This refers to the letter from your head dated 5th July 2017 concerning financial advice on the two major items highlighted in the mail. I therefore on behalf of the firm hereby wish to inform you that we have looked at the issue concretely and in detail and hence ready to strongly, friendly and professionally advise you on the matter as per the regulations framework set in place regarding the items in the subject from AASBS, IFRS, IAS, ISA, regulation present on tax matters of Australia, Corporation Acts as well as standing orders in place at the time of issuing this advice as follows;
ASSB 112 and IAS requires entities to fully account, recognize and disclose of all future tax aspects from expenses, income, profit and losses, assets and liabilities. I, therefore, wish to inform directors there is exist the great sense of tax compliance that sees efficiency in operation free from litigation, penalties, and closure when accounting for future tax.
IAS 12 requires all the future recovery of the carrying amount of assets to be recognized in the balance sheet with their full disclosure in that financial year. Any amount subjected to tax resulting from any gain or benefit expected at the point of recovering the carrying amount of a property in future is what eligible for recognition since this what set tax base as well as the carrying amount. Most entities are expected to resale or revalue properties at a gain and hence why the tax man requires accounting for that future tax, however, there are instances where the tax base is zero or no economic benefits at all, therefore, the entity is required to recognize the carrying amount to be equal to the tax base in the footnotes of the financial reports as required by AASB 112.
I further wish to inform Pewter Ltd directors that by recognizing the differences between the carrying amount and tax base as per the requirement of AASB 112 is of great help to them since this what determines the existence of tax liability or asset to the firm hence a platform for the entity to know their stand future tax wise. The temporary difference is that gap between the net book value of the asset or liability of an asset(carrying amount) with the tax base hence as the assets are recognized at book value respective temporary difference that is the gain or loss should be declared for tax purposes Chang(2009.Pg,650).
The temporary differences are either taxable or deductible depending on the end result of the difference on whether its taxable gain or deductible in nature at the point of setting off the liability as well as when recovering the asset. The future taxable amount with good examples being income earned for accounting purposes but carried forward or rather deferred for tax purposes in the near future forms the basis for the future taxable amount. In the most company the use of cash method for tax involvement while filing is what contributes to instances of deferring tax. On the other hand, the point where the company declares the expenses for tax purposes at the current year but reports the same for finance purposes in the near future, of course, there crops the future deductible amount that is mostly seen to accumulate and be accounted for.
I further wish to inform that temporary differences mainly result from lack of consistency when accounting for revenue and expenses in the books at the due date of occurrence hence leading to revenue and expenses were accounted for the present year in the accounting books but for tax purposes either in the previous year.
Existence of temporary difference that is taxable in nature leads to deferred tax liability that should be recognized at the financial position as per AASB 112(15) a and b that states stipulation as to what extent recognition exist, hence in the near future it has to be settled for tax purposes hence a credit balance form of representation in the balance sheet AASB(2004.Pg.70). On the hand, the presence of deductible temporary difference leads to deferred tax asset that is to be recognized only when there exist taxable gain to recover the deductible gap this is as well confirmed by AASB 112(24) though under specified limits.
Pewter Ltd therefore as long as they can’t report both income and expenses within the same period or if they involve the use of cash method for tax compilation style they have no option but to account for future tax consequences. It’s, therefore, the discretion of the company to decide on how to account for the revenue and expenses for the purposes of tax and book keeping.
I, therefore, advise Pewter to consider tax planning mechanisms that take into consideration the time factor of all revenue and expenses of whatever nature that is to be subjected to tax. More so wish to inform the company that accounting for future tax items is compulsory as long as there exists inconsistency while accounting for tax purpose and for that for books.
Pewter’s second issue at hand was concerning how to account and for revenue/sales, expenses, and inventory. The agreement set in place by Pewters Ltd and her retailers dictates the nature of transactions they are to engage, however, there exist sales of goods and AASB regulations that should be contravened at the point of agreement.
Recognition of revenue according to AASB 1004(6.1.4)dictates to what point should revenue be recognized from it we clearly understood that revenue is recognized only when the respective economic benefit is achieved by the protagonist in our case the Pewter Ltd Deegan(2012, Pg 2).Basing with this I would advise Pewter to only recognize revenue after the company is certain that basing with the stocks they sent and less the closing stocks the balance is what they expect as sales and hence from it, they are now comfortable to account for any expense relating to the sales for profit recognition purposes.
Concerning the time for recognizing the sales revenue I don’t agree with the agreement to be recognizing it at the start of the quarter when the goods are shipped this is so because will be defying the regulation AASB 1004 that states that until economic benefit is enjoyed no need of recognizing revenue therefore if at the start of shipping there is no benefit Pewter Ltd has enjoyed at all. More so the regulation further requires recognition of revenue to be after the transaction is done and both buyer and seller are satisfied at the start of the quarter in fact that when the transaction is commencing not starting.
It’s impractical to reverse sales revenue because going by the regulation ASSB 1004 that states that sale occurs after the benefit is achieved and after the transaction is done in this case the transaction is not done since the parties are yet to sell while the other is yet awaiting to confirm the sales. This is more of sales on return basis where one party is acting as the agent of the other and upon making sales that when is handles money to the principal in our case Pewter Ltd.
Cost of sales is only recognized after sales are made and we can’t recognize the cost of sales if there are no sales that have been made. I, therefore, wish to inform Pewter Ltd that its irrational to reverse cost of sales as well as revenue because they only apply dependably if sales are made there exist respective cost of sales.
Inventory, on the other hand, is recognized at cost as per IAS 2 hence there exists no rule of valuing it at selling prices. Each concept should be treated differently since they have different end effects and they are recognized and accounted differently as per different regulations thus therefore there exist no rational of concluding that by combining everything or working from behind the net actual sales effect is one as per the agreement.
As initially stated I don’t concur with the idea of netting of the costs relating store rent to the sales revenue since this is and expenditure in nature and it has to be accounted for in any case if throughout the quarter there exists no sales though not yet stipulated in the agreement its my belief that the retailers will expect the rent to be paid hence from the look of things in law perspective I advise Pewter Ltd not at all to set off the cost from revenue since they are different concepts and should be accounted for only to the extent in which they are incurred in any case it should be referred to as fixed cost Horngren(2009, Pg.13).I therefore strongly advise Pewter Ltd to review the agreement and implement the possible ideas shared.
Deegan, C., 2012. Australian financial accounting. McGraw-Hill Education Australia.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Chang, C., Herbohn, K. and Tutticci, I., 2009. Market's perception of deferred tax accruals. Accounting & Finance, 49(4), pp.645-673.
AASB, A.S., 2004. Presentation of Financial Statements. Balance Sheet, 68, p.73.