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FRS 112-Reconciliation Of Effective Tax Rate To Statutory Rate

slang — Tue, 21 Oct 2008 04:07:51 +0000

In FRS112 on Income Taxes or IAS 12, there is a requirement for a reconciliation statement between the Effective tax rate (ETR) to the Statutory Rate in the notes to the financial statement wherein the following are normally taken up:

Non allowable expenses
Deferred tax assets not recognized
Expenses not allowed for tax purposes
Non taxable income
Differential tax rate-SME’s ( small & medium enterprise), foreign subsidiaries
Over/under provision for prior years
Changes in tax rates of overseas subsidiaries
Changes in deferred tax due to tax rate changes

The idea of this reconciliation is allow transparency for outsiders/shareholders to understand whats the company has done to manage its taxation namely how much the actual existing taxation rate compared to the norm statutory rate. An excessive variance between ETR versus statutory rate is alarming and should be critically look at. However, sad to say, many of us tend to ignore or take lightly of such review of the reconciliation.

My two cents is that whether you are an accountant, financial controller or CFO or top management, we should look at this reconciliation more carefully

Why is this so?

Effective tax rate (ETR) is very important. In my earlier article on Economic value added (EVA), it is mentioned that ETR is one way to improve EVA as ETR is an outright cash flow where, when we manage to plan it carefully, will increase shareholder value / EVA.

Deliberate investment in tax exempted industrial areas, looking ahead to plan for future material non-allowable expenses into allowable type, ensuring certain subsidiaries of the group enjoy the SME’s status by making sure the threshold on authorized capital not exceeded, might be some suggestions to reduce ETR

So look out carefully this reconciliation in your company’s notes to the financial statement and please plan ahead to try to lower ETR to enhance company’s shareholder value. Incidentally, one part of the kpa/kpi of an inhouse tax manager is to reduce the ETR of the group/company.

What is Timing Difference in Tax and Timing Differences Versus Permanent Differences

slang — Sun, 14 Sep 2008 15:30:51 +0000

As the taxable profit is computed based on taxation laws which differ from the accounting policies applied to determine the accounting profit, hence the taxable profit and accounting profit can differ. The difference between taxable profit and accounting profit can be classified into:

permanent differences
timing differences

This articles looks at the aforesaid differences and their impact on tax

Permanent differences:

Are those differences between taxable profit and accounting profit for a period which originate in the current perio and DO NOT reverse in the subsequent periods. For example, the tax law allow only a part of an item of expenditure, the disallowed amount would result in permanent difference
The impact:-as this type of difference does not reverse in subsequent period(s), their impact on the amount of taxes to be changed in the statement of profit and loss of the current period is not measured and accounted for.

Timing Differences:

those differences between taxable profit and accounting profit for a period which arise because the period in which some items or revenues and expenses are included in taxable profit do not coincide with the period in which such items of revenues and expenses are included or considered in arriving at accounting profit. Example:interest on securities is included in accounting profit on time proportion basis but the same is taxable profit at the time it is due.
note that the total of these revenues included in accounting profit and taxable profit ultimately be the same, but periods of inclusion differ.
The impact:-timing differences are adjusted for tax amount to be charged against the revenue of the appropriate period should be measured and accounted for.

What is the Advantage(s) of Having Departmental Accounting

slang — Wed, 02 Jul 2008 15:02:05 +0000

This article looks at some of following reasons / justifications / advantages of having department accounts

Advantages

Each department is viewed as separate profit centre where department accounts is useful to evaluate performance of individual department by ascertaining trading, profit or loss of each department
The financial results namely trading profit or loss of each department can allow management to either discontinue the departments which are incurring losses or to take measures to improve the performance
As the profitability of each department can be ascertained by department accounting, the efficiency or inefficiency of each department manager can be evaluated and accordingly remunerated or monitored.
Help management to know the fixed cost of each department
By ascertaining the fixed cost of each department, the break even point of each department can be worked out
Facilitate the preparation of departmental budgets after taking into account the future development/expansion plans of the firm
Inter-departmental transactions are priced as per transfer pricing rule agreed upon and departmental profitability is assessed independently which encourage constructive competition amongst the departments which should benefit the overall company’s business.

What is Activity-Based Costing System?