What Is The Accounting Standard AASB112 On Tax-Effect Accounting?

Arguments presented by the directors of Mining Ltd and the justifications The directors of Mining Ltd decided not to comply with the accounting standard AASB112 on tax-effect accounting. By doing this, the annual report of Mining Ltd shows an accounting profit of A$60 million, with nil tax expense. According to AASB112, paragraph 5, accounting profit is defined as profit or loss for a period before deducting tax expense based on the accounting standards whereas, taxable profit is the profit for a period, determined accordance with rules of the taxation authorities (Locke, 2014). If the directors had included the income tax expense in the annual report, its profit will be reduced by A$20million. This is a significant reduction in profit, thus it is inappropriate for the directors of Mining Ltd to not disclose this information in order to show a

According to Leo, Knapp, McGowan & Sweeting (2015), tax loss provides future economic benefit for an entity in the form of deductions. Therefore, this results in a deferred tax asset and the existence of a deductible temporary difference account. Recognition criteria of deferred tax assets from tax losses is stated in AASB 112 paragraph 34 which is the probability of taxable profits available in the future against the unused tax losses. In truth, Mining Ltd had an income tax expense of A$20 million instead of tax losses if they had followed the standard. This could be due to tax deductions which are still less than its taxable income after considering the exploration and development cost. Hence, the claims made by the directors is invalid as according to AASB 112, where tax losses only arise when an entity’s allowable tax deductions exceeds its taxable