FR Ch 4-9

IAS 12 definition of taxable profit

the profit/loss for a period which is determined in accordance with the rules established by the taxation authorities upon which income taxes are payable/recoverable

2 examples of corporate tax systems

classical and imputation systems

classical system

taxes dividends at both corporate and shareholder level which could cause bias against distributions

imputation system

has the corporate tax charge at a single rate on all corporate profits and the shareholders are deemed to have paid tax at the basic rate on dividend received

types of expenses that can affect taxable profit

depreciation, general provisions for such things as doubtful debt, entertaining customers, costs for capital and losses on non current assets

which sources of income need to be deducted from the accounting profit

dividends and profits

writing allowance

when you can deduct a percentage of the item's value from your profits to provide tax relief

writing down allowance for plant and machinery

18% per annum

how are gains and losses on the disposal of capital assets taxed

taxed as chargeable gains and the amount of it computed depends on the capital gains tax rule

when is the due date for payment of corp tax

9 months after the accounting period

IAS definition of current tax

the amount of income taxes payable/recoverable in respect of the taxable profit/loss for a period and should be recognized as an expense

deferred tax

occurs when there is a timing difference between the treatment of an item for tax and the accounting purposes. is not an issue if the accounting and tax depreciation equate

timing difference

differences between the carrying amount of an asset or liability in the balance sheet and its tax base

why there is no recognition for deferred tax on permanent differences under FRS 102

as they have stated that the permanent differences relating to income and expenses will be non reversible and non taxable. they are recognized for financial reporting but not for tax purposes. e.g fines, penalties, meals and entertainment

when does IAS 12 state an entity should be provided a deferred tax

that an entity should be provided for deferred tax whenever there is a difference between the carrying amount and the tax base of an asset or liability, making permanent differences possible

timing difference

relate to those items for which tax relief and charges to the income statement occur in different periods

most significant timing difference

the purchase of a non current asset for which the cost is spread over a number of years according to different rules when using either capital allowances or depreciation

how does deferred tax accounting attempt to match accounting income and the tax charge

by charging higher tax bills later as a consequence of the write off in order to cover for the allowance given before

how are temporary differences such as capital allowance recorded

the tax written down value and the NBV value will be different as well as the certain current assets valued at market price as the change in value will be taxable profit once it can be realized. this taxable profit is recorded in the IS

3 approaches to deferred taxation

flow through, partial provision and full provision

how flow through handles deferred taxation

it ignores deferred taxation by charging the tax payable in the IS, making the tax provided only when the period occurs. no provision would be there for the deferred tax and the SoFP will only show a current liability for tax payable that hasn’t been paid at the SoFP

how partial provision handles deferred taxation

based on accounting only for the amount of deferred tax that will be payable in the future, and so the only timing differences that would be reversed are included in the deferred tax provision

how full provision (the main one) handle deferred taxation

when all deferrals of tax related transactions that occur in the period occur regardless of whether these tax bills are paid in the future

pros of deferred taxation

• the entity is a going concern so it will continue to pay tax

• the tax is a business expense so is treated like any other cost.

• they apply the accruals/matching concept and make a provision.

• helps to provide a more accurate tax position based on the company’s current profit – smoothing the tax position due to timing difference.

• reduces pressure for paying extra dividend in the year when low tax charge is shown.

• Adheres to both the prudence and matching concept. tt is also prudent to recognize this future liability

cons of deferred taxation

• matching doesn’t apply as the tax isn’t related to the account profit but rather the taxable profit as a charge

• it tries to equalize income over time but income isn’t so linear in reality

• against ‘substance over form‘ as it can only provide investors with predicted info to make decisions

• it doesn’t alter the tax payable and so there are no cash flow implications

• doesn’t reflect if there’s good tax planning as capital allowances given before can be easily hidden by allowing high upfront deduction rather than a slow depreciation

why deferred tax is not considered a liability

not sufficient enough to resolve the accounting issue as well as measure profit. The real objective of it is to match accounting income and the tax charge

defined benefit plan

post-retirement benefit plan where an employer is legally obliged to provide an agreed level of post-employment benefits

how IAS 19 regards employee benefits

by applying formal agreements between the employee and entity, legislative requirements, requirements derived from the industry arrangement and the requirements from the informal practices of constructive obligation

when are short term employee benefits expected to be paid

within 12 months of the end of the period

what are the short term benefits recorded as when accrued and when prepaid

when accrued it’s a liability and when prepaid it’s an asset

how does IFRS 2 say to recognize share based payments

companies should recognize the payments in fair value as employee benefits in the period to which they relate. An increase in equity should be recognized if the share based payment is equity settled

2 types of company pension

defined contribution DC plans and defined benefit DB plans

DC plan

when the employer agrees to contribute a specific amount to the plan and sometimes have a contribution from the employee

DC plan

where there are promised benefits defined in advance so that benefits are a function of the scheme’s benefit formula

which plan does IAS 19 says to pay pensions with

an entity paying a pensions plan should treat it as a defined contribution plan for accounting purposes unless the entity has a legal or constructive obligation to pay the benefits directly

projected unit credit method

for the recognition of costs and for purposes of liability valuation, calculates DB obligations by projecting future salary increases and prorating benefits over an employee's service life, discounted to present value

projected unit credit method variant

calculates the TB on employee retirement by taking into account expected total service to be rendered and expected salary level at retirement, with this being allocated as a fixed amount annually

what is used to understand the TVM and the investment risk

discount rate for TVM and market yields on the date for high quality corporate bonds for investment risk

benefit cost formula

service cost + net interest on the net defined benefit liability + remeasurements of net defined liability

how should the current service cost be calculated

calculate the PV of benefits earned by employees during the current period (projected unit method)

past service costs IAS 19

the change in the PV of the DB obligation for employee service in prior periods as a result of scheme amendment of curtailment (reduction)

interest/accrual interest

the net defined benefit liability

total pension cost

current service cost + interest cost

3 costs of the defined benefit plan (limitations)

the actuarial gains/losses, return on plan assets and the change in the effect of the asset ceiling

IAS 19 termination employee benefits

a company should recognize a liability and expense when committed to terminating employment before the normal retirement date

why was IAS 37 created

to restrict the use of judgement within boundaries, so that the standard restricted the managerial use of provisions to create provisions when no obligation to a liability exists

big bath accounting

when they knowingly manipulating its income statement to make poor results look even worse in order to make future results appear better

IAS 37 future provisions

only be allowed when the company has an unavoidable obligation, an intention which may or may not be fulfilled won’t be enough as entities would not create proper provisions

IAS 37 why are provisions distinguished from other liabilities and considered contingent

there is uncertainty about the timing or amount of the future expenditure required in settlement

when is a provision recognized

1. when an entity has a present obligation as a result from a past event

2. it’s probable that an outflow of resources with economic benefits will be required to settle the obligation

3. a reliable estimate can be made on the amount of the obligation

liabilities

present obligations of the entity that arise from past events, the settlement of which is expected to result in the outflow from the entity of resources with economic benefit

the main decision for accounting contingencies

likelihood of the outcome

when to do which decision for contingent liabilities

do nothing when the probability is remote, disclose when probability is possible (less than 50%), provide when probability is probable (more than 50%) and assume it is liable when virtually certain

condition for a contingent liability to be disclosed

if it is probable and there’s a possibility of an outflow of economically beneficial resources are remote

IAS 37 approach to provisions

can only be recognized if a reliable estimate can be made of the amount which is the best estimate of the expenditure required to settle the present obligation at the SoFP date

when are provisions most likely to happen

one off events are most likely to happen rather than ones for large population events

risk adjusted cash flows

discounted at a risk free rate

what to do if a provision can be reimbursed

treated as a separate contingent asset and only accounted for in the IS when the reimbursement is virtually certain

criticism of IAS 37 approach to provisions

the distinction between probable and possible is too arbitrary and so using p = >50% is not proportionate

onerous contract

when the economic environment changes from a profit making one to a loss making one. IAS 37 requires the present contract obligation be recognized and measured as a provision

unavoidable cost

reflect the lower part of the cost of fulfilling a contract and any compensation or penalties that are a result of failing to fulfil it

IAS 37 contingent assets

possible assets arising from past events which can only be confirmed and recognized by the possibility of an uncertain future event occurring

how provisions are recognized based on their decision

• CA and CL when virtually certain

• provision for a CL and a discloser for a CA when probable (>50%)

• disclosure for a CL but no disclosure for CA when possible (<50%)

• no disclosure for both CA and CL when remote

adjusting event

those that provide evidence of conditions that existed on the SoFP date

non adjusting event

those that are indicative of conditions that arise after the SoFP date. no adjusting should be done after the reporting period

examples of when a provision should be recognized

what does IAS 10.12 say about dividends

dividends declared after the reporting period shouldn’t be recorded as a liability in the SoFP but disclosed in the notes to the accounts. An entity shouldn’t prepare its FSs on a going concern basis if management determines after the end of the reporting period either that it intends to liquidate the entity or to cease trading

4 places a bonus issue of shares can be made from

revaluation reserve, share premium, capital redemption reserve and retained profit

equity when used for understanding the financial structure

considered residual as the difference between assets and liabilities, there are legal rules that govern equity and the accounting principles for equity. 

interest cover

considers the ability of a company to pay interest commitments from profit before interest

financial structure ratios

debt to equity ratio or the gearing and leverage ratios, assess a company’s riskiness by comparing equity with debt financing

what does IAS 33 say regarding ordinary shares being used in contracts

eps needs to be disclosed if the contract has been settled with ordinary shares

how are contingently issuable ordinary shares treated as

outstanding and included in the calculation for both basic and diluted EPS if the conditions are met. if they haven’t, it’s based on the no of shares that would be issuable at the end of the contingency period

what options and warrants are assumed to be

already used to repurchase ordinary shares at the average market price during the period, difference however is that the no of ordinary shares regardless of being issued on exercise or repurchased shall be treated as an issue of ordinary shares for no consideration (won’t receive anything)

how to consider convertible securities when calculating dilution

the numerator should be adjusted for the after tax effects of dividends and interest charged in relation to dilutive potential ordinary shares. The denominator should include shares that would be issued on the conversion

how the diluted eps is found

PnL = earnings - all expenses (taxes, minority interests and preference dividends from the earnings)

no of shares = by adjusting the shares in issue at the beg of period by the no of shares repurchased or issued during the period, multiplied by the time weighting factor

basic eps

dividing PnL by the weighted average number of outstanding ordinary shares during the period

eps

earnings divided by the weighted number of ordinary shares, IAS 33 required both basic and diluted

what the pe ratio can tell you

how a company is performing as a high PE ratio indicates that the investors have a lot of confidence in the company’s future while a low PE ratio is the opposite

IAS 32 transactions costs of an equity transaction are accounted

the share's nominal value gets credited to the share capital account and the premium credited to the share premium account. issue costs are charged to the shareholder's funds either at the share premium account or retained profit reserve

non distributable reserves include

share premium account, the capital redemption reserve, the revaluation surplus and any other reserves that are specifically named as non distributable

distributable reserves

those that can be distributed as dividends. Only realized profits can be legally distributed to shareholders in cash or non cash form

capital redemption reserve

when a product of the company purchasing its own shares is a situation where the share capital is reduced. a reserve that can’t be distributed to shareholders, maintaining the capital base of the company, protecting its creditors. restricted and only bonus issues can be debited.

capital base

the foundational amount of equity, retained earnings, and qualifying debt a financial institution or company holds to fund operations, support growth, and absorb unexpected losses

bonus issue

are issues with no cash inflow. are sometimes viewed as suspicious or illegal as it could be viewed as a way to reduce earnings per share or hide profitability

why shareholders may not receive their preference shares

companies aren't obliged to pay dividends on preference shares if they don't have enough earnings that year, but these shares are cumulative and so they will have to eventually

preference shares

fixed rate dividend with shareholders receiving dividends before the ordinary shareholders, less risky as preferred shareholders would still entitled to repayment before others

what share premium accounts can be used for

• paying up fully paid bonus shares

• writing off preliminary expenses

• writing off expenses of any issue of shares or debentures

• writing off commission paid or discount allowed on any issue of shares or debentures

• providing for the premium payable on any redemption of debentures and preference shares

share premium account

records the difference between the nominal value/par value of shares issued and the fair value of the consideration received, it can't be negative the lowest value even when in debt is 0

when ordinary shares can participate

in the net profit for the period only after the other types of shares such as preference shares have participated, when they are of the same class they have the right to receive dividends

ordinary share IAS 33

an equity instrument that is subordinate to all other classes of equity instruments. So it’s the lowest valued equity instrument

ordinary shares

shares that could have any remainder profit after paying back whoever’s due

market cap

product of the share price on the market and the number of shares issued, reflects the future value or rather potential while the net assets reflect the book value or what value already exists

why shares exchanged between shareholders aren't accounted for

there is no direct flow of resources to the company regardless of if it could indicate the potential to generate funds in share issues

share premium

the difference that occurs when the shares issued have a value greater than the nominal value

what do shareholder's funds equate to

net assets, where reserves can legally be classified into distributable reserves and non distributable reserves

what shareholder's funds consist of

issued share capital stated at nominal value and reserves