tax - CA Sri Lanka

Report
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI
LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE 2013/201
PRINCIPLES OF FINANCIAL AND COST
ACCOUNTING
Nadeeshani Dissanayake
B.Sc. Accounting (Sp), First Class, ACA, ACMA,
CPA (Aust)
EVENTS AFTER THE REPORTING PERIOD
LKAS 10
Events after the end of the reporting period are
those events, favourable and unfavourable,
that occur between the end of the reporting
period and the date when the financial
statements are authorised for issue.
TYPES OF EVENTS
Two types of events after the end of the reporting
period
 adjusting events―those that provide
evidence of conditions that existed at the
end of the reporting period
 non-adjusting events―those that are
indicative of conditions that arose after the
end of the reporting period
Adjusting events—adjust the amounts
recognised (and update disclosures made) in
its financial statements
 Non-adjusting events—do not adjust the
amounts recognised in its financial statements.
However, disclose:
the nature of the event, and
an estimate of its financial effect, or a
statement that estimate cannot be made


Ex 1: On 31/12/20X5 A assessed its warranty
obligation as Rs. 100,000. Before its 20X5
financial statements were authorised for issue,
A discovered a latent defect in one of its lines
of products. It reassessed its warranty
obligation at 31/12/20X5 at Rs. 150,000.
Adjusting event―latent defect existed at
31/12/20X5. Measure warranty provision at
Rs. 150,000 at 31/12/20X5.
Ex 2*: On 28/2/20X1 A’s 31/12/20X0 FS
authorised for issue. At 31/12/20X0 the fair
value of A’s investment in B’s publicly traded
shares = Rs. 20,000.
On 28/2/20X1 fair value of shares = Rs. 25,000.
Non-adjusting event―the change in the fair value
results from conditions that arose after 20X0.
A does not adjust the amounts recognised in its
financial statements. However, it must give
additional disclosure

INCOME TAX AND DEFERRED TAX
Some exceptions to this
Taxable income (TI) – tax
deductions (TD) =
Taxable profit
Accounting Standards and
the Companies Act are
key sources that
determine the appropriate
accounting treatment of
transactions
The Income Tax Act
determines the tax treatment of
transactions
Accounting profit does not equal taxable
profit
• Difference caused by different “rules” used
for accounting vs tax purposes
•
ITEM
ACCOUNTING
TAX
Passive revenue
received in
advance
Recorded as liability .
Recognised as TI
Recognised as revenue when cash received
when earned.
Depreciation
(accelerated for
acctg)
Recognised as expense
based on useful life of
asset
Bad/doubtful debts
Allowance raised and
expense recorded when
debt considered doubtful
Recognised as TD
based on predetermined
rates
Possible for accounting useful life to be shorter than tax useful life
Employee benefits
– eg annual leave
Liability raised and
expense recorded when
debt owing to employee
Recognised as a TD
when debt physically
written off
Recognised as TD when
payment made to
employee
Accounting for income taxes –
general principles

The tax consequences of transactions that occur for
accounting purposes during a period should be recognised
as income or expense during the current period, regardless
of when the tax effects will occur

This requires identifying the current and future tax
consequences of items recognised in the balance sheet

Two separate calculations are performed each year:
1.
2.
current tax liability
movements in deferred tax balances
CALCULATION OF CURRENT TAX LIABILITY
Accounting profit/(loss)
- acctg revenue not assessable for tax
+ acctg expenses not deductible for tax
+/(-) differences between acctg revenue and TI
+/(-) differences between acctg expenses and TDs
= Taxable profit
x tax rate %
= Current tax liability (CTL)
CALCULATION OF CURRENT TAX LIABILITY EXAMPLE
All amounts are in Rs.
millions
•
•
•
•
•
•
Rs. 60 allowed as a tax
deduction for plant.
Interest has not yet been
received.
Bad debts of Rs. 20 were
written off during the year.
Payments of Rs. 30 were
made to employees in relation
to annual leave taken during
the year.
The tax rate is 30%
Required:
Calculate the current tax
liability of ABC Ltd for 2012
CALCULATION OF CURRENT TAX - EXAMPLE
Accounting profit before tax 300
Government grant
(80)
Goodwill impairment exempt income
20
Interest not yet receivednot deductible (40)
Adjustment for plant depreciation (10)
Adjustment for bad debt write-offs 10
Adjustment for annual leave paid
(20)
Taxable profit
180
Current tax liability (CTL) (30%)
54
Acctg depn 50
Tax depn
(60)
Adj req
(10)
B/debts expense-acctg 30
B/debts w/off- tax
(20)
Adj req
10
A/L expense- acctg 10
Paid- tax
(30)
Adj req
(20)
In the previous example the CTL would be
recorded as:
Dr Income tax expense (current)
Cr Current tax liability
54
54
DEFERRED TAX LIABILITIES AND ASSETS

Arise when the period in which revenue and expenses are
recognised for accounting is different from the period in
which items are recognised for tax

Arise principally due to the accruals vs cash basis of
recognising transactions. Differences either result in:
1.
The company paying more tax in the future
 Taxable temporary differences (TTDs)
 Result in deferred tax liabilities (DTLs)
2.
The company paying less tax in the future
 Deductible temporary differences (DTDs)
 Result in deferred tax assets (DTAs)
CALCULATION OF DEFERRED TAX
 The existence of temporary differences results in the
carrying amounts of an entity’s assets and liabilities
being different from the amounts that would arise if a
balance sheet was prepared for tax authorities
 Carrying amount (CA)- asset and liability balances (net
of accumulated depreciation, allowances etc) based on
accounting balance sheet.
 Tax base (TB)- asset and liability balances that would
appear in a “tax balance sheet”.
 Temporary differences are calculated as follows:
CA – TB = TTD/(DTD)
CALCULATING THE TAX BASE
Calculating the tax base for an asset
CA
– future taxable amounts
+ future deductible amounts
= TB
Calculating the tax base for a liability
CA
+ future taxable amounts
- future deductible amounts
= TB
BORROWING COST
LKAS 23
Borrowing costs are interest and other costs
that an entity incurs in connection with a
borrowing of funds.
 Qualifying asset is an asset that necessarily
takes a substantial period of time to get ready
for its intended use or sale.

CAPITALISING BORROWING COSTS

An entity shall capitalize borrowing costs that
are directly attributable to the acquisition,
construction or production of a qualifying asset
as part of the cost of that asset. An entity shall
recognize other borrowing cost as an expense
in the period in which it incurs them.
LEASES
LKAS 17
A lease is an agreement whereby the lessor
conveys to the lessee in return for a payment or
a series of payments the right to use an asset
for an agreed period of time.
 A finance lease is a lease that transfers
substantially all the risk and rewards incidental
to ownership of an asset. Title may or may not
eventually be transferred.


An operating lease is a lease other than a
finance lease.
finance lease – become an asset
 operating lease – rent will be charged to P/L as
an expense


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