THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA

POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/201 PRINCIPLES OF FINANCIAL AND COST ACCOUNTING

Nadeeshani Dissanayake B.Sc. Accounting (Sp), First Class,

ACA, ACMA, CPA (Aust)

EVENTS AFTER THE REPORTING PERIODLKAS 10

Events after the end of the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue.

TYPES OF EVENTSTwo types of events after the end of

the reporting period adjusting events―those that

provide evidence of conditions that existed at the end of the reporting period

non-adjusting events―those that are indicative of conditions that arose after the end of the reporting period

Adjusting events—adjust the amounts recognised (and update disclosures made) in its financial statements

Non-adjusting events—do not adjust the amounts recognised in its financial statements. However, disclose:

the nature of the event, and an estimate of its financial effect, or a statement that estimate cannot be made

Ex 1: On 31/12/20X5 A assessed its warranty obligation as Rs. 100,000. Before its 20X5 financial statements were authorised for issue, A discovered a latent defect in one of its lines of products. It reassessed its warranty obligation at 31/12/20X5 at Rs. 150,000. Adjusting event―latent defect existed at 31/12/20X5. Measure warranty provision at Rs. 150,000 at 31/12/20X5.

Ex 2*: On 28/2/20X1 A’s 31/12/20X0 FS authorised for issue. At 31/12/20X0 the fair value of A’s investment in B’s publicly traded shares = Rs. 20,000. On 28/2/20X1 fair value of shares = Rs. 25,000.

Non-adjusting event―the change in the fair value results from conditions that arose after 20X0. A does not adjust the amounts recognised in its financial statements. However, it must give additional disclosure

INCOME TAX AND DEFERRED TAX

Some exceptions to thisTaxable income (TI) – tax

deductions (TD) = Taxable profit

Accounting Standards and the Companies Act

are key sources that determine the appropriate accounting treatment of

transactions

The Income Tax Act determines the tax treatment of

transactions

• Accounting profit does not equal taxable profit

• Difference caused by different “rules” used for accounting vs tax purposes

ITEM ACCOUNTING TAX

Passive revenue received in advance

Recognised as TI when cash received

Depreciation (accelerated for acctg)

Bad/doubtful debts

Employee benefits – eg annual leave

Recorded as liability . Recognised as revenue when earned.

Recognised as expense based on useful life of asset

Allowance raised and expense recorded when debt considered doubtful

Liability raised and expense recorded when debt owing to employee

Possible for accounting useful life to be shorter than tax useful life

Recognised as TD based on predetermined rates

Recognised as a TD when debt physically written off

Recognised as TD when payment made to employee

The tax consequences of transactions that occur for accounting purposes during a period should be recognised as income or expense during the current period, regardless of when the tax effects will occur

This requires identifying the current and future tax consequences of items recognised in the balance sheet

Two separate calculations are performed each year:

1. current tax liability 2. movements in deferred tax balances

Accounting for income taxes – general principles

CALCULATION OF CURRENT TAX LIABILITY

Accounting profit/(loss)

- acctg revenue not assessable for tax+ acctg expenses not deductible for tax

+/(-) differences between acctg revenue and TI+/(-) differences between acctg expenses and TDs

= Taxable profit

x tax rate %= Current tax liability (CTL)

CALCULATION OF CURRENT TAX LIABILITY - EXAMPLE

• Rs. 60 allowed as a tax deduction for plant.

• Interest has not yet been received.

• Bad debts of Rs. 20 were written off during the year.

• Payments of Rs. 30 were made to employees in relation to annual leave taken during the year.

• The tax rate is 30%

Required:• Calculate the current tax

liability of ABC Ltd for 2012

All amounts are in Rs. millions

CALCULATION OF CURRENT TAX - EXAMPLEAccounting profit before tax 300Government grant (80)Goodwill impairment 20Interest not yet received (40)Adjustment for plant depreciation (10) Adjustment for bad debt write-offs 10Adjustment for annual leave paid (20)Taxable profit 180Current tax liability (CTL) (30%) 54

exempt income

not deductible

Acctg depn 50Tax depn (60)Adj req (10)

B/debts expense-acctg 30B/debts w/off- tax (20)Adj req 10

A/L expense- acctg 10Paid- tax (30)Adj req (20)

In the previous example the CTL would be recorded as:

Dr Income tax expense (current) 54Cr Current tax liability 54

DEFERRED TAX LIABILITIES AND ASSETS Arise when the period in which revenue and expenses are

recognised for accounting is different from the period in which items are recognised for tax

Arise principally due to the accruals vs cash basis of recognising transactions. Differences either result in:

1. The company paying more tax in the future Taxable temporary differences (TTDs) Result in deferred tax liabilities (DTLs)

2. The company paying less tax in the future Deductible temporary differences (DTDs) Result in deferred tax assets (DTAs)

CALCULATION OF DEFERRED TAX The existence of temporary differences results in the

carrying amounts of an entity’s assets and liabilities being different from the amounts that would arise if a balance sheet was prepared for tax authorities

Carrying amount (CA)- asset and liability balances (net of accumulated depreciation, allowances etc) based on accounting balance sheet.

Tax base (TB)- asset and liability balances that would appear in a “tax balance sheet”.

Temporary differences are calculated as follows:

CA – TB = TTD/(DTD)

CALCULATING THE TAX BASECalculating the tax base for an asset

CA– future taxable amounts

+ future deductible amounts = TB

Calculating the tax base for a liabilityCA

+ future taxable amounts - future deductible amounts

= TB

BORROWING COST LKAS 23

Borrowing costs are interest and other costs that an entity incurs in connection with a borrowing of funds.

Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

CAPITALISING BORROWING COSTS An entity shall capitalize borrowing

costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognize other borrowing cost as an expense in the period in which it incurs them.

LEASESLKAS 17

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or a series of payments the right to use an asset for an agreed period of time.

A finance lease is a lease that transfers substantially all the risk and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.

An operating lease is a lease other than a finance lease.

finance lease – become an asset operating lease – rent will be

charged to P/L as an expense