Discuss about the Reporting Obligations Model Liabilities and Contingent.
The first issue pertaining to accounting of temporary differences and DTA and DTL is detailed as follows:
Pewter Limited is a company incorporated under Corporations Act, 2001. For a company, the financial report for a financial year must comply with the accounting standards as issued by the Accounting Standards Board as given under Section 296. Further, AASB Standard 112 on Income Taxes has been issued for prescribing accounting treatment for income taxes which includes the current tax and deferred tax. (Cpaaustralia,2017) The tax income and the accounting income is not the same. It is due to the fact that accounting income is based on accrual system of accounting whereas tax income is independent of accounting income and is based on the enactment of tax laws in force.
The requirement of accounting for future tax consequences is required under Corporations Act and the relevant accounting standards. It has whatsoever no relation with the tax authority as the tax authorities depends on the return of income filed and not on the financial statements prepared.
A company is collectively owned by shareholders who are the real owners of the company. They appoint the Management/Board to look after the day to day affairs of the company. One such affair includes preparation and presentation of financial statements which gives a true and view. Such is the requirement under Corporations Act. In such a scenario, where a true a fair presentation required is not met, it shall have an adverse impact on the users of the financial statements.
A deferred tax asset is recognized if there is future economic inflows to the company against which the deductible temporarily differences can be adjusted. Also, carry forward losses be adjusted against such future inflows. (Legalthomsonreuters.au. 2017)
A deferred tax liability is recognized when the amount under tax base is allowed under Income Tax higher than the books value. Such difference is temporary in nature and will reverse subsequently resulting in paying higher taxes in future.( AASB, 2017)
The whole idea of deferred tax asset and deferred tax liability is based on the fundamental accounting concepts. Matching Concept is one among them.
The accounting standards prescribed should be followed by the company irrespective of the man hours or dollars spent. This may save the company from any other huge civil penalties and prosecution in future due to contravention of the provisions of Corporations Act, 2001. Further, an action may be taken against the Certified Public Accountant attesting the financial statements as the same may be concluded as misconduct under the statutory body established.
Just by accounting the current liability and not the deferred tax liability might invite problems like non compliance of the laws/provisions of the Act thereby challenging the reputation of the company. The crux of the accounting standard is to account for the disparity between the accounting profit and taxation profit so as the same shall present a fair and better view.
Another aspect is that it would not be uniform throughout with the other companies dealing in same industry and hence shall not be comparable to assess the performance.
The issue pertaining to accounting of warranty expense is detailed as follows:
Pewter Limited is a company incorporated under Corporations Act, 2001. For a company, the financial report for a financial year must comply with the accounting standards as issued by the Accounting Standards Board as given under Section 296. Further, AASB Standard 137 on Provisions, Contingent Liabilities and Contingent Assets has been issued for prescribing accounting treatment for recognition and measurement of the same (AASB. 2015).Warranty Expense before actually incurring is in the nature of provision. A provision is one wherein a liability is expected in short period of time but can only be estimated.
In a business run organisation, the revenues are already matched up with expenses to arrive at the profits earned by the company. This is called as matching concept. However, in some businesses, the industry practice is to replace/repair the product sold against the warranty time period which may be a day, a month, or a year or years together. In such cases, it is really impossible to say when the claim for warranty would arise. It all depends on the customer’s usage and how he/she handles the product. In such cases, the best alternative would be to estimate the warranty expense based on the past experiences and then create a provision for such warranty expense in the year the product is sold.
The requirement of accounting for provisions is required under Corporations Act and the relevant accounting standards.
A company is collectively owned by shareholders who are the real owners of the company. They appoint the Management/Board to look after the day to day affairs of the company. One such affair includes preparation and presentation of financial statements which gives a true and view. Such is the requirement under Corporations Act. In such a scenario, where a true a fair presentation required is not met, it shall have an adverse impact on the users of the financial statements.
The whole idea of creating provisions is to charge the expense, be it on an estimate basis to match with the revenue for the period.
The accounting standards prescribed should be followed by the company irrespective of the variances noted in the warranty provision created vis a vis the actual warranty incurred. This may save the company from any other huge civil penalties and prosecution in future due to contravention of the provisions of Corporations Act, 2001. Further, an action may be taken against the Certified Public Accountant attesting the financial statements as the same may be concluded as misconduct under the statutory body established.
Just by not accounting the provision on actual incurring basis, the company might invite problems like non compliance of the laws/provisions of the Act thereby challenging the reputation of the company. The crux of the accounting standard is to account for the matching of revenue and expense so that the profit over the years shall be in the same pattern.
Another aspect is that it would not be uniform throughout with the other companies dealing in same industry and hence shall not be comparable to assess the performance.
Recognition of Goodwill, Unregistered Patents and Shares:
The issue pertaining to each of the following is detailed as below:
Pewter Limited is a company incorporated under Corporations Act, 2001. For a company, the financial report for a financial year must comply with the accounting standards as issued by the Accounting Standards Board as given under Section 296. Further, AASB Standard 138 on Intangible Assets has been issued for prescribing accounting treatment for recognition and measurement of the same.
It is pertinent to note that as per AASB 3 only purchased goodwill can be recognized as an intangible asset in the books of accounts (AASB, 2015).Recognition of Goodwill generated internally is not allowed as per AASB 138. Para 48 to 50 of AASB 138 deals with the internally generated goodwill which states such goodwill generated internally shall not be recognized. (AASB, 2015)
Recognition and Measurement of unrecorded patent in books of accounts: It has been assumed that the expenditure incurred for the patents at the initial phase was recorded as expense in the statement of profit and loss account. On basis of such assumption, we proceed and as given in Para 71 of the AASB 138, any expenditure that was incurred on an intangible item previously charged to statement of profit and loss shall not be recognized as an intangible asset. (Deloitte,2015). Goodwill though measurable in the current case cannot be recognized in financial statements and books of accounts.
On sale of division, the shareholders of Pewter Company shall receive shares in the Canadian Company. This receipt of shares is in the nature of consideration for sale of the division. It is received by the shareholders in lieu of foregoing their right in Pewter company. Such shareholders will now become the shareholders of the Canadian company.
Disclosure of the shares received: Such shares would be shown as Investment in the books of accounts of Pewter Company.
The disclosure requirement of the relevant accounting standards has been referred to and the requirement of various accounting standards as required under Corporations Act has been applied on case to case basis.
A company is collectively owned by shareholders who are the real owners of the company. They appoint the Management/Board to look after the day to day affairs of the company. One such affair includes preparation and presentation of financial statements which gives a true and view. Such is the requirement under Corporations Act. In such a scenario, where a true a fair presentation required is not met, it shall have an adverse impact on the users of the financial statements.
The accounting standards prescribed should be followed by the company. This may save the company from any other huge civil penalties and prosecution in future due to contravention of the provisions of Corporations Act, 2001. Further, an action may be taken against the Certified Public Accountant attesting the financial statements as the same may be concluded as misconduct under the statutory body established.
Another aspect is that it would not be uniform throughout with the other companies dealing in same industry and hence shall not be comparable to assess the performance.
References:
Cpaaustralia.(2017). IAS 12 Income Tax , Fact Sheet .Available at: https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/ifrs-factsheets/factsheet-ias12-income-taxes.pdf?la=en. (Accessed 19 Jan. 2017).
Deloitte.com.(2015). Reporting Obligations Model. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf (Accessed 19 Jan. 2017)
AASB. (2015). Accounting for Provisions, Contingent Liabilities and Contingent Assets. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB137_08-15.pdf (Accessed 19 Jan. 2017)
AASB, (2017). Accounting for Income Taxes.Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB112_08-15.pdf .(Accessed 19 Jan. 2017)
AASB,(2015). Business Combinations. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf (Accessed 19 Jan. 2017)
AASB, (2015). Intangibles.Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf (Accessed 19 Jan. 2017)
Legalthomsonreuters.au. (2017). Guidance Note.,Available at: https://legal.thomsonreuters.com.au/media/guides/cpd/teat_ug.pdf (Accessed 19 Jan. 2017)
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