Should AASB 112 Be Scrapped - Literature review Example

Running Header: Should AASB 112be Scrapped Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: Introduction The aim of AASB 112 is to prescribe the accounting treatment in relation to income taxes. According to CPA Australia (2007, p. 1), the main issue in accounting for taxes is how to account for current and future tax. This is in relation to the future recovery amounts of assets that are reported in an entity’s financial statements. Moreover, the standard is concerned with tax treatment of transactions as well as other events that are recognized in a firm’s financial statement and relate to the current period. Therefore, AASB 112 plays an important role in assisting firms to account for the tax consequences related to their transactions. However, this standard has created numerous uncertainties and issues. This paper is going to assess whether to AASB 112 should be scrapped. Deferred Taxes According to the Board of Taxation (2012, p. 26), AASB 112 does not interact effectively with other accounting standards in relation to tax consolidation. This in turn provides an opportunity for divergence between the tax measurements of deferred tax as used in the accounting standards and those ones used in calculating tax cost. CPA Australia (2009, p.2) affirms that AASB 112 requires management to apply significant judgment in evaluating when and whether to write down a deferred tax. The judgment applied can cause the tax calculation to divert away from the expected and realistic liability. Therefore, AASB 112 offers companies considerable amount of autonomy in recognizing their deferred tax liabilities hence this can lead to differences in calculation of their tax liabilities. Uncertain Tax Positions Ling (2010, p. 2) states that AASB 112 can only be applied in future. This is due to the fact that the standard fails to adequately address uncertain tax positions. AASB 112 requires current tax liabilities relating to a company’s assets to be measured at the amount expected to be recovered or paid to tax authorities. The amount should be determined using tax laws and tax rates endorsed at the time the company prepared its balance sheet. However, this makes different firms to use diverse methods leading to divergence in tax accounting. According to the Institute of Chartered Accountants Australia (2012, p. 1) the use of diverge methods by firms while treating uncertain tax positions creates a risk in managing tax. Deloitte (2009, p. 5) affirms that the existing AASB 112 does not provide clear guidance regarding how to account for transfer pricing, tax losses, depreciation and tax consolidation outcomes. This has led to development of different accounting tax treatment in the country hence creating a risk on tax management. The use of AASB 112 has enabled Australian firms’ to use taxation methods that assist them to benefit from tax deductions thereby reducing their tax liability. AASB 112 requires companies to recognize deferred tax liabilities using the consolidation tax cost setting rules. Board of Taxation (2012, p. 27) notes that uncertainty arises because of the need to utilize tax cost setting rules in order to recognize deferred tax liabilities. The lack of appropriate procedures to be used in determining carrying values causes firms to experience challenges in treating their deferred tax liabilities. Uncertainty in Tax treatment According to Institute of Chartered Accountants Australia (2012, p. 2), the amount of deferred tax liability in relation to tax bases and carrying values to be taken into consideration in calculating tax cost is uncertain while using AASB 112. It is difficult for companies to determine the carrying amount that they can recover from their assets through use or by selling them. Moreover, AASB 112 does not provide clear methods that can be used by companies to determine their tax bases so as to calculate deferred tax liabilities. Furthermore, different accounts contain differing balances in regard to deferred tax liability hence this creates difficulties in ascertaining taxable income. Additionally, uncertainty exists in treating deferred tax liability that originates from assets that are not recognized under the consolidation method. Ling (2010, p. 1) emphasizes that AASB 112 does not direct entities on the means to recognize and disclose deferred tax liabilities that are associated with uncertain tax positions. AASB 112 does not provide explicit details that are required in order to ensure effective treatment of deferred tax liabilities hence this has made firms to diverge from the accounting standards. The lack of guidance from AASB 112 on how firms should treat uncertain deferred tax liabilities has led to development of separate opinion and this has made firms in Australia to struggle in while calculating their tax liabilities (Board of Taxation 2012, p. 26). Investment Recognition Exceptions According to Deloitte (2009, p. 13), although AASB 112 requires firms to disclose temporal differences that are associated with investment in associates, subsidiaries, joint ventures and branches, in reality this disclosures are not usually made. Firms may also disclose lower levels of income tax amounts thereby making the standard unreliable. This situation arises because Australian companies experience technical difficulties in accounting for tax where consolidated groups are involved. Ling (2010, p. 2) affirms that AASB 112 may require to be modified in order to make sure that firms disclose cost bases in regard to their investments. The cost and effort required so as to calculate consolidated group taxes mostly for subsidiaries is insignificant hence this makes the firms to avoid disclosing temporal differences in their subsidiaries. PWC (2011) affirms that Australian firms fail to disclose deferred taxes associated with their foreign earnings because the calculations involved are extremely complex. Additionally, the costs of performing such calculations offset the benefits. Furthermore, firms can use consolidated tax calculations in order to avoid recognizing and disclosing deferred tax. The objective of consolidation is to eliminate duplication of losses and gains. However, the use of AASB 112 makes firms to duplicate their gains and losses on liabilities and this makes the standard to be unable to meet its objectives (Board of Taxation 2012, p. 15). Ling (2010, p. 2) notes that under AASB 112, firms are required to assume sale of their assets at the reporting date in order to calculate deferred tax associated with their investments in foreign subsidiaries. To do this, Australian companies are compelled to perform notional tax consolidated outcomes so as to determine the amount of deferred tax to be recognized at each reporting date. Deloitte (2009, p. 13), affirms that accounting for tax in entities that operate within tax consolidated group is difficult and it requires detailed calculations that rely on several factors. Similarly, firms that have invested in the country experience challenges in recognizing their deferred tax in order to comply with AASB 112. Mismatch between Commercial and Tax Outcomes According to Board of Taxation (2012, p. 24), the use of AASB 112 can cause a mismatch of tax and commercial outcomes. This situation occurs when commercial benefits that may arise due to changes in value of liabilities are not taxed. Ling (2010, p. 24) states that the disparity between commercial and tax outcomes increases especially when a company has a deferred tax liability. Deferred tax liabilities can cause firms in the vendor consolidated group to be over taxed when they are sold. On the other hand, when deductible liability ends within the purchaser of a firm in consolidated group, under taxation can arise in relation to deferred tax liabilities. Deloitte (2009, p. 11) emphasizes that the mismatch that occurs due to deferred tax liabilities is not limited to deductible liabilities. This means that deferred tax liabilities are double counted under both exit and entry allocable cost. Double counting in the exit situation arises due to cost amounts being pushed towards the tax costs in regard to membership interests. On the other hand, the use of AASB 112 causes excessive amounts of allocable cost to be pushed onto the assets of the joining firm thereby leading to the entry situation. According to Deloitte (2009, p. 11), AASB 211 requires firms to adjust their entry allocable cost amounts in situations where the parent company accounting value of liabilities is different to that of the joining firm. However, this creates difficulties because deferred tax liabilities of the joining company are adjusted thereby changing the value at which they are recognized. Board of Taxation (2012, p. 31) asserts that while calculating allocable cost amount of the joining firm, parent companies experience difficulties due to the adjustments. Furthermore, most of the firms put allocable cost amount in relation to the joining firms’ perspective. Conclusion AASB 112 is faced with a variety of controversies hence this makes the standard to be unable to meet its objectives. The failure of the standard to provide a clear guideline in relation to accounting for temporal differences in relation to deferred tax amount makes it ineffective. Furthermore, the standard does not provide means through which firms can treat uncertain tax positions. Moreover, the failure of AASB to ensure that firms disclose their temporal differences associated with their foreign investments makes the standard to be ineffectual. Therefore, AASB 112 should be scrapped or modified in order to enable it meet its objectives. References Deloitte 2009, ‘Taxing Times Ahead: AASB Income Tax Proposals’, In Accounting and Tax Alert, pp. 1-15. Institute of Chartered Accountants Australia 2012, ‘Australian Accounting Standards’, In AASB 112 Review, pp. 1-13. Ling, J 2010, ‘Reporting on Uncertain Tax Positions’, Thompson Weekly Tax Bulletin, vol. 49, no. 1, pp. 1-2. PWC 2011, ‘AUASB Bulletin’, In Auditing and Assurance Board, pp. 1-20. The Board of Taxation 2012, ‘Post Implementation Review of Certain Aspects of the Consolidation Tax Cost Setting Process’, In the Board of Taxation Discussion Paper, pp. 1-62. Read More