Tax Effect Accounting

10 Pages 2621 Words

ABSTRACT

The purpose of this essay is to identify the differences between the current tax-effect accounting with the new method purposed for tax accounting as part of Australia’s move towards international accounting standards.

To write up this essay I have researched various accounting web sites. I have also studied tax-effect accounting thoroughly in various textbooks, articles and journals.

In my research I have found that there are significant differences between the conceptual basis of tax-effect accounting adopted in the revised and superseded Standards. Some of the major differences addressed in this essay are the methodology used, the objectives, the focus, the terminology, the measurement and the recognition criteria.

The tax-effect time bomb has been ticking away since December 1999 when the Australian Accounting Standards Board (AASB) made the standard that has thrown out an old income statement approach of tax effect accounting and replaced it with what is known as balance sheet method. Some ways that organizations can confront this change is by education, technical measures and under special circumstances, understand everyday transactions. These are also discussed in the essay.

This essay concludes that the comprehensive balance sheet liability method is more consistent with the conceptual framework underlying all accounting standards. This is supported by a research done by the Australian Accounting research Foundation. It is also concluded that due to the change, there will be a challenge for prepares of financial reports in applying the new Standard.






INTRODUCTION

The current practice of accounting for company income tax is known as ‘tax-effect accounting’. It relies on the basic premise that profit from ordinary activities determines income tax expense and taxable income determines tax payable.

Sims and Cliff (2001, p.314) states that ‘AASB 1020 Accounting for Income Tax (...