Tax Effect Accounting

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Tax-Effect Accounting) was issued in 1989’. It changed the way companies considered and recorded their income tax expense for any financial period. This method also reflects the premise that the calculation of income tax expense should be based on the accounting profit and loss earned for the period and that income tax liability represented the tax payable on taxable income. This practice requires reconciliation between the amount of tax expense calculated in the company’s accounting records and the estimate of the company’s liability for tax payable made in accordance with rules of income tax legislation. Any differences discovered in doing this reconciliation are accounted for in the financial statements of the company.

Sims & Cliff (2001, p. 315) go on to state that ‘as part of the International Harmonisation project of the Australian accounting standard setters, the principles underlying the method of accounting for company income tax will change in the financial year of 2003’. They go on to say that AASB 1020 was reissued in December 1999 with the new title Income Taxes, following a lengthy exposure period to ED 87 ‘Income Taxes’.

Keyes of AARF (online) outlines that:
In consistent with the proposals in Exposure Draft ED 87 ‘Income Taxes’ and the requirements in the International Accounting Standards Committee’s Standard IAS 12 ‘Income Taxes’ (and the US’s equivalent Standard SFAS 109 ‘Accounting for Income Taxes’), the revised Standards adopt a comprehensive balance sheet liability method of tax-effect accounting. That method is based on the general principle that the current and future income tax consequences of all transactions and other events recognised in an entity’s statement of financial position give rise to current and deferred tax liabilities and assets. It adopts the notions of ‘tax base’ and ‘temporary difference’, using the following formulae:

Carrying amounts of as...