Income tax requirements differ considerably from jurisdiction to jurisdiction. The application of the existing requirements to these different circumstances can be difficult, resulting in complex and potentially diverse interpretations. The Accounting Standards of the Republic of Armenia which have been adopted by the Ministry of Finance and Economy and are based on IAS (International Accounting Standards). The common approach for accounting for income tax shared by IAS 12 and SFAS 109 (US GAAP) is the temporary difference approach. However, the standards provides for exceptions to the temporary difference approach relating to the recognition and measurement of deferred tax assets and liabilities and the allocation of tax. The international accounting standards board constantly working on to remove any exceptions to the temporary differences resulting in simpler requirements based more on principle.
(a) the enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods;
(b) the enterprise retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to the enterprise; and
(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably [2].
According to the tax law US companies are required to file tax return and when a company prepares its tax return for a particular year, the revenues and expenses (any gains/losses) included o the return are, by and large, the same as those reported on the company’s income statement for the same year. However, in some instances tax lows and financial accounting standards differ. The reason why differ is that the fundamental objectives of financial reporting and those of tax authorities are not the same. The differences in recognition for financial statements and for tax purposes are reconciled through deferred taxes.
Mentioned disparate revenue recognition approaches in tax and financial accounting fields making timing and temporary differences in tax expenses reporting. The income statement liability method focuses on timing differences, whereas the balance sheet liability method focuses on temporary differences. Timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the balance sheet. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
RESULTS AND ANALYSIS
The objective of accounting for income tax in US companies is to recognize a deferred tax liability or deferred tax asset for the tax consequences of amounts that will become taxable or deductible in future years as a result of transaction or events that already have occurred. The current US GAAP focuses on the balance sheet and the recognition of liabilities and assets. Conceptually, though, the balance sheet approach strives to establish deferred tax assets and liabilities that meet the definitions of assets and liabilities provided by the Financial Accounting Standards Board’s conceptual framework. The accounting for income taxes in iGAAP is covered in IAS 12 (“Income Taxes”). Similar to U.S. GAAP, iGAAP uses the asset and liability approach for recording deferred taxes. The differences between iGAAP and U.S. GAAP involve a few exceptions to the asset-liability approach; some minor differences in the recognition, measurement, and disclosure criteria; and differences in implementation guidance.
Accomplishment of current tax assets and liabilities recognition in Armenian companies bases on following principles. Current tax for current and prior periods should, to the extent unpaid, be recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess should be recognized as an asset. When a tax loss is used to recover current tax of a previous period, an enterprise recognizes the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the enterprise and the benefit can be reliably measured. A deferred tax liability is recognizing for all taxable temporary differences. When the carrying amount of the asset exceeds its tax base, the amount of taxable economic benefits will exceed the amount that will be allowed as a deduction for tax purposes. This difference is a taxable temporary difference and the obligation to pay the resulting income taxes in future periods is a deferred tax liability. As the enterprise recovers the carrying amount of the asset, the taxable temporary difference will reverse and the enterprise will have taxable profit. This makes it probable that economic benefits will flow from the enterprise in the form of tax payments.
Consequently, current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.
Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences may be either:
• taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or
• deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
Tax assets and tax liabilities in Armenian enterprises presented separately from other assets and liabilities in the balance sheet. Hence, deferred tax assets and liabilities is distinguished from current tax assets and liabilities. When an enterprise makes a distinction between current and non-current assets and liabilities in its financial statements, it is not classifying deferred tax assets (liabilities) as current assets (liabilities).
Recognizes differed tax liabilities gradually declining in future, in financial statements Armenian enterprises bringing tax expenses, differed tax actives, is making deductible expenses in future taxation process. When in financing and tax accounting incomes and expenses is been timing congruent, its not making differed tax actives and liabilities’.
t0 t1
REPORTING PERIOD
Income (IF) and expenses (EF) of
Financial Accounting
.
Income (IT) and expenses (ET) of
Tax Accounting
Figure 1 Timing harmonious incomes and expenses in Financial and Tax Accounting
framework
In Armenian enterprises accounting practice the differed tax liabilities taking place in cases, when:
- recognized income in financial accounting > recognized income in tax
accounting
IF >IT (figure 2)
- recognized expenses in financial accounting < recognized expenses in tax
accounting
EF < ET (figure 3)
In practice activity Armenian enterprises differed tax assets generally is occurred in two cases, when:
- recognized income in financial accounting > recognized income in tax
accounting
IF < IT (figure 4)
- recognized expenses in financial accounting > recognized expenses in tax
accounting
EF > ET (figure 5)
t0 t1
REPORTING PERIOD (IF >IT)
Incomes recognized by
Financial Accounting
POST REPORTING PERIOD
.
Differed Tax Incomes recognized by
Liabilities Tax Accounting
Figure 2 The timing process of presentation Differed Tax Liabilities in Financial
Statement (when IF >IT)
t0 t1
REPORTING PERIOD (EF < ET)
Expenses recognized by
Differed Tax Financial Accounting
Liabilities
POST REPORTING PERIOD
.
Expenses recognized by
Tax Accounting
Figure 3 The timing process of presentation Differed Tax Liabilities in Financial
Statement (when EF < ET)
REPORTING PERIOD (IF < IT)
Incomes recognized by
Differed Tax Financial Accounting
Assets
POST REPORTING PERIOD
.
Incomes recognized by
Tax Accounting
Figure 4 The timing process of presentation Differed Tax Assets in Financial
Statement (when IF < IT)
t0 t1
REPORTING PERIOD (EF >ET)
Incomes recognized by
Financial Accounting
POST REPORTING PERIOD
.
Differed Tax Expenses recognized by
Assets Tax Accounting
Figure 5 The timing process of presentation Differed Tax Assets in Financial
Statement (when EF >ET)
The more situations for differed tax assets formation in practice is related to depreciation accounting process, when Armenian Law of Profit Tax suggested only straight-line method, but simultaneously IAS 16 “Property, Plant and Equipment” offers variety of depreciation methods an asset on a systematic basis over its useful life. These methods besides of straight-line method include also diminishing balance method and the units of production method. Straight-line depreciation results in a constant charge over the useful life if the asset's residual value does not change. The diminishing balance method results in a decreasing charge over the useful life [3]. Consequently, using accelerating depreciating method is bringing temporary differences in tax expenses recognition and as a result in balance shit is presented as a differed tax assets.
For example, is purchased fixed assets by $ 3000, with 5 year useful life exploitation and $1000 per year returns. The profit tax percentage for all period of fixed asset operation is 20%. Consequently, by the and of assets exploitation period (5-th year) the enterprise will be have revenue $5000, proceeds profit $2000 and accordingly will get hold of tax obligation $400.
By the requirements of Armenian Profit Tax Law, based on Straight – Line method value of depreciation for all years of assets exploitation will be:
$3000 : 5 years = $600
According to enterprise accounting policy, accelerating approach of amortization will present depreciation value by each years of assets exploitation period such us:
1 + 2 + 3 + 4 + 5 = 15
I year 5/15 x 3000 = 1000
II year 4/15 x 3000 = 800
III year 3/15 x 3000 = 600
IV year 2/15 x 3000 = 400
V year 1/15 x 3000 = 200
In this case Tax Accounting will be recognize profit tax expenses as $80 constant value for all period asset operation (see table 1), but from another hand, in financial accounting tax expenses will be present by differed time attitude (see table 2), in consequence making differed tax assets.
Table 1
Profit Tax Formation in case of using Straight Line Depreciation method [4]
Items Years
1 2 3 4 5 Total
Revenue 1 000 1 000 1 000 1 000 1 000 5 000
Expenses 600 600 600 600 600 3 000
Profit before tax 400 400 400 400 400 2 000
Profit Tax 80 80 80 80 80 400
Net Profit 320 320 320 320 320 1 600
Table 2
Profit Tax Formation in case of using Accelerating Depreciation
Items Years
1 2 3 4 5 Total
Revenue 1 000 1 000 1 000 1 000 1 000 5 000
Expenses 1 000 800 600 400 200 3 000
Profit before tax 0 200 400 600 800 2 000
Profit Tax 0 40 80 120 160 400
Net Profit 0 160 320 480 640 1 600
In Armenian companies arrangement of differed tax assets is presented by financial accounting according following transactions:
First year
Recognition of tax paying responsibility
Dt Current tax Expanses………..80
Kt Profit Tax Liabilities……………………80
Recognition of differed tax assets
Dt Differed Tax Assets………………..80
Kt Differed Tax Expenses…………………80
Profit Tax Expense presentation in Financial Statement =
Current tax Expanses + Differed Tax Expenses = 80 - 80 = 0
Second year
Recognition of tax paying responsibility
Dt Current tax Expanses………..80
Kt Profit Tax Liabilities……………………80
Recognition of differed tax assets
Dt Differed Tax Assets………………..40
Kt Differed Tax Expenses…………………40
Profit Tax Expense presentation in Financial Statement =
Current tax Expenses + Differed Tax Expenses = 80 - 40 = 40
Third year
Recognition of tax paying responsibility
Dt Current tax Expanses………..80
Kt Profit Tax Liabilities……………………80
Recognition of differed tax assets
Dt Differed Tax Assets………………..0
Kt Differed Tax Expenses…………………0
Profit Tax Expense presentation in Financial Statement =
Current tax Expenses + Differed Tax Expenses = 80 - 0 = 80
Fourth year
Recognition of tax paying responsibility
Dt Current tax Expanses………..80
Kt Profit Tax Liabilities……………………80
Declining of differed tax assets
Dt Differed Tax Expenses…………………40
Kt Differed Tax Assets………………..40
Profit Tax Expense presentation in Financial Statement =
Current tax Expenses + Differed Tax Expenses = 80 + 40 = 120
Fifth year
Recognition of tax paying responsibility
Dt Current tax Expanses………..80
Kt Profit Tax Liabilities……………………80
Declining of differed tax assets
Dt Differed Tax Expenses…………………80
Kt Differed Tax Assets………………..80
Profit Tax Expense presentation in Financial Statement =
Current tax Expanses + Differed Tax Expenses = 80 + 80 = 160
Expenses recognized Revenues recognized
by Financial Accounting by Financial Accounting
Profit presentation
In Financial Statements’
Differed Tax
Adjustments
+ , -
Profit Recognition
through Tax Accounting
Figure 6 The mechanism of profit configuration
Accordingly, in Armenian companies in order for transforming from financial accounting into tax accounting profit in use adjustments processing, related to recognition and downgrading differed tax assets and liabilities (see figure 6).
CONCLUSION
Incidentally, IAS 12 describes recognition and measurement of deferred taxes using a temporary difference approach, similar to the method of FAS 109, Accounting for Income Taxes. Although there are significant differences in the treatment of tax basis, uncertain tax positions and recognition of deferred tax assets and liabilities, FASB and IASB working on the issue of differences. The IASB (International Accounting Standards Board) issued an Exposure Draft of an IFRS to replace IAS 12 Income Taxes with the intention of eliminating many of the differences between the IFRS and FASB standards.
Tax Accounting US-RA Comparative Interpretation making conclusion, that there are several differences between IFRS and GAAP relating to accounting for and reporting of income taxes:
Firstly, the tax rate used for measuring deferred taxes under GAAP is the enacted tax rate in place when the timing difference is expected to reverse, whereas under IFRS, the substantially enacted tax rate is used.
Secondly, under GAAP, the classification of the deferred tax asset or liability is either short-term or long-term depending on the underlying relationship of the timing difference. Under IFRS, deferred tax assets and liabilities are always recorded as long-term.
Thirdly, under GAAP (for non-public companies), a reconciliation of the expected tax expense to actual is not required in detail and only a disclosure of the nature of the reconciling items is required. IFRS requires the complete reconciliation, including the nature and amounts.
Literature:
1. The Law of Republic of Armenia on Profit Tax, 1997, item 43
2. International Accounting Standard 18 “Revenue”, item18, (revised 2003)
3. International Accounting Standard 16 “Property, Plant and Equipment”, item 62 (revised 2005)
4. S.Eloyan, Estimation of Tax Assets in Tobacco Production, Bulletin of State
Agrarian University of Armenia, #2, 2009, pages 110-111
5. “Income Taxes”, International Accounting Standard No. 12 (IASCF), as mended
effective January 1, 2009. item 11
6. FASB ASC 740-10-35: Income Taxes-Overall-Subsequent Measurement “Accounting for Income Taxes, Statement of Financial Accounting standards No. 109.
2005, item 3
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