ACCA F3 (INT) Financial Accounting - 2010 - Study text - Emile Woolf Publishing
Подождите немного. Документ загружается.
Chapter 12: Preparing financial statements
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 305
Taxation and dividends
Taxation on profits
Taxation in the income statement
Taxation in the balance sheet
Accounting for dividends
3 Taxation and dividends
3.1 Taxation on profits
A company is a legal person, and is liable to pay tax on the profits that it makes.
This tax is called income tax in international accounting standards.
The income statement and statement of financial position of a sole trader or
partnership is prepared without any concern for taxation on profits. The taxation of
the income of sole traders and partners is not a concern of their businesses, and is
not recorded in the financial accounts of the business.
Companies are different, because the company has a liability for taxation that is
reported in its income statement and statement of financial position.
The income statement reports the amount of taxation on the profit of the
company for the year. This is deducted in reaching a figure for profit after
taxation.
The statement of financial position reports the amount of taxation that the
company owes to the tax authorities as at the end of the reporting period.
3.2 Taxation in the income statement
The basic rule for taxation in the income statement of a company is that it is a charge
against profits after interest. The profit after tax is added to the retained earnings
reserve.
For example:
$
Profitsfromoperations 460,000
Interest 60,000
Profitbeforetax 400,000
Tax 100,000
Profitaftertax 300,000
Over-estimate or under-estimate of tax from the previous year
When the financial statements are prepared, the tax charge on the profits for the
year is likely to be an estimate. The figure for tax on profits in the statement of
comprehensive income/income statement is therefore not the amount of tax that
Paper F3: Financial accounting (International)
306 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
will eventually be payable, because it is only an estimate. The actual tax charge,
agreed with the tax authorities some time later, is likely to be different.
In these circumstances, the tax charge for the year is adjusted for any under-estimate
or over-estimate of tax in the previous year.
An under-estimate of tax on the previous year’s profits is added to the tax
charge for the current year.
An over-estimate of tax on the previous year’s profits is deducted from the tax
charge for the current year.
For example:
$ $
Profitfromoperations460,000
Interest60,000
Profitbeforetax400,000
Tax:
Adjustmentforunde r‐estimateoftaxin thepreviousyear 3,000
Taxoncurrentyearprofits 100,000
Taxchargefortheyear103,000
Profitaftertax297,000
3.3 Taxation in the statement of financial position
The taxation charge for the year is the liability that the company expects to pay. The
timing of tax payments on profits varies from one country to another, depending on
the tax rules in each country. The actual amount of tax payable, and reported in the
statement of financial position as a current liability (taxation payable), is calculated
as follows:
$
Taxpayableatthebeginningoftheyear A
Taxchargefortheyear B
A+B
Taxpaymentsmadeduringtheyear (C)
Taxpayableattheendoftheyear A+B–C
Example
Fresh Company has a financial year ending on 31 December. At 31 December Year 5
it had a liability for income tax (= tax on its profits) of $77,000. The tax on profits for
the year to 31 December Year 6 was $114,000.
The tax charge for the year to 31 December Year 5 was over-estimated by $6,000.
During the year to 31 December Year 6, the company made payments of $123,000 in
income tax.
Chapter 12: Preparing financial statements
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 307
Required
Calculate:
the tax charge for the year to 31 December Year 6, to include in the income
statement
the liability for income tax as at 31 December Year 6, to include in the balance
sheet.
Answer
(a)
Tax:
$
Adjustmentforover‐estimateoftaxinthepreviousyear (6,000)
Taxoncurrentyearprofits 114,000
Taxationchargefortheyear 108,000
(b)
$
Taxpayableatthebeginningoftheyear 77,000
Taxchargefortheyear 108,000
185,000
Taxpaymentsmadeduringtheyear (123,000)
Taxpayableattheendoftheyear 62,000
The tax payable will appear as a current liability in the statement of financial
position.
Exercise 1
A company has a year end of 31 December. At 31 December Year 2 there was a tax
liability in the balance sheet of $54,000. When the tax liability for Year 2 was finalised
and paid it was found to be $59,000.
The estimate of tax due for the year to 31 December Year 3 is $65,000.
What is the tax charge for Year 3 in the income statement and the liability for tax in
the statement of financial position at 31 December Year 3?
3.4 Accounting for dividends
The accounting rules for dividends can be summarised as follows.
Total dividends paid are not shown in the income statement, as part of the
income statement itself.
The proposed final dividend for the accounting year is not shown in the
statement of financial position, unless (in a very unusual circumstance) the final
dividend is proposed before the end of the financial year.
Paper F3: Financial accounting (International)
308 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Total dividends actually paid during the year (the final dividend for the
previous year and the interim dividend in the current year) are reported as
deductions from equity (deductions from retained earnings) in another financial
statement, the statement of changes in equity.
The final proposed dividend for the year, if it is proposed after the end of the
year (which is the normal practice), is disclosed in a note to the financial
statements, as a non-adjusting post-balance sheet event.
The figure for retained earnings in the statement of financial position is after
deduction of equity dividends paid during the period.
Dividends are paid out of retained earnings. When a dividend is paid:
Debit: Retained earnings
Credit: Bank account.
Example
A company has 2,000,000 ordinary shares of $0.50 each in issue. At the beginning of
Year 2, its accumulated profits were $450,000. Also at the beginning of Year 2, it
owed $50,000 in tax on profits to the tax authorities
Its profit before taxation for Year 2 was $300,000. Taxation on these profits is
$90,000. During the year, the company:
made payments of tax on profits totalling $85,000
paid a final dividend for the previous financial year (Year 1) of 7 cents per share
paid an interim dividend for the current financial year (Year 2) of 3 cents per
share
Profit for the year
$
Profitbeforetaxation 300,000
Taxation 90,000
Profitaftertaxation(creditretainedearningsreserve) 210,000
Retained earnings
$ $
Balanceatthebeginningoftheyear450,000
ProfitaftertaxationforYear1210,000
660,000
Dividends
FinaldividendforYear1(2,000,000x$0.07) 140,000
InterimdividendforYear2(2,000,000x$0.03) 60,000
200,000
Balanceattheendoftheyear(statementoffinancialposition)460,000
Chapter 12: Preparing financial statements
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 309
Taxation: current liability
$
Liabilityfortaxationatthebeginningoftheyear 50,000
Taxationonprofitsfortheyear 90,000
140,000
Taxationpaidduringtheyear (85,000)
Liabilityfortaxationattheyear‐end(balancesheet) 55,000
Paper F3: Financial accounting (International)
310 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Events after the reporting period
Definition
The accounting problem with events after the balance sheet date
Adjusting and non-adjusting events
Events after the reporting period: the accounting rules (IAS 10)
Proposed dividends
4 Events after the reporting period
4.1 Definition
An event after the reporting period is an item of information that is obtained or an
event that occurs:
after the end of a financial period (after the reporting period) and
before the financial statements are authorised for issue, and
this item of information or event is material and relevant to the financial
position of the business.
An event can be either favourable for the business or adverse (unfavourable).
4.2 The accounting problem with events after the reporting period
When an event occurs after the reporting period, the problem is to decide:
whether to alter the financial statements for the period that has just ended, to
include the effect of the event, and
if the financial statements are not altered, whether to report the event in some
way in the financial statements that will soon be issued.
The rules for the accounting treatment of events after the reporting period are
contained in IAS 10 Events after the reporting period.
4.3 Adjusting and non-adjusting events
A distinction is made between adjusting events after the reporting period and non-
adjusting events.
An adjusting event is an event or information that provides evidence about
conditions that already existed at the end of the reporting period.
A non-adjusting event is an event that occurs after the reporting period and
does not relate to conditions that existed at the end of the reporting period.
However, the event is of sufficient importance (it is sufficiently material) that a
failure to disclose its existence to the users of the financial statements would be
misleading and inappropriate.
Chapter 12: Preparing financial statements
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 311
4.4 Events after the reporting period: the accounting rules (IAS 10)
The accounting rules for events after the reporting period are as follows:
Adjusting events Non-adjusting events
Alter the financial statements for the
accounting period that has just ended,
to include the effects of the event.
Do not alter the financial statements for
the accounting period that has just
ended, to include the effects of the
event. However, provide details of the
event in a note to the financial
statements.
Examples Examples
The bankruptcy of a customer who
owed money at the end of the reporting
period. A bad debt is now expected.
Account for this as a bad debt in the
income statement and reduce total
receivables in the statement of financial
position as at the end of the reporting
period
An issue of new share capital after the
end of the reporting period.
A fall in the market value of
investments after the end of the
reporting period.
An insurance company has agreed to
pay an insurance claim that was still
being negotiated at the end of the
reporting period. Account for this as
‘other income’ and include in the
statement of financial position as a
receivable.
A major new loan obtained after the
end of the reporting period.
An item of inventory held at the end of
the reporting period, is sold after the
reporting period for less than its cost,
due to its poor condition. This provides
evidence that the inventory should be
valued at its net realisable value, not
cost, in the statement of financial
position. The difference between cost
and net realisable value will be treated
as an expense for the year that has just
ended.
The acquisition of another business, or
the disposal of a part of the existing
business after the reporting period.
A physical disaster such as a fire or
flooding after the reporting period, that
has material financial consequences for
the business.
The discovery of a fraud after the
reporting period that affects the
accounting figures for the reporting
period.
4.5 Proposed dividends
A company might propose a final dividend to its shareholders, or declare a
dividend, after the reporting period but before the financial statements are
authorised for issue.
Paper F3: Financial accounting (International)
312 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
In virtually all cases, proposed dividends are a non-adjusting event after the
reporting period.
Practice multiple choice questions
1 A company has made a material change to an accounting policy in preparing its
financial statements for the year. The change was not prompted by a new international
financial reporting standard.
Which of the following disclosures must be made about the change in accounting
policy?
1 The nature of and reasons for the change of accounting policy
2 The amount of the adjustments to the financial statement in the current financial
period as a consequence of the change in policy
3 The amount of the adjustments to the financial statement in the previous
financial period as a consequence of the change in policy
4 The expected amount of the adjustments to the financial statements in the next
three years as a consequence of the change in policy
A 1 only
B 1 and 2 only
C 1, 2 and 3 only
D 1, 2, 3 and 4
(2 marks)
2 A company has the following transactions.
1 The company paid its credit suppliers $2,000.
2 Goods held in inventory that cost $2,000 were sold for $3,000.
3 A credit customer whose debt of $1,000 had been written off now pays the
money owed in full.
What is the combined effect of these transactions on the company’s total working
capital (current assets minus current liabilities)?
A Increase of $1,000
B Increase of $2,000
C Increase of $3,000
D Increase of $4,000
(2 marks)
3 At 31 December Year 3 the following items require inclusion in a company’s financial
statements.
1 The company has paid insurance $18,000 in Year 3 covering the period to 31
October Year 4.
2 On 1 January Year 3 the company made a one-year loan of $20,000 to an
employee at an interest rate of 3% per year. The employee repaid the loan in full
on 1 January Year 4 together with all the interest accrued to that date.
3 In January Year 4 the company received rent on sub-let office premises $8,000
covering the three-month period to 31 December Year 3.
Chapter 12: Preparing financial statements
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 313
For these three items, what amounts should be included in the statement of financial
position as at 31 December Year 3 as current assets and current liabilities?
Current assets Current liabilities
$ $
A 23,000 20,600
B 35,600 15,000
C 43,600 nil
D 15,600 8,000
(2 marks)
4 Which of the following statements are correct, according to IAS 10 Events after the
reporting period?
1 Events after the reporting period are those that occur after the reporting period
has ended and before the financial statements are authorised for issue.
2 If inventory is sold after the reporting period at a material loss, the loss should be
reflected in the financial statements as an adjusting item.
3 Details of all adjusting events must be disclosed in notes to the financial
statements.
4 If the market value of investments held by an entity falls significantly after the
reporting period, the details must be disclosed in a note to the financial
statements.
A 2 and 3 only
B 1, 3 and 4 only
C 2 and 4 only
D 1, 2 and 4 only
(2 marks)
5 In the draft statement of financial position of Company Z at 31 June Year 2, the
inventory value was based on an inventory count on 4 July Year 2, which gave a total
inventory value of $363,800.
Between 30 June and 4 July Year 2 the following transactions occurred.
$
Purchase of goods 12,500
Sale of goods (profit margin 40% on sales) 14,000
Purchase returns by Z 600
What adjusted figure for inventories should be included in the statement of financial
position of Z as at 30 June Year 2?
A $360,300
B $359,100
C $361,900
D $368,600
(2 marks)
Paper F3: Financial accounting (International)
314 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
6 Which of the following material events after the reporting period are adjusting events?
1 Discovery of a fraud relating to the past two years
2 The insolvency of a credit customer who still owed money as at the end of the
reporting period
3 The sale of a property at a large profit.
4 A property valuation providing evidence of impairment in value at the end of the
reporting period
A 1, 2 and 4 only
B 2, 3 and 4 only
C 1 and 2 only
D 1, 2 and 3 only
(2 marks)
7 Which of the following items should be treated as adjusting events after the reporting
period?
Item 1: A building owned by the company has been valued after the end of the
reporting period. The valuation indicates evidence of impairment in its value as at the
end of the reporting period.
Item 2: Fraud has been discovered since the end of the reporting period, affecting the
financial statements.
A 1 only
B 2 only
C 1 and 2
D Neither of them
(1 mark)