We have done an extensive research on the two situational cases you have hired us to do. Our research delved on Australian Accounting Standards Board Pronouncements. Part one focuses on the timing difference between the amount that the company reports as net income subject to tax and the amount that the tax laws require the companies to pay. The second part deals with the basic theory of when to recognize revenue from the sale of website –related software and the website development and maintenance services.
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Basis for the us of AASB presentation of the Financial statements
The basis for the preparation of the financial statements is to serve as a tool for their decision meeting. The software customer needs the financial statements to determine whether to continue buying from the company or look for other competing suppliers to fill the customers' needs. The suppliers need the financial statements to determine if whether to approve the company's credit loan application. The board of directors will use the financial statements to determine if they will have to set up more software branches. The Australian government needs the financial statements to determine if the company has been implementing its pollution laws. The employees are also interested to get a copy of the financial statements to determine if the company in order for them to decide when to ask for a salary increase. The following topics are focused to serve these users.
I. Timing Difference
AASB 112 states that the timing difference between taxes paid and the tax expense is a normal, legal and Tax agency approved scenario. A future tax liability or asset results from the temporary differences between the accounting book value of assets liabilities and their tax value. The timing difference here is amount that varies between the net profits or losses reported in the accounting books and the amount that taxes to be paid. They are differences between the book value of the assets or liability recorded in the balance sheet and income statement and the amount that should be reported in the financial statements that include the balance sheet and income statement in compliance with Australian tax laws.
The reason is obvious. The recording accounting transactions by the accountants hired by the companies are governed or based Australian International Accounting Standards. The international accounting standards state that the profits presented in the financial statements like the income statement should be based on accrual basis of accounting. There are two kinds of sales. They are the cash sales and the credit sales. Cash sales occur when the customer pays up front the amount of the purchase immediately upon receiving the goods bought. Credit sales occur when the customer receives the goods and promises to pay the amount at a letter date. The net profit includes sales from
On the other hand, the amount that the company must pay to the Australian tax agencies are based on the Australian income tax laws. The Australian Tax law states that the amount of tax should be based on actual cash collections.
For example, the company bought a factory equipment for Au$1,000. The company depreciates the assets under the straight line method for four five years. However, the company reports to their tax collecting agency that their asset is depreciation using the reducing balance method. Assume the corporate tax rate is 35%.
The company would realized a deferred tax liability for year 1 and 2 because its book value was higher than the tax value. However, the 3rd and 4th year shows a tax asset because the company's asset value is lower than the income tax value. The company has not underpaid income tax in this case so there is no need for any adjustments.
II. Revenues and Expenses
The basis for the revenue for the sale of the products and services of Medium Pty. Ltd. is AASB 118 (Revenue). The Australian Accounting Standard Board stated in its pronouncements stated in its AASB 118 (Revenue) that revenue (Section 1)is recognized when it is probable that future economic benefits will flow into the organization and these benefits are measurably reliable. It further provides that revenue can be generated from the sale of goods or the rendering of services. The Medium Pty. Ltd. should record the maintenance revenue from the offer of services to set up a website. The maintenance services that are offered keep the customers' websites in tiptop shape should also form part of revenue from services under the same AASB 118. Section 4 of AASB 118 also states that rendering of services includes the performance of the organization of a contractual agreed task over an agreed period of time. The services may be performed within a single period or over more than one period. AASB 102 states that the software shall form part of inventory.
AASB 101 states in section 82 that the statement of comprehensive income should DISCLOSE line items that present under the following titles during the period. Revenue, finance costs, share of profit or loss of associates, tax expense, and a single amount representing other expenses.
AASB 132 interpretation states that all costs of documenting the specifications of the website, including the technology to be implemented to achieve the desired website, revenue, and expense results should be expensed. The expenditures should be dealt with in accordance with AASB accounting standards. Market research costs for assessing the feasibility of the project should be recorded under research and development expenses. These are expensed outright on day of the expense occurrence. Staff training for website development should fall under salary expenses since website development is an ongoing day to day operating activity. Costs relating to the development of the website software like licensing expenses. The computer hardware use in the development of the software should form part of office equipment Asset. It will be depreciated over its useful life. Internal Staff employment expenses should form part of the Administrative operating expenses of the company.
Promotion and advertising to launch the new website development should fall under the marketing operating expenses of the company and expensed when incurred. Staff training in use of website software should form part of salaries expenses.
The sales of the customized software will form part of the revenues of the company. The sale of the two –year performance contract would be part of the service revenues of the company. The amounts for cost of developing should form part of the operating expenses. In addition, the difference between the tax amount and the accounting book amounts is because of the difference between the accounting standards and the tax laws.
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