Chapter 24 Application of Tax-effect Accounting to Consolidated Financial Statements

Lecture Topics Assessable Entities Calculation of group tax Tax-effect accounting and consolidation under AASB 1020 Tax-effect accounting and intercompany transfers

Lecture Topics Tax effects and consolidation concepts Tax loss transfers

Lecture References Text- Chapter 24 AASB- 1020

Key Concepts Accounting profit Taxable income Income tax expense Income tax payable Assessable entities Deferred tax assets Deferred tax liabilities

Assessable Entities Income tax levied on single companies Possible move to a group assessment basis – Losses offset – Consolidated accounts

Calculation of Group Tax Simple aggregation Tax-effect accounting – Group income tax expense – Consolidated pre-tax accounting profit – Consolidation difference amortisation – Dividends – Eliminations of unrealised profits – Group tax payable

Tax-effect Accounting and Consolidation Under AASB 1020 Tax effect of obtaining control – Impact of fair value adjustments on temporary differences Individual entities Consolidated entity Exceptions to the recognition of DTLs Exceptions to the recognition of DTAs

Tax-effect Accounting and Consolidation Under AASB 1020 Tax effect of obtaining control – DTLs and DTAs and the calculation of goodwill or discount Acquisition of another entity or operation AASB 1013 – Accounting for Goodwill AASB 1015 – Acquisition of Assets Included in determining consolidation difference

Tax-effect Accounting and Consolidation Under AASB 1020 Tax effect of obtaining control – Applying tax effect at control date – Set-off of DTAs and DTLs Generally prohibited Required when: –Legal right of set-off –Same entity –Different entity where net basis or simultaneous settlement

Tax-effect Accounting and Intercompany Transfers – Impact recognised through assessable/deductible temporary differences arising when the carrying amount in the individual statements of financial position differs from the carrying amount in the consolidated statement of financial position

Tax-effect Accounting and Intercompany Transfers of Inventory: Example Company sells an asset for $2000 Cost of asset $1500 Therefore – profit of $500 If sold within the group, profit would be eliminated therefore consolidated carrying amount of $1500 Tax base to new owner of $2000 Company sells an asset for $2000 Cost of asset $1500 Therefore – profit of $500 If sold within the group, profit would be eliminated therefore consolidated carrying amount of $1500 Tax base to new owner of $2000

Tax-effect Accounting and Intercompany Transfers of Inventory: Example Tax base now $500 greater than consolidated carrying amount -> $500 deductible temporary difference At tax rate of 30% -> DTA of $150 Tax base now $500 greater than consolidated carrying amount -> $500 deductible temporary difference At tax rate of 30% -> DTA of $150 DrDeferred tax asset150 CrDeferred tax revenue150

Tax effects of Inventory Transfers - Periodic DrSales880 CrPurchases880 Elimination of intercompany sale of goods DrCost of Sales (Closing inventory)180 CrInventory (asset)180 Elimination of unrealised profit on intercompany sale DrDeferred tax asset54 CrDeferred tax revenue54 30% (tax rate) of $180 DrSales880 CrPurchases880 Elimination of intercompany sale of goods DrCost of Sales (Closing inventory)180 CrInventory (asset)180 Elimination of unrealised profit on intercompany sale DrDeferred tax asset54 CrDeferred tax revenue54 30% (tax rate) of $180

Tax effects of Inventory Transfers - Perpetual DrSales880 CrCost of Sales880 Elimination of intercompany sale of goods DrCost of Sales 180 CrInventory 180 Elimination of unrealised profit on intercompany sale DrDeferred tax asset54 CrDeferred tax revenue54 30% (tax rate) of $180 DrSales880 CrCost of Sales880 Elimination of intercompany sale of goods DrCost of Sales 180 CrInventory 180 Elimination of unrealised profit on intercompany sale DrDeferred tax asset54 CrDeferred tax revenue54 30% (tax rate) of $180

Tax-effect of Unrealised Profit in Opening and Closing Inventory Dr Retained profits (SOP) xxx CrCost of Sales (SOP Inventory)xxx Elimination of unrealised profit in opening inventory DrDeferred tax asset xx CrRetained Profits (SOP) xx Recognition of DTA (consolidation carrying amount less than tax base) Dr Retained profits (SOP) xxx CrCost of Sales (SOP Inventory)xxx Elimination of unrealised profit in opening inventory DrDeferred tax asset xx CrRetained Profits (SOP) xx Recognition of DTA (consolidation carrying amount less than tax base)

Tax-effect of Unrealised Profit in Opening and Closing Inventory Dr Sales xxx CrPurchases xxx Elimination of intercompany sales of inventory DrCost of Sales (EOP inventory) xx CrInventory (statement of FP) xx Elimination of unrealised profit in carrying amount of inventory) Dr Sales xxx CrPurchases xxx Elimination of intercompany sales of inventory DrCost of Sales (EOP inventory) xx CrInventory (statement of FP) xx Elimination of unrealised profit in carrying amount of inventory)

Tax-effect of Unrealised Profit in Opening and Closing Inventory DrDeferred tax expense xx CrDeferred tax asset xx Decrease during reporting period of existing DTA due to reduced excess of tax base over consolidation carrying amount (less unrealised profit in inventory balance) DrDeferred tax expense xx CrDeferred tax asset xx Decrease during reporting period of existing DTA due to reduced excess of tax base over consolidation carrying amount (less unrealised profit in inventory balance)

Tax-effect Accounting and Intercompany Transactions Non Depreciable Assets – Reporting period in which sale takes place DrRevenue – gain on sale of assetx CrNon-current assetx DrDeferred tax assetx CrDeferred tax revenuex DrRevenue – gain on sale of assetx CrNon-current assetx DrDeferred tax assetx CrDeferred tax revenuex

Tax-effect Accounting and Intercompany Transactions Non Depreciable Assets – Reporting period in which sale takes place DrNon-current assetx CrExpense – loss on sale of assetx DrDeferred tax expensex CrDeferred tax liabilityx DrNon-current assetx CrExpense – loss on sale of assetx DrDeferred tax expensex CrDeferred tax liabilityx

Tax-effect Accounting and Intercompany Transactions Non Depreciable Assets – Reporting period in which sale takes place DrNon-current assetx CrExpense – loss on sale of assetx DrDeferred tax expensex CrDeferred tax liabilityx DrNon-current assetx CrExpense – loss on sale of assetx DrDeferred tax expensex CrDeferred tax liabilityx

Tax-effect Accounting and Intercompany Transactions Non Depreciable Assets – Reporting period in which sale takes place Transfer reflects fair value Transfer does not reflect fair value

Tax-effect Accounting and Intercompany Transactions Non Depreciable Assets – Subsequent reporting periods: profit on sale DrRetained profits (SOP)x CrNon-current assetx DrDeferred tax assetx CrRetained profits (SOP)x DrRetained profits (SOP)x CrNon-current assetx DrDeferred tax assetx CrRetained profits (SOP)x

Tax-effect Accounting and Intercompany Transactions Non Depreciable Assets – Subsequent reporting periods: loss on sale Dr Non-current asset x CrRetained profits (SOP)x Dr Retained profits (SOP) x Cr Deferred tax liabilityx Dr Non-current asset x CrRetained profits (SOP)x Dr Retained profits (SOP) x Cr Deferred tax liabilityx

Tax-effect Accounting and Intercompany Transactions Depreciable Assets – Reporting period in which sale takes place DrAccumulated depreciationx CrDepreciation expense x DrDeferred tax expensex CrDeferred tax liabilityx DrAccumulated depreciationx CrDepreciation expense x DrDeferred tax expensex CrDeferred tax liabilityx

Tax-effect Accounting and Intercompany Transactions Non Depreciable Assets – Subsequent reporting periods: gain on sale DrAccumulated depreciationx CrRetained profits (SOP) x Dr Retained profits (SOP) x Cr Deferred tax assetx DrAccumulated depreciationx CrRetained profits (SOP) x Dr Retained profits (SOP) x Cr Deferred tax assetx

Tax-effect Accounting and Intercompany Transactions Non Depreciable Assets – Subsequent reporting periods: gain on sale DrAccumulated depreciationx CrDepreciation expense x Dr Deferred tax expensex Cr Deferred tax assetx DrAccumulated depreciationx CrDepreciation expense x Dr Deferred tax expensex Cr Deferred tax assetx

Tax Effects and Consolidation Concepts Entity concept – Elimination of profit on intercompany transfers 100% Parent entity concept – Elimination 100% for upstream transfers only Proprietary concept – Notional OEI share of partly owned subsidiary not admitted as consolidation data

Tax Loss Transfers Not addressed by AASB 1020 Does not give rise to unrealised gains or losses No consolidation adjustments required OEI allocation not an issue

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