The Australian Accounting Standards Board is responsible for the development of

accounting standards for application by companies and Statements of Accounting Concepts.

AASB 112 Income Taxes describes that future tax consequences are recognized as deferred

tax assets and deferred tax liabilities in accounting records. Since AASB 112 (FASB 109)

requires the amount of deferred tax assets (DTA) and liabilities (DTL) to be presented in the

balance sheet, therefore it is important to know whether they meet the definition and

recognition of asset and liabilities respectively. Further analysis is required here when IASB

and FASB announced their proposed conceptual framework (December 2007) which includes

changes in existing definition of assets and liabilities. The discussion will start on whether

DTA satisfy the definition and the recognition of assets according to existing (AASB) and the

proposed (IASB/FASB) conceptual frameworks and continued with the DTL where the

issues discussed are the same with the DTA’s.

Asset Conceptual Framework

In the current Framework paragraph 49:

Assets are ‘future economic benefits’ ‘controlled by the entity; as a result of ‘past transactions’ or other past events.

From the definition, there are three critical characteristics of an asset; (1) The first one states

an asset has future economic benefits which the benefits are in the form of a potential to

contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity, (2) the

future benefits must be controlled by the entity refers to the aptitude of the company to deny

or regulate access to those benefits, and (3) the assets must have come into existence as a

result of past events.

In comparison, the DTA shall be recognized in paragraph 24 of AASB 112:

To the extent that it is probable that taxable profit will be available against which the deductible

temporary difference can be utilized.

Market perceived DTA as a reflection of future savings on tax (Amir, Kirschenheiter &

Willard, 1997). This analytically means that the asset criteria of future economic benefit have

been met. When DTA is attained by a company, the entity has the exclusive rights to that

benefit, hence can control other’s access to it. Besides that, according to Petree, Gregory and

Vitray (1995) a company can implement tax planning strategies to reduce income for the tax

deduction to be increased. With these, the criteria of ‘controlled by entity’ is satisfied. When

DTA is the results from the tax loss carried forward, this means it is arise from the

consequence of past transaction. Hence, this meets with the asset criteria of ‘result of past

events’’. From there, it is clearly stated that DTA satisfies the definition of assets in the

existing conceptual framework.

For recognition of assets, it should be recognized in the financial position when and only

when:

(a) It is probable that the future economic benefits embodied in the asset will eventuate(b) The asset possesses a cost or other value that can be measure reliably

When there is deductible temporary difference between tax base of an asset or liability and its

carrying amount in the financial position, DTA is said to be recognized (Petree, Gregory &

Vitray, 1995). According to Leahey (1995), deferred tax assets are the composition of future

tax benefit of; (1) Unused current-prior operating losses carried forward to future periods, (2)

unused current-prior tax credits carried forward to future periods, and (3) existing deductible

temporary differences. As the amount to be offset can reliably be measured and comprising

with future economic benefits, hence DTA has met the recognition criteria (a) and (b) for

assets.

Asset Proposed Conceptual Framework

According to IASB/FASB Boards, the asset proposed conceptual framework is:

Asset is a present economic resource to which an entity has a present right or other privileged access.

As DTA can be used as a present economic resource to offset any income tax expense as well

as the reduction in taxable income, hence the definition criterion of ‘present economic

resource’ is met. The second criteria, ‘economic benefits’ is satisfied when there is reduce in

cash outflows to the ATO of the future reporting period. As an entity has the privilege on the

usage of DTA that cannot be transferred to other entity, this mean, the third definition criteria

‘privileged access’ has been met. Overall, DTA satisfies the definition of proposed

conceptual framework as well.

Liabilities Conceptual Framework

As for the definition of liabilities, the existing definition is as follow:

A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. (Framework, paragraph 49)

As for the recognition of liabilities stated in Framework paragraph 83,

A liability is to be recognized if (a) it is probable that the future sacrifice of economic benefits willbe required; and (b) the amount of the liability can be measured reliably.

DTL represents the increase in taxes payable in future years as a result of taxable temporary

differences existing at the end of the current year where this means more tax has to be paid in

the future. This indicates there is a ‘future sacrifice of economic benefits’ recognized

liabilities and it meets the liabilities definition criteria ‘present obligation’. Beside, taxable

temporary difference arises from the past transactions of assets or liabilities where the

amount calculated by Australian Taxation Office for the given elements in the financial

statements will be taxed. This satisfies the recognition criteria (b) as it is countable and meets

the definition criteria of ‘past event transaction’. As DTL is the income taxes amount payable

in the future periods, this satisfies the liabilities definition, ‘future outflow of resources.

Moreover, in paragraph 16 of AASB 112, it states:

As the entity recovers the carrying amount of the asset, the taxable temporary difference will reverse and the entity will have taxable profit. This makes it probable that economic benefits will flow from the entity in the form of tax payments. Therefore, the Standard requires the recognition of all deferred tax liabilities, except in certain circumstances described in paragraphs 15 and 39(Appendix)

It is argued in the above paragraph that with DTL the recognitions of liabilities, the liabilities

criteria will always be satisfied; thus, there is no necessitate for any particular recognition

criteria for DTL to be explicitly stated in the standard (Leo, Hoggett, Swetting & Radfrod,

2009). From there, it can be concluded that DTL has already met the definition recognition

criteria of liabilities.

Liabilities Proposed Conceptual Framework

The proposed changes on liabilities definition comprising of (1) higher level of

concern on enforceable ‘economic obligation’ rather than future sacrifice of economic

benefits (enforceable obligation includes participation of separate party and the presence of

mechanism that is capable of forcing an entity to take a specified course of action), and (2)

emphasizing more on the present events (Leo, Hoggett, Swetting & Radfrod, 2009). In DTL,

there is no explicit or implicit contract between the reporting entity and the creditor (Rue &

Volkan, 1997). The government does not claim to the entity’s assets for the future tax

liability at any point in time in the life on the entity and the only time the claim arises is in the

future when sufficient taxable income is reported. The incidence of tax depends on the

occurrence of aggregate future events that together determine whether taxable income exists.

Therefore, the element (1) of the proposed changes is very likely to be defeated. Income taxes

needed to be paid are deferred to the next financial reporting period. Thus, the tax payables is

not incurred in the present but in the future. In addition, Rue and Volkan, (1997) further

explained that temporary differences between taxable income and the financial statement

income are not caused by the event of depreciation but by the differences occur because of

the use of alternative methods of depreciation; different allocation method and estimates in

residual value. Therefore, since estimates of useful life and residual values must reflect future

usefulness, it seems that element (2) of proposed framework for liabilities is not the best

reflecting DTL.