Answer to Question (i)
Calculation of taxable income for the year ended on 30th June, 2017 after considering the additional information and adjusting the items of revenue and expenses is provided in the table below:
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Current Tax Worksheet and Current tax liability for the year 30 June 2017 |
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|
Particulars |
Amount ($) |
Amount ($) |
|
Profit before tax |
600,000.00 |
|
|
Add: Expenses disallowed for tax purposes |
||
|
Depreciation on building |
8,000.00 |
|
|
Depreciation on Plant |
50,000.00 |
|
|
Entertainment expenses |
18,000.00 |
|
|
Bad Debt expenses |
60,000.00 |
|
|
Long service leave expense |
45,000.00 |
|
|
Annual leave expenses |
30,000.00 |
|
|
Rent received |
35,000.00 |
|
|
Office supplies |
15,000.00 |
|
|
261,000.00 |
||
|
Less: |
861,000.00 |
|
|
Rent revenue |
30,000.00 |
|
|
Government grant |
10,000.00 |
|
|
Tax depreciation |
75,000.00 |
|
|
Bad Debt written off |
45,000.00 |
|
|
Long service leave and annual service leave |
50,000.00 |
|
|
Office supplied paid for |
18,000.00 |
|
|
198,000.00 |
||
|
Taxable income |
663,000.00 |
|
Current tax liability |
|
|
Particulars |
Amount ($) |
|
Taxable income |
633,000.00 |
|
Tax Rate |
30% |
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Current tax liability @30% |
189,900.00 |
|
Allowance for Doubtful debt |
|||
|
Particulars |
Amount |
Particulars |
Amount |
|
Account Receivable |
$45,000.00 |
Opening balance |
$40,000.00 |
|
Closing balance |
$55,000.00 |
Expenses |
$60,000.00 |
|
Total |
$100,000.00 |
Total |
$100,000.00 |
|
Rent Received in Advance |
|||
|
Particulars |
Amount |
Particulars |
Amount |
|
Revenue |
$30,000.00 |
Opening balance |
$20,000.00 |
|
Closing balance |
$25,000.00 |
Cash |
$35,000.00 |
|
Total |
$55,000.00 |
Total |
$55,000.00 |
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Provision for Employee benefit |
|||
|
Particulars |
Amount |
Particulars |
Amount |
|
Cash |
$50,000.00 |
Opening balance |
$75,000.00 |
|
LSL Expenses |
$45,000.00 |
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|
Closing balance |
$100,000.00 |
A/L Expenses |
$30,000.00 |
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Total |
$150,000.00 |
Total |
$150,000.00 |
|
Journal entry |
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|
Particulars |
Debit ($) |
Credit ($) |
|
Income Tax expenses |
189,900.00 |
|
|
Current tax Liability |
189,900.00 |
|
|
(Being the current tax liability recorded) |
|
Deferred tax Worksheet as at 30 June 2017 |
|||||
|
Accounts |
Carrying Amount |
Deductible Amount |
Tax Base |
Taxable Temporary difference |
Deductible Temporary Difference |
|
Assets |
|||||
|
Cash |
$80,000.00 |
$0.00 |
$80,000.00 |
||
|
Inventory |
$170,000.00 |
$170,000.00 |
$170,000.00 |
||
|
Accounts Receivable |
$445,000.00 |
$0.00 |
$500,000.00 |
$55,000.00 |
|
|
Office Supplies |
$25,000.00 |
$0.00 |
$0.00 |
$25,000.00 |
|
|
Plant |
$240,000.00 |
$110,000.00 |
$110,000.00 |
$130,000.00 |
|
|
Building |
$152,000.00 |
$0.00 |
$0.00 |
$152,000.00 |
|
|
Goodwill |
$70,000.00 |
$0.00 |
$0.00 |
$70,000.00 |
|
|
Liability |
|||||
|
Accounts Payable |
$290,000.00 |
$0.00 |
$290,000.00 |
||
|
Provision for employee benefits |
$100,000.00 |
$100,000.00 |
$0.00 |
$100,000.00 |
|
|
Rent received in Advance |
$25,000.00 |
$25,000.00 |
$0.00 |
$25,000.00 |
|
|
Total Temporary Difference |
$377,000.00 |
$180,000.00 |
|||
|
Excluded Difference |
$222,000.00 |
||||
|
Temporary Difference for deferred tax |
$155,000.00 |
$180,000.00 |
|||
|
Deferred Tax Liability (30%) |
$46,500.00 |
||||
|
Deferred Tax Assets (30%) |
$54,000.00 |
||||
|
Beginning Balance |
$38,100.00 |
$40,500.00 |
|||
|
Adjustments |
$0.00 |
$0.00 |
|||
|
Increase for the year |
$8,400.00 |
$13,500.00 |
|
Journal entry |
||
|
Particulars |
Debit |
Credit |
|
For 2016 |
||
|
Deferred tax Assets |
$40,500.00 |
|
|
Deferred tax Liability |
$38,100.00 |
|
|
Income Tax Expenses |
$2,400.00 |
|
|
(Being deferred tax recognized) |
||
|
For 2017 |
||
|
Deferred tax Assets |
$13,500.00 |
|
|
Deferred tax Liability |
$8,400.00 |
|
|
Income Tax Expenses |
$5,100.00 |
|
|
(Being deferred tax recognized) |
|
Journal entry to record the current tax liability as on June 30, 2017 |
||
|
Particulars |
Amount ($) |
Amount ($) |
|
Income Tax Expenses |
221,550.00 |
|
|
Current tax liability |
221,550.00 |
|
|
(Being current tax liability recorded) |
||
|
Deferred tax Assets |
$15,750.00 |
|
|
Deferred tax Liability |
$9,800.00 |
|
|
Income Tax Expenses |
$5,950.00 |
|
|
(Being deferred tax recognized) |
|
Particulars |
Deferred Liability |
Deferred tax |
|
Opening Deferred Balance |
44,450.00 |
47,250.00 |
|
Current balance |
54250 |
63000 |
|
Deferred balance |
9,800.00 |
15,750.00 |
In accounting, materiality has gain significant importance. The materiality theory, in the language of accounting can be discussed in various ways. The accounting principles or framework which tells that each important and essential items of the company needs to be disclosed in its financial statement to provide proper information to the users of the financial statements while taking important decision is because of the concept and principle of materiality (Cheung and Jiang 2016). Simultaneously, the user of these information or the accountants are permitted by this principle of materiality in accounting to breach other accounting principles or policies is such a manner that it do not leave any major impact over the company’s financial statements. Hence, it can be observed from the above stated explanation of the concept of materiality that any inaccuracy or mistake in materiality can misguide the decision of an investor (Fourie et al. 2015). As per US Generally Accepted Accounting Policies (GAAP), any such transaction or item that has the capability to influence the user’s decision that is further related to the user’s economic circumstances can be considered as a material item. The concept of materiality is not specific or fixed. It differs from one firm, company or individual to another. An item worth $100 can be material for a company that is operation in small scale. However, the item of $100 may not be material to such company that have an enormous yearly turnover or make huge profits yearly.
There are no specific or any particular meaning or definition for materiality concept that can be observed from the above-mentioned example that state that materiality differs from one firm or organization to another. In addition to these, there are no such item or transaction in the accounting standards or policies that are defined specifically as material items. Thus, many important and crucial information and data are disclosed in the financial statements due to materiality. Hence, it can be clearly understood that, the concept of materiality is declining the clarity, transparency and understanding of the statement of financial performances of the firms that are regularly used by the users and they are certainly not aware of these information as well (Aman et al. 2017).
Answer to Question (ii)
As far as the International Integrated Reporting Framework (IIRF) is concerned, the concept of materiality has a huge role to play in this. The matters which are essential to be added in the IR can be identified though the concept of materiality. This ensures correctness and conciseness. Those elements where materiality is extremely important and crucial are stated below:
- Materiality helps to identify those elements that are essential to include in the IR. These consists of shareholder’s issues, drivers of values, internal as well as external factors, current performance of the organization, etc.
- Materiality also assists in assessing the importance and essentialities of the elements based on the magnitude of those affects and the possibilities of such happenings.
- Materiality always offers priority to those matters that are which are essential as per their effectiveness and importance (Richtermeyer 2016).
- Various data that are helpful for the investor are disclosed in the financial statements due to materiality concept and it emphasises over this fact. These elements consists of the workers or staffs involved, the process of materiality, the governing body, definition and discussion of material items, the company’s objective and performances, etc.
IAS 7-Statement of Changes in Financial Position was replaced by IAS 7-Statement of Cash Flows, which was issued by the International Accounting Standard Committee in the year 1992. IAS 7 was amended various times since that time. While preparing the Cash Flow Statements, the management had to face several problems (Lee and Thi 2016). Manipulation of data and information in the Cash Flow Statement was one of the major issue faced by the management or organization. With respect to this, it can be stated that payment to the suppliers may be delay to increase the net cash flow. Apart from this, the management may opt to acquire goods on lease so that cash payment can be avoided. Hence, currently IAS 7 has been amended to resolve the issues that are associated with IAS 7. Offering more clarity, transparency and understanding to the user of the financial statement is the primary cause due to which IAS 7 was amended and changes were implemented. First, it is clearly stated in the amendment that every organization shall provide disclosures that will separately assist the user of these data to gain substantial knowledge regarding the liabilities that rises out of the financial activities of the company and the possible differences in such amounts (Sreekumar and Pavithran 2015). Hence, the IASB must make sure that the following changes are implemented regarding the liabilities that arises out of its financial activities in order to achieve the above-mentioned objective or goal.
- Fluctuations that arises out from gaining or losing control of any subsidiary or other business.
- Alteration or variation that arises out from the financial cash flows of the company.
- Any effects that are caused by the rates of foreign exchanges that are continuously changing.
- Several other changes including changes for values.
The requirements regarding the fulfilments of new disclosures can be achieved by reconciling the closing and opening balances of the liabilities that rises out of the organization’s financial operation. This is also mentioned in the current amendments.
In addition to these, separation of the changes in liabilities that are arising out from financing activities from that of the variation that takes place among other assets and liabilities of the company has been made mandatory to disclose.
The International Financial Reporting Standards introduced substantial changes that was not issued by GAAP. Under these changes, every organizations are required to go through huge changes in their methods of reporting as stated in the IFRS. Such as due to the IFRS requirements, companies for the first time ever was required to report about the share based payments and financial instruments. Due to this, the preparation of financial statements became more complex and difficult under the requirements of IFRS as compared to the GAAP requirements. Due to a large number of recognition and measurements as well as substantial amount of requirements for disclosures, the preparation of financial statements under IFRS framework is more complex and difficult (Balakrishnan et al. 2016). However, the establishment of uniformity and comparability among financial statements is the primary objective of the IFRS, but the process is so complex and confusing that it caused much problems for the users of such information to understand those financial statements that in turn lead to inconsistencies in realising the financial statements by the investors and other users.
Answer to Question (iii)
IAS-1 Presentation of Financial Statements deals with the IFRS form and methods of presentation of financial statements. Various alternative for presenting financial statement are set out by this standard. Supplementary information of the local legislation are also required to be disclosed in the financial statement. Hence, an internationally uniform and optimal method of representation of financial statements are still to develop. Because of which, every organization that is initiating a transition to IFRS makes it in such a manner so that there involve minimal changes as compared to that of the GAAP reporting standards which were carried out previously. Taking an example of UK companies, who have prepared a separate statement for the changes in equity and adopted the practice of creating a separate statement relating to recognised income and expenses. While on the other hand, the practice of single statement of changes in equity are adopted by the French companies (Dokas et al. 2014).
Moreover, due to the lack of transparency and guidance in few accounting standards, there are certain probability of interpreting the standards in some different manner by the companies. As formulated by IAS-39 Financial Instruments: Recognition and Measurement, there are various ways of recording financial assets in the company’s financial statement or reports.
The standards that are framed by the IFRS are not based on those principles that are reliable in nature. Moreover, in these standards there exists several inconsistencies. These standards permits the accountants and other individual to utilise alternative accounting treatments and this again is an addition to those sources of inconsistencies in the financial statements of the company. For example, the IAS-31 Interest in Joint Venture allows interest, in the entries that are jointly controlled to be accounted or recorded with the help of proportionate consolidation method or equity method (Carraher and Van Auken 2013). The company has the freedom to opt for the accounting policy that is used as per the national Generally Accepted Accounting Policies. Similarly, IAS 16 provides alternated method of accounting where company has the freedom to undertake their asset valuation either as per revaluation model or as the cost model. The selection of the accounting policies have resulted to greatly influence the management’s judgement and which further is the main cause for incomparability and inconsistencies among various other company’s financial statements.
There are other such circumstances where different organization adopted different accounting treatments is IFRS 1-First Time Adoption of International Financial Reporting Standards. Here the companies were permitted by the IFRS to enjoy numerous exemptions. The organizations can get affected for several years by these exemptions. These includes, the companies with respect to post-employment benefit may opt for recognising all the collective actuarial losses and gains but chosen the corridor approach afterwards. Thus, in order to write-off all the actuarial losses once, can opt this that will influence its financial statement hugely and will affect its comparability as well (Wahlen et al. 2014). In addition to these, the company may also choose to identify subsequent losses and gains separate to the profit and loss in other comprehensive incomes during that time when they took place but the corridor approach was not used. This will again negatively affect the financial statement’s comparability among different companies.
Answer to Question (iv)
The IAS 18 permits recognition of revenue in other ways. Regarding the arrangement with various deliverables, there are no distinct or particular guideline available in the standard. It is stated by the standard that each transaction would be considered from the viewpoint of their actual balance and not its form. In the standard, there are no other clarification except this. Moreover the identification process of the functional currency is also quite subjective under the IAS-21which is also another reason for inconsistencies.
Compared to the system of reporting under the GAAP, the IFRS system of reporting of monetary transactions have greater impact over the management’s judgement. Fair value method is used by the IFRS extensively. The management uses its own assumptions and judgements and selecting the methods of valuation and formulating assumptions while transacting in areas like share based payments, intangible assets, onerous contracts, impairments of assets, etc. On the amount identified in the financial statements the variations in the assumption, methods have great influence. If there are any substantial risk of material adjustment to the carrying amount in the next financial year, it is thus expected in the IAS 1 that disclosure regarding the methods, estimates and the company shall make assumptions behind the carrying amount (Wang 2014). However, the management makes such judgement where no material adjustments or significant risk can be encountered. Thus, they fails to reveal the degree of assumption and uncertainty that ultimately affects the comparability following these assumptions.
A strong framework for financial reporting is essential apart from the IFRS. Effective corporate governance, audit practices of high quality, enforcement mechanism and efficient oversight would be included by this infrastructure. Hence, it is also very essential to understand that apart from IFRS, the comparability and consistency in the financial statement will also contribute towards a healthy accounting guideline and framework in an organization. Many accountants and other accounting professional may be trained as per GAAP and not as per IFRS that will further have an impact over the comparability (Weil et al. 2013). Moreover, there may not exist significant information regarding the market to use the fair value method because the country might not be developed well. This will further cause the initiation of hypothetical markets or utilising the mathematical models and this in turn will increase the inconsistency issues.
The transformation from GAAP to IFRS is undoubtedly beneficial considering the long run fact that will definitely add comparability and consistency in every reporting framework across the globe. Nevertheless, there still exists a substantial figure of issues in this transition that might spoil the comparability and consistency elements of a financial statement.
Reference:
Aman, A., Yunus, Y.M., Maelah, R., Embong, Z., Syaima’Adznan, A.A.A., Nurzarifah, Z. and Fernandez, D., 2017. Talent Pool for Finance & Accounting Global Business Services: Industry-Academia Collaboration.
Balakrishnan, K., Watts, R. and Zuo, L., 2016. The effect of accounting conservatism on corporate investment during the global financial crisis. Journal of Business Finance & Accounting, 43(5-6), pp.513-542.
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Cheung, W.M. and Jiang, L., 2016. A cynosure of the academic literature relating to initial public offerings (IPOs) is the question of why they are “mispriced” so frequently. The large and growing literature addressing this question is evidence as to its intractability. This paper develops a theory of underwriters’ behavior suggesting that they will exploit their private information to minimize the bilateral risks to themselves of… Review of Quantitative Finance and Accounting, 46(1), pp.179-193.
Dokas, I., Giokas, D. and Tsamis, A., 2014. Liquidity efficiency in the Greek listed firms: a financial ratio based on data envelopment analysis. International Journal of Corporate Finance and Accounting (IJCFA), 1(1), pp.40-59.
Fourie, M.L., Opperman, L., Scott, D. and Kumar, K., 2015. Municipal finance and accounting. Van Schaik Publishers.
Lee, C.F. and Thi, C.H., 2016. Recap of the 23rd Annual Conference on Pacific Basin Finance, Economics, Accounting, and Management. Review of Pacific Basin Financial Markets and Policies, 19(01), p.1696001.
Richtermeyer, S.B., 2016. Making progress? The Women’s Accounting Leadership Series looks to help get more women into finance and accounting leadership roles. Strategic Finance, 97(11), pp.22-32.
Sreekumar, K. and Pavithran, K.B., 2015. Management Accounting Practices and Organisational Performance: A Study of Environmental and Organisational Antecedents as Perceived by Finance and Accounting Managers in the Manufacturing Sector in India (Doctoral dissertation, Cochin University of Science and Technology).
Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.
Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), pp.955-992.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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