imposed or levied. However, indirect taxes are paid by the ultimate user of the asset. The income taxes are the taxes kind of direct taxes where the payable amount is paid by the person on whom the tax is imposed. In the given report, a detailed account of the accounting terms is studied like deferred taxes, temporary differences and the permanent differences in the context of an ASX listed company named as Orora Company.

ii. Concepts for accounting of income taxes:-

a) Accounting profit

Accounting profit is defined as the net income that is reported by the GAAP based on the financial statements of the company. The explicit cost of the firm is subtracted from the total revenues of the firm by the accountant to calculate the total accounting profit. The explicit cost of the firm includes all the measurable costs for instance, labor costs (Krstanovic and Barbaca, 2016). Moreover, the accounting profit is when the total revenue exceeds the company’s explicit cost. For instance, in the given report of the Orora Company, net profit of the company is 161.2 million which has increased by average 12% since last three year (Orora Company, 2020).

b) Taxable profits

Taxable profits refer to the profit on which the tax is levied by the government and it depends on the taxation authority. The rules and laws of these authorities define the tax that an organization has to pay depending upon the location of the entity or where it does business. For example, if the government declares an organization as a nonprofit entity, then it is not subjected to any taxes on the income of the company. The primary foundation on which the taxable profit is based is operating earnings. Taxable earnings can also generate from dividend income, capital gains on long term assets and interest income (Rossi, 2015). On these taxable earnings, the tax rates imposed by the authorities is different. For instance, in the given report of the Orora Company, net profit and taxable profit both are same and it is recorded as161.2 million which has increased by average 12% since last three year (Orora Company, 2020).

c) Temporary differences

Temporary difference in accounting tax is defined as the difference between the tax accounting and financial accounting rules that subject accounting income to tax to know whether it is high or low compared to the taxable income to be paid in the current period. The temporary differences are reversible unlike the permanent differences that result in irreversible differences among the accounting and taxable income. These differences face implications in the deferred tax. The temporary differences tend to reverse or change in the future. Temporary differences is of two types namely, deductible and taxable. For instance, in the given report of the Orora Company, Origination and reversal of temporary differences, is 2 million which is way too low as compared to last year data (Orora Company, 2020).

d) Taxable temporary difference

The timing difference due to which the payable tax is lower than the accounting income to be paid in the current period. The occurring difference between the payable income tax and accrual tax on income is equal to the deferred tax liability. The depreciation amount that is permitted by the tax regulators is stated as taxable temporary because it will be added in the taxable amount paid in the coming years. More amount deduction is allowed for depreciation by the tax regulators in the early stages as compared to the accounting authorities. Therefore, the depreciation allowed by the regulators is reduced later in the life of asset. This results in showing high depreciation in the accounting book compared to the depreciation that is actually allowed on the asset and a taxable amount results that is payable by the taxpayer. For instance, in the given case of the annual report, it is found that the current tax is adjusted as DTA and DTL and same is attributable to the temporary differences recorded tax base of the recorded assets and liability at their given carrying amount and unused tax losses (Orora Company, 2020).

e) Deductible temporary difference

It is the type of temporary difference where the payable income tax is more than accrual income tax in the current period. Therefore, it results in the reduction of the income or the taxable profit. Generally, those transactions that are affected in business affairs are included in the taxpayer’s financial reports but these transactions are excluded from the books where tax regulators holds the responsibility of generation in the time differences. These differences have the tendency to reverse in the coming years that will cause reduction in the taxable amount are considered as the deductible type of temporary differences. For example, if any taxpayer receives an income in advance then it is not considered as income in the record of the accounting books. But that income will be considered as an income for the purpose of tax. This results in reduction of the taxable amount that has to be paid in the next year because a higher amount of tax has to be paid in the year in which the income is received (Orora Company, 2020).

f) Deferred tax assets

The literal meaning of deferred is to delay or postpone something to be done in any other time. In the context of tax, deferred tax is the tax that is estimated but not yet paid in the ongoing financial year. The origination of this tax happens if the tax is already paid but has not been mentioned in the income statement. Deferred tax asset is part of this whole deferred tax. Deferred tax asset is beneficial as it tends to lower the future liabilities of the company. This type of tax arise if the taxpayer has paid an excess amount of tax in the present or precious years. Deferred tax asset is created when the profit made according to tax laws is greater than the profits shown in the accounts books (Mpakaniye and Paul, 2019). In the balance sheet, this is represented below the non-current asset’s head (Orora Company, 2020).

g) Deferred tax liability (DTL)

It is a tax that has been estimated and assesses but is due to be paid for the current financial year. The deferral here comes when there is difference between the timing of tax accrued and tax paid. The deferred tax liability is created to record that the company, in future, will pay as greater amount of income tax because of the transaction that was incurred in the current year.

The difference in the tax laws and the rules of accounting gives rise to DTL where the earnings on income statement before taxes can be more than the taxable income. Therefore, deferred tax liability is defined as the future payment of the tax that a company has to pay to the tax authorities in the coming years. The source of DTL is the depreciation expense differences in the accounting rules and the tax laws (Sozbilir, Kula and Baykut, 2015).

iii. Recognition criteria of deferred tax assets and deferred tax liability:-

Recognition criteria of deferred tax asset (DTA)

The tax mentioned in the accounting books to take benefits of tax in the future years is known as the deferred tax asset. The creation or recognition of these taxes is done in the accounts book of the taxpayer when there are certain deductible temporary differences are found in the financial statements of the individual. These differences result in lowering the accounting profit in comparison to the taxable profit for the current year. Higher taxable profits tend to increase the liability of tax in the ongoing year (Chytis, 2015). However, it will cause reduction in the future liability because a higher tax amount is paid by the taxpayer in the current year  

Recognition criteria of deferred tax liability

The liabilities t mentioned in the accounting books of the taxpayers that has to pay in the future years by the taxpayer are known as deferred tax liabilities (DTL). Unlike DTA, in DTL, a substantial taxable temporary difference is found in the financial statements of the taxpayer. When this difference is accounted then a deferred tax liability is created (Orora Company, 2020). Source: - (Orora Company, 2020). These difference account for higher profits compared to the taxable profits in the same financial year. If the taxable profits are low for the financial year then it tends to reduce the tax liability of the same financial year (Morris, 2017). But this lowering of taxable profits will increase the liabilities in the future years because the taxpayer pays a lesser amount of income tax in the current financial year (Orora Company, 2020).   i. Tax expenses in the financial year The taxes are the amount that is paid according to the revenue of the company and the laws of the income authorities. Orora Company is a petrochemical under the ASX list. Company whose expenses are shown in the table (Orora Company, 2020).

 

These difference account for higher profits compared to the taxable profits in the same financial year. If the taxable profits are low for the financial year then it tends to reduce the tax liability of the same financial year (Morris, 2017). But this lowering of taxable profits will increase the liabilities in the future years because the taxpayer pays a lesser amount of income tax in the current financial year (Orora Company, 2020).  

iv. Tax expenses in the financial year:-

The taxes are the amount that is paid according to the revenue of the company and the laws of the income authorities. Orora Company is a petrochemical under the ASX list. Company whose expenses are shown in the table (Orora Company, 2020).

The income tax expenses of the Orora Company for the financial year 2018 and 2019 is shown in the table. It was found to be $74.0 million for the financial year 2018 and the expense on tax for the financial year 2019 was $55.4 million (Orora Company, 2020).

v. Break-up of the total expenses of Orora Company:-

The different components collectively represent the total expenses in the tax of a company in any financial year (Orora Company, 2020).The components that make up the total tax expenses include deferred tax expenses, expenses of the current tax, adjustment of the past year’s tax benefits. These expenses collectively give rise to the income tax that has to be paid by the company (Orora Company, 2020).The expenses of the Orora Company are also combination of the deferred tax expenses, past year tax benefits and expenses of the current tax. A break-up of these expenses of the income tax are shown in the given table for the two consecutive financial years, 2018 and 2019 (Orora Company, 2020).

The income tax expenditure of a company represents the collected tax liabilities computed by the tax regulating authorities on the current financial year. It also shows the expenses due to the deferred tax and the tax adjustments on the loss or profit of the previous years. However, some analyst argues to choose a different method for the calculation of the taxes. In this method, the accounting income of the taxpaying individual is multiplied with the tax rates and they are represented in the annual reports of the firms (Orora Company, 2020).  

vi. Deferred tax assets/ liabilities shown by Orora Company:-

The financial statement of Orora Company shows the deferred tax liabilities of the financial year 2018 and 2019 as $82.3 million and $83.3 million respectively. The annual report of Orora Company does not represent the deferred tax asset for the financial years 2018 and 2019 (Fund, 2020). The reason is that the company set off the taxable and deductible temporary differences amounts (Orora Company, 2020).

The financial information that is reported is found to have temporary differences therefore, the deferred tax and deferred liabilities are created by the company in the annual report. The dissimilarities in the carrying balance in the assets of the company as recorded by the tax regulators and accounting regulation gave rise to the temporary differences in the tax payments (Orora Company, 2020).

The deferred tax assets are the assets that has been mentioned in the accounts book so that the taxpayer can take advantage of the paid tax in the coming years. Moreover, the deferred tax liabilities are the taxes that arise when a lesser amount of the tax is paid in the current year and the remained liabilities are added to be paid in the coming years. Deductible and taxable temporary difference is found in deferred tax asset/ liability respectively (Orora Company, 2020).

vii. Current tax liabilities for Orora Company:-

The current tax liabilities that are recorded for the Orora Company is $10.6 million and $8.7 million for the financial year 2019 and 2018 respectively. The tax expenses of the company however, are different than the current liabilities and they are $55.4 million for the financial year 2019 and $74.0 million for the financial year 2018 (Orora Company, 2020). It can be argued on the fact that if the company has shown its tax expenses in financial report as $74.0 million and $55.4 million for the years 2018 and 2019 respectively then how can the tax liabilities be shown for both the financial years as $8.7 million and $10.6 million (Orora Company, 2020).It can be understood by the fact that the shown expenses in the financial report are total tax expenses computed by the tax regulators for the financial year along with all the adjustments of the previous year’s loss and profit and deferred tax expenses. However, the current tax liabilities that are shown are sum of the pending amounts on the reporting date for current tax payments (Orora Company, 2020).

viii. Tax expenses in cash flow statement:-

Cash flow statement of a company is prepared to represent the actual outflow and inflow of the cash of the firm. The cash flow statements are prepared to keep a check on the cash flow occurring outside or towards the business firm. With the help of an income statement, a company discloses or represents the occurring financial transactions in the firm and that are affecting it (Orora Company, 2020). The financial statement is prepared based on the increased benefits of the company by the accounting regulations. Accrual basis refers to the requirement of the transactions to be mentioned in the accounts whenever they become pending or whenever the payment is done. The recognition is based on whichever event occurs first. It is generally doubted by the analysts that the paid tax expenses shown in the income statement and the cash flow are different. These doubts arise due to the different recognition concepts for these elements present in the financial statements (Orora Company, 2020).  

ix. Difference between permanent and temporary differences:-

Temporary differences

The occurrence of the temporary differences is witnessed when there is diversity in the carrying amount and the tax base of liabilities and assets represented in the balance sheet. The temporary differences arise only if the caused differences can reverse in future to an extent where the items in the balance sheet are anticipated to economic benefits or profits for the enterprise in future. The temporary difference can be of two types (Orora Company, 2020).

• Taxable temporary differences: these temporary differences result in the taxable amount that has to be settled or paid in future. The differences give rise to the deferred tax liabilities in cases where the carrying capacity of the assets somehow exceed the tax base (Orora Company, 2020).

• Deductible temporary differences: in this type of temporary difference the taxable income is reduced in the future whenever the item on the balance sheet is settled. It gives rise to deferred tax asset whenever an asset’s tax base tends to exceed the carrying amount of that asset (Heltzer and Shelton, 2015).

Permanent differences

Permanent differences are irreversible therefore, they do not have the capability to give rise to deferred tax liabilities/ assets (DTL/DTA).The permanent differences give rise to a difference between the statutory and effective tax rate of a company. Another example where the permanent difference is applicable is when a fine is levied on the defaults by the tax regulators cannot be reverse. Therefore, these are those differences that cannot be reversed in the coming years (Orora Company, 2020).

x. Insights on the accounting of taxes in Orora Company:-

The company Orora Company is found be following the accounting regulations and has taken proper care of the tax norms and regulations while compiling the reports of the financial statements. The company has filed the items of cost and revenue according to the norms of accounting regulations. There were no reports of deferred tax assets in the company’s financial statement and the amounts for deductible type of temporary difference are adjusted from the expenses of the taxable differences. It was found in the company’s report that it cannot record liability and asset of deferred tax at the same period of time in the already recorded accounts. Among these two deferred taxes, one is needed to be fixed or adjusted prior to other so that the other tax can be adjusted according to the first one. It is found that the amount of tax that has to be paid cannot be shifted as responsibility of other individual (Engström et al, 2015). The DTL and DTA of the company are recorded so that it can have a compliance of the tax that has deducted or that has to be paid in future. It is also seen in the report that the indirect taxes are paid by the ultimate user of the asset (Orora Company, 2020).

Conclusion

It can be concluded from the above questionnaires that the tax plays a very crucial role in the economy development of the company. A detailed account of deferred tax asset and liability is show. The DTA is the taxable amount that the company pays as tax and the remained amount that is not paid on time is booked as the liability of the company. Moreover, the temporary and permanent differences in the taxes are studied in the context of the Orora Company. The accounting profits and taxable profits are studied to get a deep understanding of the accounting of taxes with the help of real life examples. It is also concluded that the concepts like taxable profit, accounting profit, deferred tax and temporary differences are very important when dealing in the income tax regulations.  

References

Arnold, B.J., Ault, H.J. and Cooper, G. eds., 2019. Comparative income taxation: a structural analysis. Kluwer Law International BV.

Engström, P., Nordblom, K., Ohlsson, H. and Persson, A., 2015. Tax compliance and loss aversion. American Economic Journal: Economic Policy, 7(4), pp.132-64.

Heltzer, W. and Shelton, S.W., 2015. Book-tax differences and audit risk: evidence from the United States. Journal of Accounting, Ethics and Public Policy, 16(4).

Krstanovic, N. and Barbaca, D.B., 2016. Accounting profit as a determinant of development of entrepreneurship. Economy Transdisciplinarity Cognition, 19(2), p.14.

Morris, J.L., 2017. Classification of Deferred Tax Assets and Deferred Tax Liabilities: An Evaluation of FASB’s Attempt at Standards Simplification. Journal of Accounting and Finance, 17(8).

Mpakaniye, D. and Paul, J., 2019. Effect of Temporary Differences on Deferred Tax in the Banking Sector in Rwanda. Effect of Temporary Differences on Deferred Tax in the Banking Sector in Rwanda (March 22, 2019).

Rossi-Maccanico, P., 2015. Fiscal state aids, tax base erosion and profit shifting. EC Tax Review, 24(2), pp.63-77.

Sozbilir, H., Kula, V. and Baykut, E., 2015. A Research on Deferred Taxes: A Case Study of BIST Listed Banks in Turkey. European Journal of Business and Management, 7(2), pp.1-9.

Orora Company, 2020, annual report and investor relation and documents, available at https://www.ororagroup.com/system/downloads/files/000/000/334/original/19.09.13_Orora_2019_Annual_Report_to_shareholders_%28interactive%29.pdf?1568329656 accessed o 03rd June, 2020

Chytis, E., 2015, February. Deferred tax assets from unused tax losses under the prism of financial crisis. In International Conference on Business & Economics of the Hellenic Open University, Athens (Vol. 160, pp. 152-158).

Fund, F.D.R., 2020. Monthly Report. Network, 9, pp.31-8.

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