Should tax refund be classified as Income in financial statement?
Let's look at the double entries of tax refund upon receipt of advice / monies from the Income Tax Authority of the country:
Dr. Cash
Cr. Taxation Expense
Let's illustrate with example. Company XYZ made provision for tax in relation to Year of Assessment 2008 amouned to US$200 based on its tax computation, full payment of US$200 has been made. US$200 has been charged to its income statement as taxation expense.
In the same year/ subsequent year, Comptroller of Income Tax inform the Company that there's a computation error, and the actual tax for YA 2008 should be US$180 (ie overpaid by S$20). The Company should have recorded a credit to its taxation expense account (i.e. a gain to income statement) as tax refund.
In short, tax refund should not be classified as income in financial statement. It should be considered a credit to taxation expense account.
Showing posts with label Auditing- Taxation. Show all posts
Showing posts with label Auditing- Taxation. Show all posts
#52 Tax Refund
What are the accounting entries for tax refund?
Dr. Cash
Cr. Provision for Taxation (B/S)
Being recognition of tax refund receipt
Dr. Provision for Taxation
Cr. Taxation Expense (P/L)
Being recognition of tax refund in Profit & Loss statement (upon finalization of YA)
As noted above, a tax refund is offset against the taxation recorded in P/L ( as evident from crediting taxation). Be noted that, a tax refund is potential indicating that the tax computation is at its final stage ( more or less finalized). Hence, any excess provision with respect to the particular Year of Assessment should be re-assessed / reversed out accordingly.
Dr. Cash
Cr. Provision for Taxation (B/S)
Being recognition of tax refund receipt
Dr. Provision for Taxation
Cr. Taxation Expense (P/L)
Being recognition of tax refund in Profit & Loss statement (upon finalization of YA)
As noted above, a tax refund is offset against the taxation recorded in P/L ( as evident from crediting taxation). Be noted that, a tax refund is potential indicating that the tax computation is at its final stage ( more or less finalized). Hence, any excess provision with respect to the particular Year of Assessment should be re-assessed / reversed out accordingly.
#18 Deferred Tax Asset from Unearned Income
A deferred tax asset can arise from differences in recognition of income. In this thread we're talking about the deferred tax asset arise from unearned income.
For instance, a financial company is a lessor and receives advance mortgage payments for a building it leases, the tax and book accounting purposes of the payments may differ. The tax laws, under certain circumstances, require the financial company to take into income the entire amount of the payment, even though the payments include monthly payments for the period occurring after the close of the tax year.
For book purposes, this income is not included into income until the payment is actually "earned," that is to say, as each month passes. This is also a deferred tax asset because the item causes a greater amount of income in the current period for tax purposes than it does for book purposes. Why? Because in subsequent years, the corporation will recognize book income when there is not a corresponding recognition of taxable income. Thus, where income is recognized in the current year for tax purposes and will be recognized in subsequent years for book purposes, a deferred tax asset arises.
For instance, a financial company is a lessor and receives advance mortgage payments for a building it leases, the tax and book accounting purposes of the payments may differ. The tax laws, under certain circumstances, require the financial company to take into income the entire amount of the payment, even though the payments include monthly payments for the period occurring after the close of the tax year.
For book purposes, this income is not included into income until the payment is actually "earned," that is to say, as each month passes. This is also a deferred tax asset because the item causes a greater amount of income in the current period for tax purposes than it does for book purposes. Why? Because in subsequent years, the corporation will recognize book income when there is not a corresponding recognition of taxable income. Thus, where income is recognized in the current year for tax purposes and will be recognized in subsequent years for book purposes, a deferred tax asset arises.
#13 Is Unutilized Investment Allowances DTA?
Should untilized investment allowances be recognized as Deferred Tax Assets?
It is now generally agreed that unutilized investment allowances should be recognized as Deferred Tax Assets. The unutilized investment allowancs may come under IAS 12 paragraph 34, depends on the fact and circumstances.
Companies that have not been recognising DTA in respect of unutilised investment allowances in the past may need to do so (subject of course to the probable future taxable profit test). This would be a change in accounting policy.
It is now generally agreed that unutilized investment allowances should be recognized as Deferred Tax Assets. The unutilized investment allowancs may come under IAS 12 paragraph 34, depends on the fact and circumstances.
Companies that have not been recognising DTA in respect of unutilised investment allowances in the past may need to do so (subject of course to the probable future taxable profit test). This would be a change in accounting policy.
#6 Unused Tax Losses & Unused Tax Credits (Deferred Tax Assets Implications)
IFRS 12:
“A deferred tax asset should be recognized for the carry-forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and used tax credits can be utilized”
If a company has unused tax losses carried forward from previous year (years), some of the companies tend not to recognize the deferred tax asset in its balance sheet. As stated in IFRS 12: “… to the extent that it is probable that future taxable profit will be available against which the unused tax losses …can be utilized”. Assuming XYZ co has been making Net Losses for 2 consecutive years, and the current losses position is strong evidence that XYZ co’s businesses are not doing well, and future profitability is in doubt.
In order to “utilize” the unused tax losses carried forward, XYZ co. has to make a profit in next financial year. Unless there are strong reasonable grounds to believe that ‘it is probable that future taxable profit will be available’, such as: entering an agreement with customers for next 12 month orders, the company should not recognize the Deferred Tax Assets, based on ground of prudence.
The second issue involved in recognizing deferred tax assets for unused tax losses and unused tax credits is: the unused tax losses are subject to Inland Revenue Authority of respective countries, and compliance with certain underlying provisions. Due to these reasons, the market tends not to recognize DTA, even if they are likely in a net profit position in next financial year.
However, one could disclosed unutilized tax losses or unutilized tax credits in the form of notes to financial statement, as an information to financial statements users.
“A deferred tax asset should be recognized for the carry-forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and used tax credits can be utilized”
If a company has unused tax losses carried forward from previous year (years), some of the companies tend not to recognize the deferred tax asset in its balance sheet. As stated in IFRS 12: “… to the extent that it is probable that future taxable profit will be available against which the unused tax losses …can be utilized”. Assuming XYZ co has been making Net Losses for 2 consecutive years, and the current losses position is strong evidence that XYZ co’s businesses are not doing well, and future profitability is in doubt.
In order to “utilize” the unused tax losses carried forward, XYZ co. has to make a profit in next financial year. Unless there are strong reasonable grounds to believe that ‘it is probable that future taxable profit will be available’, such as: entering an agreement with customers for next 12 month orders, the company should not recognize the Deferred Tax Assets, based on ground of prudence.
The second issue involved in recognizing deferred tax assets for unused tax losses and unused tax credits is: the unused tax losses are subject to Inland Revenue Authority of respective countries, and compliance with certain underlying provisions. Due to these reasons, the market tends not to recognize DTA, even if they are likely in a net profit position in next financial year.
However, one could disclosed unutilized tax losses or unutilized tax credits in the form of notes to financial statement, as an information to financial statements users.
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