Difference in Accounting Methods

Questions: 1. Describe what you understand by the accounting concepts mentioned and provide examples from your selected annual report.2. Discuss the problem of tax effect accounting addressed in the above statement in the context of the present AASB/IASB standards and the conceptual framework using your selected annual report to provide examples.3. Comment on the issues of tax effect accounting in the above in the statement as they relate to the provision of decision useful information. Use your selected annual report to provide exapmples. Answers: Introduction: The assignment presents the difference in accounting methods and its relevance in decision-making process for the users of the annual report. The discussion states the accuracy and reliability for the conventional and modern accounting methods. Moreover, the solution deals with the relative tax- effect problems and issues vital for decision making process for the users and other stakeholders. The entire solution is presented in consideration to Australian Accounting Standards Board (AASB)/ International Accounting Standards Board and with the selected company Cash Converter. 1. Two types of accounting concepts prevail to record and report the transactions, one is traditional or conventional accounting method and the other is modern accounting method. In the era when technology was not advanced, accountants used to follow the conventional accounting method. Conventional method of accounting is generally- accepted practice based on the rules and not legally- binding practice and hence this system is not very effective in present days. Conventional or traditional accounting systems were based on reporting the historical costs of assets and liabilities through which accuracy and reliability of financial statement was difficult. For example, capitalized liabilities, deferred tax liabilities or provisions are some of the items arise due to accrual concept of accounting difficult to report if the conventional accounting is followed by organizations (Arnold, Harris and Liu, 2015). Whereas modern accounting method represents the financial statements of organizations in more concise, accurate and reliable manner as it takes fair market values of the assets and liabilities to report in the books. According to the accounting rules as specified in the International Financial Reporting Standards financial statements should be based on accrual, prudence, going concern and consistency concept. As the technology in this era is very advanced, accountants adopt modern method of accounting, which is faster in recording and reporting data, more reliably and accuracy, which eventually helps to better decision-making. Modern accounting method followed by the entities in respect to international accounting standards and accounting principles amended from time to time so that the financial statements presents true and fair view for the stakeholders and users (Shapiro, 2015). In this method of accounting, necessary provisions, contingencies, obligations are measured in terms th at are more accurate because of the filtered information and availability of data and scientific calculation systems. In the selected company, cash converter listed on Australian Stock Exchange presents its financial data as per modern accounting method. In the consolidated financial statement data for impairment of non- current assets, finance costs, exchange differences are few items reported which is difficult to measure if the company follows conventional or traditional accounting method. Further, in the statement of financial position accountants of cash converter has reported provisions of liabilities amounted to $ 240,082 in 2015 and 148,539 in 2014 considering employee benefits, fringe benefit tax for both current and non- current. Other measurements for depreciation, impairments, receivables and payables on accrual concept has been accurately derived and reported in the balance sheet, which is difficult to derive in the conventional accounting method (Balakrishnan, Watts and Zuo, 2015). 2. In the given statement of the assignment, the problem of tax effect accounting is related to the income tax accounting as per the standards of AASB 112. Treatment of tax is different in financial accounting and tax accounting about the timing and scope of transactions in terms of accrual of the events and actual receipt or payment made for the transactions. AASB 112 states the objectives, scope and accounting treatment for current tax liabilities and current tax assets. It recommends the reporting principles for the timing difference arises due to application of different tax and accounting principles. Conceptual framework is a regulator of accounting bords and IFRS, which supplies necessary amendments and rules to report financial statements in true and fair view. As per AASB 112, current tax for current or prior period shall be recorded to the extent it remains unpaid (Agrawal and Cooper, 2016). This might lead to tax difference arise as per the amount considered in tax accounti ng and financial accounting is considered as deferred tax asset if there is benefit incurred from the tax loss. To record and measure the deferred tax in accounting, there exists temporary and permanent timing difference. If the difference is permanent in nature i.e. if the tax loss is not recoverable during the life of the asset or liability then such difference is permanent in nature and as per AASB 112 it is not recorded in the books of accounts only the disclosure in the notes to accounts should be provided. On the other hand, if the tax loss is recoverable under virtual certainty during the life of the asset and liability then such difference is of temporary nature and should be recorded as deferred tax asset/ liability. In the financial statement of Cash Converter, deferred tax asset has been reported in the statement of financial position $ 10,875,338 in 2015 in context to AASB. The problem of tax effect in this context is the accurate measurement of the relative tax difference considering the determination of goodwill as well. In case of goodwill impairment test is required so that impairment loss can be measured. Cash converter reported impairment of goodwill in the year 2015 while deferred tax is computed by considering doubtful debts, accruals, provisions which is relative difficult to measure accurately as per the current market values. Additionally, deferred tax liability is recorded against fixed and intangible (Kim and Im, 2016). Hence, it can be said that the modern accounting method is little complicated over conventional method which was quite simple to follow. 3. The objective of financial statements in context to IFRS and IASB is to provide required information about the organization to its stakeholders and investors. On application of taxation provision in to the accounting records the relative information and position of the company gets distorted with the differences arise in assets and liabilities. For example depreciation charge on the fixed assets is derived by straight line method or diminishing value method or at the rates specified in the IASB whereas according to the tax accounting depreciation rates are different. This difference gives rise to deferred tax asset/ liability, which changes the carrying amount of the asset and accordingly change the decision information for users. Another tax effect issue relevant for decision-making is provisions on borrowings and advances considered for determination of deferred tax of the company (Watts, 2016). In the financial statements of Cash Converter Limited issue of net deferred tax asset amounted $ 10,875,338 in 2015 and $ 13,543,414 in 2014 presents valuable information for decision making of investors because deferred tax asset appears on the statement of financial position is not an actual asset lying with the entity. It represents a mere monetary valuation of tax loss whose benefit would be incurred in future years in respect to doubtful receivables, provisions, and impairment on goodwill. Though the tax effect issue is not the sole source for making decisions about the entitys position it is one of the important decision making factors apart from the current ratios, capital gearing ratios, earning per share and few other financial ratios (Lee, 2016). Conclusion: The above solution has been dealt with the arguments about the relevance and accuracy of conventional/ traditional accounting method and modern accounting method for presenting and reporting the financial statement. Conventional method used to be followed in more simpler and general practice based unlike modern method, which is more reliable and accurate as well as complicated. The solution also presented different issues and complications of tax consequences arise in accounting statements because of the difference in measurement of tax liabilities in financial accounting and tax accounting, which is one of the useful factors for decision making. Reference List: Agrawal, A. and Cooper, T., 2016. Corporate governance consequences of accounting scandals: Evidence from top management, CFO and auditor turnover.Quarterly Journal of Finance. Arnold, L.W., Harris, P. and Liu, M., 2015, July. CORPORATE ACCOUNTING MALFEASANCE: AN OVERVIEW. InGlobal Conference on Business Finance Proceedings(Vol. 10, No. 2, p. 58). Institute for Business Finance Research. Balakrishnan, K., Watts, R.L. and Zuo, L., 2015. The effect of accounting conservatism on corporate investment during the global financial crisis. Bhasin, M.L., 2016. Communion of Corporate Governance and Forensic Accounting: A Study of an Asian Country.British Journal of Research,3(1), pp.014-040. 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