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Hanrick Curran Audit Training - Tax Effect Accounting - June 2012

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

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

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  • 1. Audit Training - Tax Effect Accounting - June 2013Tax Effect Accounting(AASB 112 / IAS 12)June 2013
  • 2. This document contains information in summary form and is therefore intendedfor general guidance only. It is not intended to be a substitute for detailedresearch or the exercise of professional judgement. It does not purport to becomprehensive or to render professional advice. The reader should not act onthe basis of any matter contained in this publication without first obtainingspecific professional advice.We believe that the statements made by us in this document are accurate but nowarranty of accuracy or reliability is given. Our conclusions are based oninterpretations of accounting standards and other relevant professionalpronouncements and legislation current as at the date of this document. Shouldthe interpretations, accounting standards, other relevant professionalpronouncements or legislation change, our conclusions may not be valid. We areunder no obligation to update the matters considered in this document after itspublication.© Hanrick Curran, June 2013All rights reservedDisclaimerLiability limited by a scheme approved underprofessional Standards Legislation
  • 3. Today’s presenters– Matthew Green CA– Hafsa Manjra CAContact details: matthew.green@hanrickcurran.com.au0447 724 595(07) 3218 3900Twitter: @matthewjgreencaLinkedIn: http://au.linkedin.com/in/matthewjgreencaWeb: www.hanrickcurran.com.auAudit Training - Tax Effect Accounting - June 2013
  • 4. About Hanrick CurranOur client base is mainly located in South East Queensland, but alsoextends to Northern New South Wales, Western Queensland, Sydney,Melbourne, Darwin, Townsville and Mackay as well as other regionalareas.Hanrick Curran are a member firm of the international Alliott Group,which is a worldwide alliance of independent firms that combine to workon engagements and who refer work where local knowledge is arequirement.Hanrick Curran’s Client BaseAudit 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 throughOut of scope for this morning:- intermediate concepts such as recognition and disclosure- advanced concepts such as TOFA and tax consolidation impactsAudit Training - Tax Effect Accounting - June 2013
  • 6. General Concepts & Overview Forward looking – focus on future tax consequences Comprehensive disclosure of DTA & DTL balances andmovement schedules Common area for errorsAudit Training - Tax Effect Accounting - June 2013
  • 7. Key Pronouncements AASB 112/IAS 12 Income Taxes Interpretation 121 Income Taxes – Recovery of Revalued Non-DepreciableAssets Interpretation 125 Income Taxes – Changes in the Tax Status of an Entityor its Shareholders Interpretation 1003 Australian Petroleum Resource Rent Tax Interpretation 1039 Substantive Enactment of Major Tax Bills in Australia Interpretation 1052 Tax Consolidation AccountingAudit 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 TaxAudit 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Audit Training - Tax Effect Accounting - June 2013
  • 10. Key DefinitionsAt Paragraph 5 of AASB 112 Taxable Profit - profit for a period determined in accordancewith the rules established by the taxation authority uponwhich income taxes are payable Tax base - is the amount attributable to an asset or liabilityfor tax purposes Current Tax - is the amount of income taxes payable inrespect of the taxable profit for a period Tax Expense - comprises current tax expense and deferredtax expenseAudit Training - Tax Effect Accounting - June 2013
  • 11. A great comment from AASB 112“Where the tax base of an asset or liability is not immediatelyapparent, it is helpful to consider the fundamental principle uponwhich this Standard is based: that an entity shall, with certainlimited exceptions, recognise a deferred tax liability (asset)whenever recovery or settlement of the carrying amount ofan asset or liability would make future tax payments larger(smaller) than they would be if such recovery or settlementwere to have no tax consequences. Example C followingparagraph 51A illustrates circumstances when it may be helpful toconsider this fundamental principle, for example, when the tax baseof an asset or liability depends on the expected manner of recoveryor 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 - June2013
  • 13. Tax Process: Information Required PY tax calculation PY tax return Integrated client account Quarterly BAS forms GL listings for tax accountsAudit 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 records2) Check spreadsheets & underlying logic – including formulae3) Check proofs of balances4) Check disclosures – does it all make sense?5) Document your work!Audit Training - Tax Effect Accounting - June 2013
  • 15. Tax Process: PreparingThe process of preparing a tax calculation follows:1) Complete the accounting profit & loss2) Prepare a statement of taxable income (STI) showingassessable and deductible items3) Calculate deferred taxes4) Prepare proofs of deferred tax balances5) Prepare journal entry6) Complete the documentation and filingAudit 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 AASB108 Follows from a process of comparing tax returns and taxestimates and usually results in adjustment to current anddeferred taxesAudit Training - Tax Effect Accounting - June 2013
  • 17. Current TaxStep 1 Calculate current tax liability owing to tax authority(ATO)Step 2 Recognise in the manner of the underlying itemi.e. Profit or lossOther comprehensive incomeDirectly in equityBusiness CombinationAudit Training - Tax Effect Accounting - June 2013
  • 18. Deferred Taxes1) Determine Accounting balances2) Determine Tax bases3) Calculate temporary differences that arise4) Assess recognition requirements and exemptions5) Calculate the proofs of closing balancesAudit Training - Tax Effect Accounting - June 2013
  • 19. Deferred TaxesShortcut rules for tax bases1) Where recovery or settlement will have no tax consequencesthe tax base will equal the carrying amount (i.e. no deferredtax)2) Where recovery of an asset will give rise to taxable profit butthere 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 taxbase will be nil (i.e. employee benefits)4) Tax bases for assets, usually their CGT cost baseAudit Training - Tax Effect Accounting - June 2013
  • 20. Lets do some exercises,and then,Lets continue the example,using CaseWare’s in-build tax effect accountingworkpaper . . .Audit Training - Tax Effect Accounting - June2013
  • 21. European enforcement decisions Enforcement decisions from European Securities and MarketsAuthority (“ESMA”) provide evidence of global interpretationof contention matters. EECS/0111-06 determined that taxes are an estimate andsubject to change that is not normally considered a prior yearerror. 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 disclosureAudit Training - Tax Effect Accounting - June 2013
  • 22. Is a deferred tax asset an intangibleConsidered 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 inthe matter between ASIC and Opus Capital Limited. Stone, Jacobson & Collier JJ provided a detailed judgmentthat addressed the matter of what type of asset is a deferredtax asset (“DTA”). Judgment held that the decision to recognise the DTA wasdetermined as a matter of fact – recognition turned onwhether there was an expectation that future profits weresufficiently 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 DTAis 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 138concluded at [165] and [167] that a DTA is not an asset to bereceived, rather it is an economic benefit which may berealised at a future point in time, the value of which isdependent upon the accuracy of the opinion as to futureprofits and is of no different character than the value of otherintangible 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 returnedto the AAT for further consideration regarding other mattersrelevant to the case. Determined at [161] that the DTA was an excluded asset forthe purpose of assessing compliance with an AFSL (AustralianFinancial Services Licence) and was to be deducted from thevalue of total assets in calculating the value of its NetTangible Assets (“NTA”).Audit Training - Tax Effect Accounting - June 2013
  • 26. Audit Training - Tax Effect Accounting - June 2013Thank youwww.hanrickcurran.com.auHanrick Currant. (07) 3218 3900f. (07) 3218 3901Level 11307 Queen StreetBrisbane Qld 4000GPO Box 2268Brisbane Qld 4001

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