1. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE /201 Principles of Financial and Cost Accounting
Nadeeshani Dissanayake B.Sc. Accounting (Sp), First Class, ACA, ACMA, CPA (Aust)

2. Events after the Reporting period LKAS 10

3. Events after the end of the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue.

4. types of events
Two types of events after the end of the reporting period
adjusting events―those that provide evidence of conditions that existed at the end of the reporting period
non-adjusting events―those that are indicative of conditions that arose after the end of the reporting period

5. Adjusting events—adjust the amounts recognised (and update disclosures made) in its financial statements
Non-adjusting events—do not adjust the amounts recognised in its financial statements. However, disclose:
the nature of the event, and
an estimate of its financial effect, or a statement that estimate cannot be made

6. Ex 1: On 31/12/20X5 A assessed its warranty obligation as Rs. 100,000
Ex 1: On 31/12/20X5 A assessed its warranty obligation as Rs. 100,000. Before its 20X5 financial statements were authorised for issue, A discovered a latent defect in one of its lines of products. It reassessed its warranty obligation at 31/12/20X5 at Rs. 150,000.
Adjusting event―latent defect existed at 31/12/20X5. Measure warranty provision at Rs. 150,000 at 31/12/20X5.

7. Ex 2. : On 28/2/20X1 A’s 31/12/20X0 FS authorised for issue
Ex 2*: On 28/2/20X1 A’s 31/12/20X0 FS authorised for issue. At 31/12/20X0 the fair value of A’s investment in B’s publicly traded shares = Rs. 20,000.
On 28/2/20X1 fair value of shares = Rs. 25,000.
Non-adjusting event―the change in the fair value results from conditions that arose after 20X0.
A does not adjust the amounts recognised in its financial statements. However, it must give additional disclosure

8. Income tax and deferred tax

9. Accounting profit does not equal taxable profit
Some exceptions to this
Taxable income (TI) – tax deductions (TD) = Taxable profit
Accounting Standards and the Companies Act are key sources that determine the appropriate accounting treatment of
transactions
The Income Tax Act
determines the tax treatment of transactions
Accounting profit does not equal taxable profit
Difference caused by different “rules” used for accounting vs tax purposes

10. Recorded as liability . Recognised as revenue when earned.
ITEM
ACCOUNTING
TAX
Passive revenue received in advance
Recognised as TI when cash received
Depreciation (accelerated for acctg)
Bad/doubtful debts
Employee benefits – eg annual leave
Recorded as liability . Recognised as revenue when earned.
Recognised as expense based on useful life of asset
Recognised as TD
based on predetermined rates
Possible for accounting useful life to be shorter than tax useful life
Allowance raised and expense recorded when debt considered doubtful
Recognised as a TD
when debt physically
written off
Liability raised and expense recorded when debt owing to employee
Recognised as TD when payment made to
employee

11. Accounting for income taxes – general principles
The tax consequences of transactions that occur for accounting purposes during a period should be recognised as income or expense during the current period, regardless of when the tax effects will occur
This requires identifying the current and future tax consequences of items recognised in the balance sheet
Two separate calculations are performed each year:
current tax liability
movements in deferred tax balances

12. Calculation of current tax liability
Accounting profit/(loss) - acctg revenue not assessable for tax + acctg expenses not deductible for tax +/(-) differences between acctg revenue and TI +/(-) differences between acctg expenses and TDs = Taxable profit x tax rate % = Current tax liability (CTL)

13. Calculation of current tax liability - example
All amounts are in Rs. millions
Rs. 60 allowed as a tax deduction for plant.
Interest has not yet been received.
Bad debts of Rs. 20 were written off during the year.
Payments of Rs. 30 were made to employees in relation to annual leave taken during the year.
The tax rate is 30%
Required:
Calculate the current tax liability of ABC Ltd for 2012

14. Calculation of current tax - example
Accounting profit before tax 300 Government grant (80) Goodwill impairment 20 Interest not yet received (40) Adjustment for plant depreciation (10) Adjustment for bad debt write-offs 10 Adjustment for annual leave paid (20) Taxable profit 180 Current tax liability (CTL) (30%) 54
exempt income
not deductible
Acctg depn 50
Tax depn (60)
Adj req (10)
B/debts expense-acctg 30
B/debts w/off- tax (20)
Adj req
A/L expense- acctg 10
Paid- tax (30)
Adj req (20)

15. In the previous example the CTL would be recorded as: Dr Income tax expense (current) 54 Cr Current tax liability 54

16. Deferred tax liabilities and assets
Arise when the period in which revenue and expenses are recognised for accounting is different from the period in which items are recognised for tax
Arise principally due to the accruals vs cash basis of recognising transactions. Differences either result in:
The company paying more tax in the future
Taxable temporary differences (TTDs)
Result in deferred tax liabilities (DTLs)
The company paying less tax in the future
Deductible temporary differences (DTDs)
Result in deferred tax assets (DTAs)

17. Calculation of deferred tax
The existence of temporary differences results in the carrying amounts of an entity’s assets and liabilities being different from the amounts that would arise if a balance sheet was prepared for tax authorities
Carrying amount (CA)- asset and liability balances (net of accumulated depreciation, allowances etc) based on accounting balance sheet.
Tax base (TB)- asset and liability balances that would appear in a “tax balance sheet”.
Temporary differences are calculated as follows:
CA – TB = TTD/(DTD)

18. Calculating the tax base
Calculating the tax base for an asset CA – future taxable amounts + future deductible amounts = TB Calculating the tax base for a liability + future taxable amounts - future deductible amounts

19. Borrowing Cost LKAS 23

20. Borrowing costs are interest and other costs that an entity incurs in connection with a borrowing of funds.
Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

21. Capitalising borrowing costs
An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognize other borrowing cost as an expense in the period in which it incurs them.

22. Leases LKAS 17

23. A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or a series of payments the right to use an asset for an agreed period of time.
A finance lease is a lease that transfers substantially all the risk and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.

24. An operating lease is a lease other than a finance lease.
finance lease – become an asset
operating lease – rent will be charged to P/L as an expense