Abstract on Income Tax Accounting

The report has shed light on “Income Tax Accounting in case of BHP Billiton Ltd.”. Thus, in this context, it can be said that the major reason for choosing this mining company is because BHP Billiton is Australia based and is also listed in the ASX. Furthermore, in context to the report, it is to be seen that the study has emphasised on brief concepts as well as treatment of income tax and its understanding in terms of accounting and adjustments for income tax by considering BHP Billiton’s last two fiscal years’ (2018 and 2019) financial statements.

Table of Contents

Introduction..

Question 1.

Question 2.

Question 3.

Question 4.

Question 5.

Question 6.

Question 7.

Question 8.

Question 9.

Conclusion.

Reference list

Introduction to Income Tax Accounting

This is important for the researchers or financial analysts to properly possess some knowledge regarding the income tax as income tax could play an important role within the financial activities of the company in this situation. However, in this context, this would be appropriate to properly assess the different financial activities of BHP Billiton and several issues regarding their income tax under different circumstances. This has been found out that if anybody properly studies the financial statements of the company, the knowledge regarding taxation and its concept could be increased. In accordance with this situation, researchers would be able to analyze the financial statements of BHP Billiton for the year 2018 as well as 2019 in order to identify different issues regarding their income tax in this situation. This entire study could easily advance the financial activities of this company throughout the industry as well. 

Income Tax Accounting - Question 1

Accounting Profit

The term profit is one of the important aspects of the financial activities of any kind of company. Most of the company or the owner of the company, therefore, has the key objective to make the profit through doing their different business activities in this situation. However, it can be stated that there could be a certain amount of income that can be generated by the company after doing their business in an effective way and that amount also distributed among the business owners of the company or partners (Allen 2016). Under the concept of accounting, those amounts could be considered as the accounting profit. This amount therefore could be presented in the statement of profit and loss account. Based on the accounting profit of the company, it can be easily understood in which way the company is operating throughout its financial year. In the concept of financial management, the term, "Profit" or "Income" could depict the same meanings under any kind of situation.

Taxable Profit

Taxable profit indicates the situation where based on some numbers the income tax of the company could be calculated. Those numbers are therefore considered as taxable profits for that relevant organization. The amount, not the taxable profit therefore could be different compared to the relevant earnings of the company in this situation. On the other side, based on these criteria, the amount of taxable profit could be less or high compared to the amount of the earnings of the company in this context. In accordance with this concept, it can be identified that there are two kinds of taxable profits, such as Profit after tax (PAT) as well as Profit before tax (PBT). However, there can be some differences PAT as well as PBT and due to this kind of difference; the company could present the deferred tax assets or liabilities within their financial statements under different circumstances. On the other side, the taxable profit could be used in order to differentiate the accounting earnings or profit in this situation.

Temporary Difference

The temporary difference could be played an important role within the financial statements of the company as most of the taxable decisions could depend on this concept of the temporary difference. However, the temporary difference could be recognized as the difference among the carrying costs of the liabilities as well as assets of the company from their balance sheet throughout the relevant financial years in this situation. These temporary differences therefore could be two kinds under different circumstances, such as deductible temporary difference as well as the taxable temporary difference in this situation (Andries et al. 2017). However, this entire concept therefore could depict the financial situation regarding the income tax of the company and the company also could be able to make different decisions based on this concept under different circumstances.

Taxable Temporary Difference

The taxable temporary difference can be recognized as the yield of the taxable amount for any company from their financial statement in this situation throughout that financial year. That outcome could be taxable for their near future in this context for the relevant company. This kind of function could be calculated during the time of determining the income or expenses of the company and that income or expense also could be considered as the taxable amount under that situation.

Deductible Temporary Difference

This kind of temporary difference, therefore, presents the deductible amount for the company in their future period of time. Similarly, taxable temporary difference, the deductible temporary difference also can be determined to determine the profit or loss which can also be taxable for the relevant company in this situation.

Thus based on the above discussion it can be stated that a temporary difference and it's types has a different impact on the financial performance of any kind of company and this is one of the important aspects for the company in relation to their several financial activities.

Deferred Tax Assets

This has been found out that the company always suffers from the process of income tax as it can bring more costs to the company. However, in accordance with these kinds of situation, there can also be a process or situation which can be called as deferred tax assets. These assets are the items from the balance sheet of the company throughout their relevant financial years, which can be used to decrease the taxable income for the future period of time of the company (Arnold et al. 2019). This kind of function or concept could be aroused if the relevant company could pay their taxes in advance or overpaid their taxes under different circumstances. This overpayment therefore could be recorded as the deferred assets within the balance for the company under this situation.

Deferred Tax Liabilities

This kind of liabilities could arise or recorded in the balance sheet of the company if the company hasn't paid its income tax throughout the financial year. This kind of situation therefore could increase the liabilities for the company and in accordance with this situation the company could be liable to pay more tax in their future period of time (Sebestikova and Krzikallova 2017). This kind of situation, therefore, creates more risks for the company for that financial year under different circumstances.

Income Tax Accounting - Question 2

It is significant for companies for identifying as well as recognizes deferred tax assets as well as liabilities from the balance sheet statements. Therefore, in order for recognizing the certain assets of deferred tax, the company is required to have specific taxable profits in context to the future period of time. Therefore, based on the implication of the standard of IAS 12.28 there would be certain taxable profit, which would be further available against the deductable temporary differences (Inamura and Okuda 2017). Hence, it can be said that within the balance sheet statement of companies' if there are any certain items that have been overly paid in context to the taxable income, then those particular items could be recognized as per deferred tax assets. Additionally, for recognizing deferred tax liabilities, it is to be considered that if payment is likely to be overdue against taxable income, then those would be recognized as deferred tax liabilities.

Income Tax Accounting - Question 3

BHP Billiton’s tax expenses presented in its 2018 and 2019’s latest financial statements are presented below

In accordance with Table 1, it is observed that as per BHP Billiton’s latest financial statements of FY18 and FY19 are $7007 Million and $5529 Million respectively. Significantly, the total tax expenses of the company have derived from current tax expenses, which were $5052 Million in FY18 and $5408 Million in FY19 as well as deferred tax expenses of $1955 Million in FY18 and $121 Million in FY19. (bhp.com 2020d)

Income Tax Accounting - Question 4

No, according to the above-discussed table, the total expenses of the income tax of BHP Billiton are not the same as tax rate times of BHP on their accounting income in this situation.

In accordance with this situation, this can be easily stated that the tax on profit for this company is 30% and this is basically based on Australian Prima Facie Tax. On the other side, the above table shows that the amount of PBT in this situation is 14,751 (Million) (USD) for the year of 2018 and 15,049 (Million) (USD) for the year of 2019 in this situation. Thus based on this information the tax rate times have been calculated after imposing the 30% of tax which is clearly provided on the above table. On the other side, the below table presents the tax expenses for this company in the year 2018 as well as 2019 in this situation (bhp.com 2020a)

However, these differences could depend on certain factors that could actually affect the BHP's income tax expenses. These factors could be, such as

  • These tax expenses and rate could differ due to the standard rate which is specified as per regulations of Australia's corporate tax
  • Again overall tax expenses could include the expenses and impairments which is generated on profit or loss from the account of equity investment (Arnold et al. 2019)

Income Tax Accounting - Question 5

The reported deferred tax assets and liabilities in BHP’s balance sheet for FY18 and FY19 are presented below:

Significantly, in accordance with Table 4, it is to be said that the possible reasons for recording the deferred tax assets and liabilities in BHP’s balance sheet are primarily due to recognition of deferred tax in context to temporary differences raising between carrying amount of the assets and liabilities along with tax bases in the financial statement (Bauman and Shaw 2016). Hence, in addition to this, the other major possible reasons regarding why the deferred assets and liabilities are reported in BHP’s balance sheet are further presented below:

Therefore, in accordance with Figure 1, it is to be said that in case of BHP Billiton for settling liabilities as well as realizing assets on a net basis, it might become essential for reporting as well as recognizing the certain deferred tax assets and liabilities within BHP Billiton’s balance sheet statement. (bhp.com 2020b)

Income Tax Accounting - Question 6

Income tax payable or current tax assets conceptualize that at certain terms income tax payable is equally treated as current tax assets. Fundamentally, when the company overpays income taxes and needs to refund, then a specific amount is also needed to be reported on the balance sheet under the terms of current asset taxes. Likewise, in the case of BHP also income tax payable and current tax assets would be considered the same (Canoquena et al. 2019). Therefore, yes, there is a certain value of current asset taxes that have been recorded by BHP Billiton, which is presented below:

Furthermore, in reference to income tax expenses and income tax payable, it is to be said that BHP’s income tax expense and income tax payable is not the same.

Therefore, the prime reason for income tax expense and income tax payable to be unequal in case of BHP Billiton is due to the treatment of income tax payable as a deferred expected tax that is levied on BHP's taxable income that company is likely to owe in accordance with tax codes and rules. This is particularly to be seen in terms of the taxes that have been raised within the firm, however not had been paid yet. Furthermore, contrarily, income tax expenses reflect presenting all taxes incurred in the financial period and was paid within the financial period based on standard business accounting rules (Ferraro 2016). Hence, by considering these factors, it is to be said that BHP Billiton’s income tax expense is not the same as the income tax payable.

Income Tax Accounting - Question 7

No, the shown income tax expenses in BHP’s income statement are not the same as the company's income tax paid shown in the statement of cash flow. Hence, for the FY18 and FY19, BHP Billiton’s shown Income Tax Expenses and Income Tax Paid are presented below:

In context to the above Table 7, that is presenting BHP Billiton’s income tax expense and income tax paid, it can be noticed that both the values of expenses of the income tax shown in the income statement and paid income tax shown in cash flow statements are different to each other. Specifically, to evaluate, BHP’s shown income tax expense was $6879 Million in FY18 and $5335 Million in FY19. On the other side, shown income tax paid in cash flow statement was $4935 Million in FY18 and $5999 Million in FY19. Therefore, it can be easily said that no the shown valuation of income tax expense in BHP Billiton's statement of income is not the same as its income tax paid which is further shown in the cash flow statement. (bhp.com 2020c)

The main reason behind this difference is due to the certain difference in the timing. Contextually, at the time when the company's income tends to be get recognized or identified as well as also, there could specific items that would also or could not be taxation subjected (Jordan 2016). Therefore, as a whole by turning into significant differences in between the valuation of tax expenses and tax paid on income because of reporting in different timing, BHP Billiton’s reported income tax expense in income tax statement and income tax paid in cash flow statements are not same.

Income Tax Accounting - Question 8

In reference to the explanation of two concepts of Temporary Difference as well as Permanent Difference, it can be said that the concept of Temporary Difference refers to a certain difference that is estimated between carrying amounts of assets and liabilities in the balance sheet of company’s financial statement. However, on the contrary, it is further seen that the specific concept of Permanent Difference reflects particular transactions of a business that is further considered to be reported differently for tax as well as financial reporting purposes and fundamentally, due to which any differences are not likely to be eliminated (Lanis et al. 2017).

Furthermore, in context to the identification of permanent differences that BHP Billiton might have, it can be observed that the company has the permanent differences in its financial reporting, as based on the financial reporting for FY18 and FY19, it has been found that BHP Billiton involves permanent differences, which is more likely to be identified through firm’s determination of income taxes (Mikler et al. 2019). It is significantly identified based on the implication of statutory applicable income rates of pre-taxes with having certain adjustments in terms of tax credits and permanent differences.

Income Tax Accounting - Question 9

In accordance with the holistic approach of the overall discussion in the above in context to BHP Billiton and its several taxation treatments, it can be said that the functionalities, as well as adjustments and understanding of deferred Tax Assets and Liabilities, have been little confusing, specifically, in terms of treatment of it. Fundamentally, as treatment of temporary differences is not shown or is not presented in financial statements of BHP Billiton. Therefore, it is a little hard in terms of identifying a particular way through which the company would treat or adjust these deferred tax and liabilities (Mullinova and Simonyants 2016). Hence, as a whole, this aspect has made understanding quite confusing.

On the other side, based on the above evaluation as well as discussion of the tax expenses of BHP Billiton, in this situation, the new idea could be generated regarding the income tax and their functions within the company which also enhance the knowledge regarding the economic contribution of the company as well as any financial payment that has been made under different circumstances. Thus it can be clearly stated that this company has contributed within the government as well as the country by paying their income tax as well as annual tax and the payments of royalties in this situation. Based on their financial statements of the year 2018 as well as 2019, it has been found out that BHP Billiton has paid 31.8% of the tax rate which is globally adjusted and 45% of the payment has made regarding royalty in this situation. Thus these amounts have been considered as the taxable expenses which have been contributed by this company in order to enhance the country as well as its economy under different circumstances. (bhp.com 2020c)

Conclusion on Income Tax Accounting

Based on the above discussion throughout the report, it is to be concluded that the study critically emphasis on BHP Billiton Ltd’s structure of corporate income tax as well as its treatments within the company. Along with that, the insights on the understanding of deferred tax assets and liabilities treatments in context to the concept of temporary differences have also been found. Furthermore, in addition to this, the report has also summarised that BHP’s overall expenses of income tax are different from the taxable amount on income in reference to the Australian Prima Facie Tax rate on accounting income. Thus, in a nutshell, it is to be said that based on tax types as well as its adjustment and recognition and timing difference based on statutory law and tax codes, the valuation of tax expenses and tax paid on income differs from each other.

Reference List for Income Tax Accounting

Allen, D. 2016. The case for personal income taxation cuts. Institute of Public Affairs Review: A Quarterly Review of Politics and Public Affairs, The, 68(1), p.28.

Andries, K., Gallemore, J. and Jacob, M. 2017. The effect of corporate taxation on bank transparency: Evidence from loan loss provisions. Journal of Accounting and Economics, 63(2-3), pp.307-328.

Arnold, B.J., Ault, H.J. and Cooper, G. eds. 2019. Comparative income taxation: A structural analysis. Netherlands: Kluwer Law International BV..

Bauman, M.P. and Shaw, K.W. 2016. Balance sheet classification and the valuation of deferred taxes. Research in Accounting Regulation, 28(2), pp.77-85.

bhp.com. 2020a. Annual report: 2018. Available at: https://www.bhp.com/investor-centre/annual-reporting-2018/ [Accessed on 20.05.2020]

bhp.com. 2020b. Annual report: 2019. Available at: https://www.bhp.com/investor-centre/annual-report-2019/ [Accessed on 20.05.2020]

bhp.com. 2020c. BHP Billiton. Available at: https://www.bhp.com/ [Accessed on 20.05.2020]

bhp.com. 2020d. Economic contribution and government reports. Available at: https://www.bhp.com/media-and-insights/news-releases/2015/09/bhp-billiton-releases-first-economic-contribution-and-payments-to-governments-report/ [Accessed on 20.05.2020]

Canoquena, J., Hasan, Z. and Taggart, J. 2019. A comparison of the debt carried by indigenous corporations and charities in Australia. Third Sector Review, 25(2), p.177.

Ferraro, R. 2016. Tax education: Understanding tax law. Taxation in Australia, 51(3), p.129.

Inamura, Y. and Okuda, S.Y. 2017. Deferred taxes and cost of debt: evidence from Japan. Asia-Pacific Journal of Accounting & Economics, 24(3-4), pp.358-376.

Jordan, C.E. 2016. FASB's New Standard for Classifying Deferred Taxes. The CPA Journal, 86(7), p.22.

Lanis, R., McClure, R. and Zirnsak, M. 2017. Tax aggressiveness of alcohol and bottling companies in Australia. Canberra: Foundation for Alcohol Research and Education, pp.1-32.

Mikler, J., Elbra, A. and Murphy-Gregory, H. 2019. Defending harmful tax practices: mining companies’ responses to the Australian Senate Inquiry into tax avoidance. Australian Journal of Political Science, 54(2), pp.238-254.

Mullinova, S. and Simonyants, N. 2016. Reflection of a deferred tax liability in the credit union reporting according to IFRS (IAS) 12" Income taxes". Modern European Researches, (1), pp.83-88.

Sebestikova, V. and Krzikallova, K. 2017. The impact of deferred tax on company valuations in the case of mergers. Zeszyty Teoretyczne Rachunkowości, (94 (150)), pp.131-143.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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