Accounting for Income Tax Essay Example | Topics and Well Written Essays - 1500 words

Accounting for Income Tax - Essay Example In the same way, the recognition of deferred tax liabilities and assets in combination of an entity has implications on the extent of goodwill that is realised in the recognised bargain purchase gain or in such an entity combination. Other areas that are dealt with by this standard include the recognition of differed tax assets that are generated from unused tax credits or unused tax losses, and the disclosure of income taxes information and the presentation of income taxes in the financial statements (EFRAG, 2011). According to IAS 12, the way, a liability is settled or the way an asset is recovered can have implications on either the item’s tax base or the relevant tax rate, or both. For example, if a vehicle is sold, indexation can be applied on it, in addition to tax deductions against the proceeds of its original cost. In other words, the tax base of the vehicle would act as the vehicle’s indexed cost. On the other hand, if the vehicle is used to run business with the purpose of making taxable profits, corporation tax allowances are not provided, and in that note, its tax base would be zero. It is, however, essential to know that the tax rates applied on use of an item or on sales differ from one jurisdiction to the other (EFRAG, 2011). Difficulties of applying and understanding IAS12 and provide examples. The standards are perceived by the users of financial statements as complex, incomplete and non-standardised. In particular, the information regarding the deferred tax is considered, by users, to be to be insufficient to an extent that it is difficult to forecast the future tax cash flows, accurately. Incidentally, it would have been much helpful if the users are able to understand the strategy applied by an entity, which should be coupled with clear clarifications on the treatment of tax expenses because users do not have the technical accounting knowledge to understand accounting irregularities and complex tax issues that characterise the financial statements. These limitations originate from lack of reflection of the economics of transactions by the accounting method, and from the current standard’s exceptions to the principles - IAS 12 requirements to recognise deferred tax on assets estimated at fair value, and long leasehold investment assets does not reveal the economic implications of recovering the property (EFRAG, 2011). In some jurisdictions, the seller is prohibited from deducting the cost of the property against the income following its use. In such a situation, the fair value of the property will show the present value of future cash flows minus the payments of future tax. Although the current provisions by IAS12 may not reveal the economic impacts of getting back the carrying amount in such situations, when the property is valued at fair value, the deferred tax liability reproduces a tax impact that is perhaps already featured in