Is IAS12 too difficult to apply and understand? Essay

International Accounting Standards 12 continues to receive numerous criticisms on applicability and usefulness of numbers in accounting for corporate income taxes. The argument presented is that the standards set by IAS 12 are too hard to apply or even understand. In the plight of these criticisms, two accounting standards boards, UK’s (ASB) and Germany’s (GASB) opted to conduct a proactive project plan aimed at fundamentally reviewing the standards set by IAS 12 prove hard to solve through piecemeal amendment. Their main agenda was to look at critical issues of accounting for corporate income in an attempt to develop a discussion paper on the principles of IAS 12 and set out proposals.

IAS 12 prohibits companies to give an account to deferred taxes by using the deferral method based on the income statement. It instead prefers the passive methodology based on the balance sheet. In addition to the above requirement, the standard requires corporations to acknowledge either a deferral tax liability.

Don't use plagiarized sources. Get Your Custom Essay on
Is IAS12 too difficult to apply and understand? Essay
GET AN ESSAY WRITTEN FOR YOU FROM AS LOW AS $13/PAGE
Order Essay

Thirdly, IAS 12 requires recognition of deferred tax assets when it is certain that a corporation possess revenues in future to realize deferred tax asset.

For instance, given that a company has a history of losses it will recognize deferred tax assets to the extent that taxable temporary expenses in amounts are sufficient. “Fourthly, IAS 12 does not allow asset credit and delayed tax liabilities brought about by types of material goods and liabilities whose books vary in amounts at the moment of acknowledgment” (IAS – 12). The other requirement is that IAS 12 prohibits recognition of deferred tax liabilities, and those liabilities encountered or arising from adjustments for conversion so long as it satisfies two conditions: * The main investor is capable of controlling the timing of reversal’s temporary difference.

* It is certain that impermanent variation may become irreversible in the near future. Therefore, it is a requirement of the company to disclose information concerning cumulative amount of temporary variation involved. Further, IAS 12 recommends explicitly to adjustments to a fair value of assets and liabilities arising from a dual business combination. It however prohibits recognition of deferred tax liabilities because of initial recognition of good will. During revaluation of assets, IAS 12 allows and requires a corporation to recognize deferred tax liabilities in case revaluation of asset takes place. Moreover, IAS 12 requires that valuation of assets and deferred tax liabilities based on tax consequences that may arise in a manner that a company expects to recover the amount.

“The standard also prohibits the deduction of deferred tax assets and liabilities to account for its current value” (Kirk, 2005). The IAS 12 further prohibits companies from making distinctions between the current and non-current assets and liabilities in its financial reports. It also provides restrictive conditions on debit and credit balances that represent deferred tax assets that could be compensated. This requirement is based on the requirements as stipulated by the financial assets and liabilities IAS 32, financial instruments disclosure and presentation. It is worth noting that among the new information IAS 12 requires disclosure include:

* That for every class of impermanent disparity;

* The amounts of assets and tax liabilities recognized and the amount of expenses or income labeled in the income statement with respect to discontinued operations, the realization of deferred tax asset depends on future prospects over the profits coming from reversals of existing impermanent parities. There has been a rise in criticism on financial reporting for income taxes from users and preparers. The criticism is based on the implication of the current and future effects it will have on cash flows. In their arguments, the users cite accounting requirements as too complex to apply in working out income tax. “In addition, the principles underlying IAS 12 standard exhibit numerous exemptions that finally compromise on its principles and requirements. Some users also argue against the notion that the principles underlying IAS 12 is flawed” (JORGE, 2008). However, they believe that the principles of IAS 12 are good but face a number of limitations arising from different and complex jurisdictions governing the various taxes in different parts of the world.

“Due to these and other complexities, surrounding the applicability of IAS 12, there is a need to examine in reality the requirements of the principle is hard to apply in financial accounting and reporting” (Gupta, 2005). First, there is a need to examine significant improvements that can be incorporated to allow flexibility in application due to incompatibility with the various jurisdictions. To understand issues surrounding IAS 12, there is a need to understand problems cited as a limitation to its application. It is important to note that users and preparers believe that the requirements in IAS12 are unsatisfactory in certain aspects. In addition, users of financial reports do not find information courtesy of IAS 12 useful. In fact, complexity of taxes within corporations makes it quite difficult to assess its impact and prescribes suitable management strategies. As a result, clear and transparent information that is not adequately provided by IAS 12 prepared financial statements.

“The standard seems to concentrate on extensive disclosures focusing on accounting technicalities relating to temporary differences rather than on aspects of real concern, for instance, current and future tax cash flows” (Greuning, 2011). The requirements provided by IAS 12 appear too difficult to apply in practice since they are unclear. Its relevance and understandability of information provided by the standard according to preparers is questionable. In the plight of these limitations, IAS 12 has proved hard to apply and understand and therefore a number of issues need to be addressed to make it better. Several strategies can be incorporated to address the limitations in the IAS12.

* Amendments

“Some amendments can be adopted to fix the limitations present in IAS 12 standard” (Everingham & Kana, 2008). These would address particular issues such as the current unsatisfactory requirements and disclosures provided in financial reports prepared under IAS 12. This strategy will protect the main principles of IAS 12. * Develop a new accounting standard- This is on different principles from the present IAS 12 standard. It is vital to note that developing an entirely different approach to accounting pose a considerable challenge. This is because developing a new approach that matches the standards of IAS 12 can take time but limited amendments can save credible amount of time and result in less disruptive time for change and complete replacement.

The main question that users should ask to concern IAS 12 is whether the limitations should be addressed through limited amendments or by simply developing an entirely new standard that is based on different principles away from that which is addressed by IAS 12. In view of these strategies, some preparers disagree with the proposed changes. “This is because they believe that the limitations contemplated in the IAS 12 were not as serious to justify the expenses and efforts” (Delaney, 1985). Some amendments need change for instance; the current IAS 12 brings confusion in the relationships between the tax paid and current tax expense as reported in the income expense. In order to address the inefficiencies, the following questions need answers: * Should there be additional disclosures in IAS 12? Moreover, will these disclosures help in solving the misunderstanding between the taxes paid and current tax expenses? * “Should strategies on tax accommodate user information needs?”(Choi, 2001)

* If a new standard different to IAS 12 was to be adopted in preference to amending it, will the new system deliver up to the expectation of income tax determination? Will the new approaches pose a challenge when it comes to implementation? It is important to note that, the use of IAS 12 is a complex affair since the users have limited knowledge on the limitations and intrigues surrounding its use on tax issues and end up struggling using the information as it is without caution and end up messing.

Moreover, dealing with the challenges is not a straightforward venture. Uncertainty of taxes in financial statements is of utmost interest to users and is therefore more interested on how to reflect tax risks in financial reporting. In addition, IAS 12 neither provides explicit guidance nor gives specific disclosures on accounting for uncertain tax positions. “It only gives provisions that current tax liabilities at the amount expected to be paid tax authorities using the tax laws enacted at the balance sheet date on rates specified for different nations. This implies that the amount recognition is based on estimates owed or realized” (Balthazar, 2011).

Conclusion

In conclusion, IAS 12 has numerous loopholes that should not be ignored. This is because it creates a large gap between the requirements as suggested by IAS 12 standard as compared to what is needed by users for purposes of predicting future tax cash flows. These user needs may not be met through additional disclosures in financial statements rather other parts of company report may be used to provide a secure location for that kind of information.

References:
BALTAZAR, E. (2011). International GAAP 2012 Generally Accepted Accounting Practice under International Financial Reporting Standards. Chichester, West Sussex, U.K., John Wiley & Sons. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=420730 CHOI, F. D. S., MEEK, G., & FROST, C. A. (2001). International accounting. Upper Saddle River, N.J., Prentice Hall.

DELANEY, P. R. (1985). GAAP. New York, J. Wiley & Sons. EVERINGHAM, G. K., & KANA, S. P. (2008). Corporate reporting. Sunninghill, PricewaterhouseCoopers.
GREUNING, H. V., SCOTT, D., & TERBLANCHE, S. (2011). International financial reporting standards: a practical guide. Washington, D.C., World Bank. GUPTA, K. (2005). Contemporary auditing. New Delhi, Tata McGraw-Hill. “IAS – 12 – World GAAP Info.” Web. 17 Feb. 2013

<http://www.worldgaapinfo.com/pdf/IAS/IAS12.pdf>.
INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE. (2000). Revisions to international accounting standards: IAS 12, Income Taxes; IAS 19, Employee Benefits; IAS 39, Financial Instruments: recognition and measurement and other related standards. JORGE FAUSTINO, S. M. (2008). Implementing reforms in public sector accounting. Coimbra [Portugal], Université de Coimbra.

KIRK, R. J. (2005). International financial reporting standards in depth. Volume 1, Theory and practice. Amsterdam, Elsevier/ Butterworth Heinemann/CIMA Pub. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=166355 LAWRENCE, S. (1997). International accounting. London [u.a.], Internat. Thomson Business Press.

NOBES, C., & PARKER, R. H. (2008). Comparative international accounting.
Harlow, Essex, England, Prentice Hall/Financial Times.
OPPERMANN, H. R. B. (2009). Accounting standards. Lansdowne, Juta. PADMAVATHI, C. (2005). Accounting standards: towards harmonization and convergence. Hyderabad, ICFAI University Press.
PRICEWATERHOUSECOOPERS. (1998). International accounting standards: applying IAS 12, income taxes, in practice. [Londres], PricewaterhouseCoopers. POWER, M. (2007). Organized uncertainty: designing a world of risk management. Oxford [u.a.], Oxford Univ. Press.

WIECEK, I. M., & YOUNG, N. M. (2010). IFRS primer: international GAAP basics. Hoboken, NJ, John Wiley & Sons
ZIMMERMANN, J., WERNER, J. R., & VOLMER, P. B. (2008). Global governance in accounting: rebalancing public power and private commitment. Basingstoke [England], Palgrave Macmillan. (2007). International accounting and reporting issues. New York, United Nations Publication

(2008). Relationships with the state: proposed amendments to IAS 24 : comments to be received by 13 March 2009. London, U.K., International Accounting Standards Board. (2009). International Financial Reporting Standards IFRSs 2009

Grand Paper Writers
Order NOW For A 10% Discount!
Pages (550 words)
Approximate price: -

Our Advantages

Plagiarism Free Papers

All papers are written by the best professional writers to ensure 100% originality. We always provide plagiarism reports whenever we deliver completed papers.

Free Revisions

All papers by Grand Paper Writers are completed and submitted on time. This timely delivery of papers gives you time to go through the paper before the official deadline.

Title-page

As an additional service, we will provide a title page that precedes the contents of your paper. Here, you will provide your personal details.

Bibliography

We also ensure that we provide an extra page for the references or bibliographies following referencing rules.

Originality & Security

At Grandpaperwriters.com, we guarantee students for the provision of security and original work. All your personal information is handled with confidentiality and is not shared with third parties. Additionally, we ensure that we provide original content with accompanying plagiarism reports to show originality.

24/7 Customer Support

Our customer support team is always available 24/7 to provide instant responses to any queries raised by students.

Try it now!

Calculate the price of your order

We'll send you the first draft for approval by at
Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

Grandpaperwriters.com has the best professional essay writers for quality services.

Pricing

Flexible Pricing

Here, a Grandpaperwriters.com, we do not compromise on the time of our clients. We always deliver all completed papers on or before the deadlines.

Communication

Admission Help & Client-Writer Contact

Grandpaperwriters.com provides an interactive portal where students can communicate directly to their writers.

Deadlines

Paper Submission

Here, a Grandpaperwriters.com, we do not compromise on the time of our clients. We always deliver all completed papers on or before the deadlines.

Reviews

Customer Feedback

Grandpaperwriters.com appreciates feedback from our clients to help us improve the delivery of essay writing services. As such, we are constantly changing our policies to ensure maximum customer and writer satisfaction.