Assessment Details and Submission Guidelines
MA511 Financial Accounting & Reporting
|Course Name||Master of Professional Accounting (MPA)|
|Unit Title||Financial Accounting & Reporting|
|Assessment Title||Assessment Task 3 – Individual|
|Unit Learning Outcomes Addressed:|
a.Describe and discuss the function and role of high quality financial accounting in the contemporary business environment.
b.Describe and discuss the application and basis of selected IFRSs set by the IASB.
c.Apply IFRSs including the framework in the preparation of general purpose financial statements.
d.Apply financial analytical skills to evaluate, explain and solve financial accounting problems relating to general purpose financial statements.
f.Compare, contrast and review financial accounting systems to ensure efficient and reliable financial accounting information.
g.Evaluate and appraise stock exchange listed entity’s financial statements.
h.Develop and communicate solutions to ethical issues orally and in writing.
Assessment Task Description
Green Wine Ltd (GWL) is a reporting entity, that is required to prepare General Purpose Financial Statements (GPFS), engaged in wine production in large scale. Green wine ltd is a profitable company and had been paying company tax. The company has recorded a $12 million accounting loss in the current period as a result of bush fire. The management of Green Wine Ltd are debating whether it can raise a deferred tax asset in relation to this loss in the financial statements for the current period.
Prepare a report to managing director of GWL discussing whether the tax loss in the current year be recognised as a deferred tax asset in accordance with AASB 112 accounting for company income taxes, incorporating the followings (1 to 6).
You are required to review one of the ASX listed companies’ annual report’s financial statements and notes to provide examples as to how they recognise deferred tax assets, when writing this report.
In your report:
This assignment must be written/structured in the form of a ‘business report’. That is, it must have a/an;
(a) Executive summary (between 100 to 150 words),
(b) Introduction that;
Succinctly summarizes this assignment’s topic and its key issues, controversies, etc. (no more than 200 words), and
(c) Body that addresses all the requirements – see above 1-6 (no more 1500 words),
(d) Conclusion that sums up the mains issues of this assignment (no more than 200 words), and
(e) Reference list containing all cited works.
(f) Proper English Grammar, appearance, format, etc.
At least 2 recognized journal article should be cited.
1. Tax effect accounting in accordance with AASB 112
The AASB 112 is in relation to the accounting for the income taxes and it deals with the accounting of current and future tax outcomes which arises from the settling or the future recovery of amount which are carried by the assets, transactions or events that raise in the current period and are recorded in the financials of the entity (Morris, 2017). The standard enforces the entities to report the effect of transaction or event in the same manner as it record or recognize the event in the P&L. in case the event are recorded outside P&L the tax impact would also be recorded outside the P&L. in addition to this, the standard recognize the deferred tax asset and liabilities arising from the tax credits or losses (Morris, 2017).
Therefore, in the present case as mentioned in the case study, the loss that has arisen from the bush fire is required to be recognized by the company in similar way it is recognized in the P& L account. The loss will result in the decreasing of revenue for the company (Utari, & Widiastuti, 2016).
2. Recognition of deferred tax assets and deferred tax liabilities
As per the standard the taxable temporary difference shall be recognized under the deferred tax liability. The events which are in relation to the investment in branches, subsidiaries, joint ventures are all recognized in the taxable temporary difference whereas the transaction arising from the initial goodwill recognition, asset and liability not being business combination are not recognizable under the deferred tax liability (Bauman, & Bowler, 2018).
The deductible temporary difference to the extent of taxable gains shall be recognizable under the deferred tax asset. The difference arising in association with the investment of branches, subsidiaries and joint agreements interest shall all be recognized under the deductible temporary difference. However, the DTA arising from the initial recognition of assets or liability which is not business combination shall not be recognizable (Widiatmoko, & Mayangsari, 2016).
The major difference in relation to the recognition of DTA and DTL is in regard to the goodwill recognition. The initial recognition of goodwill is done in case of deferred tax asset and is not taken into account in case of deferred tax liability.
3. Tax loss
The tax loss can be defined as the loss arising from the period where the amount of income tax becomes recoverable and it is determined by the taxation authorities in accordance with the prevailing rules. The tax loss is determined from the temporary difference which is calculated when the amount carries by the asset and liabilities is settled or recovered. The tax losses are recognizable under the deferred tax asset that has some of the unused tax loss. The loss arising from the income tax is adjusted with the taxable profit and it can be further used in the later years for the settlements i.e. can be carried for the future under the head DTA (Edwards, 2018).
4. Factors to be considered when deferred tax assets relating to tax loss are to be recognized
There is a similarity in the recognition of deductible temporary difference and the DTA in context of the unused tax loss. There is an estimation as per the standard that if the unused tax losses recorded by the company is high than there are high chances that there may not be future taxable profit for the settling of the losses (Badenhorst, & Ferreira, 2016). Therefore, if the organization has an increasing graph of loss, the entity can recognize the tax loss or credit only up to the limit where taxable temporary difference is available for the settlement of tax loss or credit or there must be the evidence that there will be future taxable profits for the settlement of losses (Bauman, & Bowler, 2018).
5. Recognition disclosure of DTA, DTL and tax loss by selected entity
The ASX listed company whose financials have been studied for the recognition and disclosure policies in relation to the deferred tax assets, deferred tax liabilities and tax losses is Abacus property group. The company recognizes the deferred tax asset at the deductible temporary difference, carry forward of unused tax losses up to the extent taxable profit is available for the settlement of losses. It is not recognizable when the DTA is in relation to the deductible temporary difference which arises from the initial recognition of asset or liability not being a business combination and the deductible difference is in association with the investment in subsidiaries, associates and interest in joint arrangement. The amount is reviewed at the balance sheet data and is subtracted to the extent if there arises a probability there will be sufficient taxable profit for the settlement (Bauman, & Bowler, 2018).
The deferred tax liabilities are recognized at the taxable temporary difference except the DTL arising from the initial recognition of asset or liability that is not in business combination and when the taxable difference is in association with the investment in joint venture, associates and subsidiaries.
The company has disclosed the net deferred tax asset under the non-current asset head of the balance sheet and the deferred tax liabilities under the non-current liabilities head of the balance sheet. The notes to the financial statement present what comprises of the deferred tax assets and the deferred tax liability. The image below is a presentation of the notes to the financial statement of the company (Edwards, 2018).
6. Recommendation as to how income tax loss can provide future benefits
The tax losses are referred to as losses that are incurred in the current period by the company or have been carried forward by the company which can be settled from the taxable profits of the company. the taxable losses are a beneficial element for the settling or reducing of taxable profit that are recorded by the company in the current period r may record in the future. Nonetheless, it is mandatory to understand that if the company records a continuous loss and is carrying forward the unused tax loss than there is a high probability that there may not be taxable profit for the future as well and the loss shall not be allowed to be recorded then (Badenhorst, & Ferreira, 2016).