THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA

Events after the end of the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/201

Principles of Financial and Cost Accounting

Nadeeshani Dissanayake B.Sc Accounting (Sp), First Class, ACA,

ACMA, CPA (Aust)

Events after the Reporting period

LKAS 10

Events after the end of the reporting period are those events, favourable and

unfavourable, that occur between the end

of the reporting period and the date when the financial statements are authorised

for issue.

types of events

Two types of events after the end of the

reporting period

 adjusting events―those that provide

evidence of conditions that existed at the end of the reporting period

 non-adjusting events―those that are

indicative of conditions that arose after the end of the reporting period

 Adjusting events—adjust the amounts

recognised (and update disclosures made)

in its financial statements

 Non-adjusting events—do not adjust the amounts recognised in its financial

statements However, disclose:

 the nature of the event, and

 an estimate of its financial effect, or a statement that estimate cannot be made

 Ex 1: On 31/12/20X5 A assessed its warranty obligation as Rs 100,000 Before its 20X5 financial statements were authorised for

issue, A discovered a latent defect in one of its lines of products It reassessed its

warranty obligation at 31/12/20X5 at Rs

150,000

Adjusting event―latent defect existed at

31/12/20X5 Measure warranty provision at Rs 150,000 at 31/12/20X5.

 Ex 2*: On 28/2/20X1 A’s 31/12/20X0 FS authorised for

issue At 31/12/20X0 the fair value of A’s investment in B’s publicly traded shares = Rs 20,000

On 28/2/20X1 fair value of shares = Rs 25,000.

Non-adjusting event―the change in the fair value results from conditions that arose after 20X0

A does not adjust the amounts recognised in its financial

statements However, it must give additional disclosure

Income tax and deferred tax

Some exceptions to this

Taxable income (TI) – tax

deductions (TD) = Taxable profit

Accounting Standards and the Companies Act are key sources that determine the appropriate accounting treatment of

• Difference caused by different “rules” used

for accounting vs tax purposes

ITEM ACCOUNTING TAX

Passive revenue

received in

advance

Recognised as TI when cash received

Recognised as expense based on useful life of asset

Allowance raised and expense recorded when debt considered doubtful Liability raised and expense recorded when debt owing

to employee

Possible for accounting useful life to be shorter than tax useful life

Recognised as TD based on predetermined rates

Recognised as a TD when debt physically written off

Recognised as TD when payment made to

employee

 The tax consequences of transactions that occur for accounting

purposes during a period should be recognised as income or

expense during the current period, regardless of when the tax

effects will occur

 This requires identifying the current and future tax consequences of

items recognised in the balance sheet

 Two separate calculations are performed each year:

1 current tax liability

2 movements in deferred tax balances

Accounting for income taxes –

general principles

Calculation of current tax liability

Calculation of current tax liability - example

• Rs 60 allowed as a tax deduction for plant.

• Interest has not yet been received.

• Bad debts of Rs 20 were written off during the year.

• Payments of Rs 30 were made to employees in relation to annual leave taken during the year.

• The tax rate is 30%

Calculation of current tax - example

Accounting profit before tax 300

Adjustment for plant depreciation (10)

Adjustment for bad debt write-offs 10

Adjustment for annual leave paid (20)

Taxable profit 180

Current tax liability (CTL) (30%) 54

exempt income not deductible

Acctg depn 50

Tax depn (60)

Adj req (10)

B/debts expense-acctg 30 B/debts w/off- tax (20) Adj req 10

A/L expense- acctg 10 Paid- tax (30) Adj req (20)

In the previous example the CTL would be recorded as:

DrIncome tax expense (current) 54

CrCurrent tax liability 54

Deferred tax liabilities and assets

 Arise when the period in which revenue and expenses are recognised for

accounting is different from the period in which items are recognised for tax

 Arise principally due to the accruals vs cash basis of recognising transactions

Differences either result in:

1. The company paying more tax in the future

 Taxable temporary differences (TTDs)

 Result in deferred tax liabilities (DTLs)

2. The company paying less tax in the future

 Deductible temporary differences (DTDs)

 Result in deferred tax assets (DTAs)

Calculation of deferred tax

 The existence of temporary differences results in the carrying amounts of an entity’s assets and liabilities being different from the amounts that would arise

if a balance sheet was prepared for tax authorities

 Carrying amount (CA)- asset and liability balances (net of accumulated

depreciation, allowances etc) based on accounting balance sheet.

 Tax base (TB)- asset and liability balances that would appear in a “tax

balance sheet”.

 Temporary differences are calculated as follows:

CA – TB = TTD/(DTD)

Calculating the tax base

Calculating the tax base for an asset

CA – future taxable amounts + future deductible amounts

= TB

Calculating the tax base for a liability

CA + future taxable amounts

- future deductible amounts

= TB

Borrowing Cost

LKAS 23

 Borrowing costs are interest and other

costs that an entity incurs in connection with

a borrowing of funds.

 Qualifying asset is an asset that

necessarily takes a substantial period of time to get ready for its intended use or sale.

Capitalising borrowing costs

are directly attributable to the acquisition,

construction or production of a qualifying

asset as part of the cost of that asset An

entity shall recognize other borrowing cost as

an expense in the period in which it incurs

them.

Leases LKAS 17

 A lease is an agreement whereby the lessor conveys to the lessee in return for a payment

or a series of payments the right to use an asset for an agreed period of time.

 A finance lease is a lease that transfers

substantially all the risk and rewards

incidental to ownership of an asset Title may

or may not eventually be transferred

 An operating lease is a lease other than a finance lease.

 operating lease – rent will be charged to P/L as an expense