Training slides for audit staff in how to prepare and audit company tax calculations that comply with IAS 12 / AASB 112 Income Taxes

1. Audit Training - Tax Effect Accounting - June 2013
Tax Effect Accounting
(AASB 112 / IAS 12)
June 2013

2. This document contains information in summary form and is therefore intended
for general guidance only. It is not intended to be a substitute for detailed
research or the exercise of professional judgement. It does not purport to be
comprehensive or to render professional advice. The reader should not act on
the basis of any matter contained in this publication without first obtaining
specific professional advice.
We believe that the statements made by us in this document are accurate but no
warranty of accuracy or reliability is given. Our conclusions are based on
interpretations of accounting standards and other relevant professional
pronouncements and legislation current as at the date of this document. Should
the interpretations, accounting standards, other relevant professional
pronouncements or legislation change, our conclusions may not be valid. We are
under no obligation to update the matters considered in this document after its
publication.
© Hanrick Curran, June 2013
All rights reserved
Disclaimer
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3. Today’s presenters
– Matthew Green CA
– Hafsa Manjra CA
Contact details: matthew.green@hanrickcurran.com.au
0447 724 595
(07) 3218 3900
Twitter: @matthewjgreenca
LinkedIn: http://au.linkedin.com/in/matthewjgreenca
Web: www.hanrickcurran.com.au
Audit Training - Tax Effect Accounting - June 2013

4. About Hanrick Curran
Our client base is mainly located in South East Queensland, but also
extends to Northern New South Wales, Western Queensland, Sydney,
Melbourne, Darwin, Townsville and Mackay as well as other regional
areas.
Hanrick Curran are a member firm of the international Alliott Group,
which is a worldwide alliance of independent firms that combine to work
on engagements and who refer work where local knowledge is a
requirement.
Hanrick Curran’s Client Base
Audit Training - Tax Effect Accounting - June 2013

5. Objectives for today
• Refresher in GAAP requirements for accounting for income taxes.
• Look at the key concepts that underpin tax effect accounting
• Practical examples in calculating deferred taxes
• Some pointers on common mistakes
• An example to work through
Out of scope for this morning:
- intermediate concepts such as recognition and disclosure
- advanced concepts such as TOFA and tax consolidation impacts
Audit Training - Tax Effect Accounting - June 2013

6. General Concepts & Overview
 Forward looking – focus on future tax consequences
 Comprehensive disclosure of DTA & DTL balances and
movement schedules
 Common area for errors
Audit Training - Tax Effect Accounting - June 2013

7. Key Pronouncements
 AASB 112/IAS 12 Income Taxes
 Interpretation 121 Income Taxes – Recovery of Revalued Non-Depreciable
Assets
 Interpretation 125 Income Taxes – Changes in the Tax Status of an Entity
or its Shareholders
 Interpretation 1003 Australian Petroleum Resource Rent Tax
 Interpretation 1039 Substantive Enactment of Major Tax Bills in Australia
 Interpretation 1052 Tax Consolidation Accounting
Audit Training - Tax Effect Accounting - June 2013

8. Concept Check:
Are the following covered by the standard?
- Income Taxes
- Capital Gains
- R & D Tax Allowances
- Stamp Duty
- Petroleum Resource Rent Tax
- Fringe Benefits Tax
- Goods & Services Tax
Audit Training - Tax Effect Accounting - June 2013

9. Concept Check:
Are the following covered by the standard?
- Income Taxes
- Capital Gains
- R & D Tax Allowances
- Stamp Duty
- Petroleum Resource Rent Tax
- Fringe Benefits Tax
- Goods & Services Tax
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Audit Training - Tax Effect Accounting - June 2013

10. Key Definitions
At Paragraph 5 of AASB 112
 Taxable Profit - profit for a period determined in accordance
with the rules established by the taxation authority upon
which income taxes are payable
 Tax base - is the amount attributable to an asset or liability
for tax purposes
 Current Tax - is the amount of income taxes payable in
respect of the taxable profit for a period
 Tax Expense - comprises current tax expense and deferred
tax expense
Audit Training - Tax Effect Accounting - June 2013

11. A great comment from AASB 112
“Where the tax base of an asset or liability is not immediately
apparent, it is helpful to consider the fundamental principle upon
which this Standard is based: that an entity shall, with certain
limited exceptions, recognise a deferred tax liability (asset)
whenever recovery or settlement of the carrying amount of
an asset or liability would make future tax payments larger
(smaller) than they would be if such recovery or settlement
were to have no tax consequences. Example C following
paragraph 51A illustrates circumstances when it may be helpful to
consider this fundamental principle, for example, when the tax base
of an asset or liability depends on the expected manner of recovery
or settlement.”
(source: AASB 112.10)
(see also AASB 112.17/26)
Audit Training - Tax Effect Accounting - June 2013

12. Lets do an example . . .
Audit Training - Tax Effect Accounting - June
2013

13. Tax Process: Information Required
 PY tax calculation
 PY tax return
 Integrated client account
 Quarterly BAS forms
 GL listings for tax accounts
Audit Training - Tax Effect Accounting - June 2013

14. Tax Process: Auditing
 Apply professional scepticism!
 Use experts!
Process to audit tax:
1) Check details – tie to underlying records
2) Check spreadsheets & underlying logic – including formulae
3) Check proofs of balances
4) Check disclosures – does it all make sense?
5) Document your work!
Audit Training - Tax Effect Accounting - June 2013

15. Tax Process: Preparing
The process of preparing a tax calculation follows:
1) Complete the accounting profit & loss
2) Prepare a statement of taxable income (STI) showing
assessable and deductible items
3) Calculate deferred taxes
4) Prepare proofs of deferred tax balances
5) Prepare journal entry
6) Complete the documentation and filing
Audit Training - Tax Effect Accounting - June 2013

16. Prior Period Tax
 Generally needed to reconcile the tax payable account
 Generally treated as an estimate
 Genuine errors retrospectively adjusted as required by AASB
108
 Follows from a process of comparing tax returns and tax
estimates and usually results in adjustment to current and
deferred taxes
Audit Training - Tax Effect Accounting - June 2013

17. Current Tax
Step 1 Calculate current tax liability owing to tax authority
(ATO)
Step 2 Recognise in the manner of the underlying item
i.e. Profit or loss
Other comprehensive income
Directly in equity
Business Combination
Audit Training - Tax Effect Accounting - June 2013

18. Deferred Taxes
1) Determine Accounting balances
2) Determine Tax bases
3) Calculate temporary differences that arise
4) Assess recognition requirements and exemptions
5) Calculate the proofs of closing balances
Audit Training - Tax Effect Accounting - June 2013

19. Deferred Taxes
Shortcut rules for tax bases
1) Where recovery or settlement will have no tax consequences
the tax base will equal the carrying amount (i.e. no deferred
tax)
2) Where recovery of an asset will give rise to taxable profit but
there are no deductions available the tax base will be nil (i.e.
revalued assets)
3) Where liability is only deductible for tax when paid, the tax
base will be nil (i.e. employee benefits)
4) Tax bases for assets, usually their CGT cost base
Audit Training - Tax Effect Accounting - June 2013

20. Lets do some exercises,
and then,
Lets continue the example,
using CaseWare’s in-build tax effect accounting
workpaper . . .
Audit Training - Tax Effect Accounting - June
2013

21. European enforcement decisions
 Enforcement decisions from European Securities and Markets
Authority (“ESMA”) provide evidence of global interpretation
of contention matters.
 EECS/0111-06 determined that taxes are an estimate and
subject to change that is not normally considered a prior year
error.
 Decisions set out below address taxes and IAS 12:
• EECS/1208-10 – deferred tax asset recognition
• EECS/1207-04 – deferred tax asset recognition
• EECS/0111-06 – income tax expense disclosure
Audit Training - Tax Effect Accounting - June 2013

22. Is a deferred tax asset an intangible
Considered by the Full Bench of the Federal Court.
Some comments from the judgement follow . . .
Audit Training - Tax Effect Accounting - June 2013

23. ASIC v AAT [2011] FCAFC 114 (31 August 2011)
 Judgment in ASIC‟s appeal against the decision of the AAT in
the matter between ASIC and Opus Capital Limited.
 Stone, Jacobson & Collier JJ provided a detailed judgment
that addressed the matter of what type of asset is a deferred
tax asset (“DTA”).
 Judgment held that the decision to recognise the DTA was
determined as a matter of fact – recognition turned on
whether there was an expectation that future profits were
sufficiently probable to warrant recognition (at [85]).
Audit Training - Tax Effect Accounting - June 2013

24. ASIC v AAT [2011] FCAFC 114 (31 August 2011)
 Judgment held that the determination of the nature of a DTA
is a matter of law.
 Concluded at [161] that a DTA is an intangible asset and a
„non-monetary asset‟.
 Lengthy assessment of the meaning of „received‟ in AASB 138
concluded at [165] and [167] that a DTA is not an asset to be
received, rather it is an economic benefit which may be
realised at a future point in time, the value of which is
dependent upon the accuracy of the opinion as to future
profits and is of no different character than the value of other
intangible assets.
Audit Training - Tax Effect Accounting - June 2013

25. ASIC v AAT [2011] FCAFC 114 (31 August 2011)
 Judgment for ASIC and ordered that the matter be returned
to the AAT for further consideration regarding other matters
relevant to the case.
 Determined at [161] that the DTA was an excluded asset for
the purpose of assessing compliance with an AFSL (Australian
Financial Services Licence) and was to be deducted from the
value of total assets in calculating the value of its Net
Tangible Assets (“NTA”).
Audit Training - Tax Effect Accounting - June 2013

26. Audit Training - Tax Effect Accounting - June 2013
Thank you
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