Simplified (interim) standards of small-scale business’s accounting

This time we present you the ways of solving the issues related to showing of profit taxes in business accounting and financial accounts according to the simplified standards.

All local and foreign taxes, which are calculated on the basis of financial incomes and tax profitability, are regarded as profit taxes and divided into current and deferred ones.
Tax expense (return) consists of the current tax expense (return) and the deferred tax expense (the deferred tax return).
The asset’s tax base is the sum which for tax purposes is deducted from the taxable economic profit, which an enterprise gains when it gets back the balance cost of the asset. In case the above-mentioned economic profit is not liable to taxation, the asset’s tax base will correspond to its balance cost.
Example I
For taxation purposes, adding on of fixed assets’ accumulated depreciation is made by separate groups. A group’s cost balance makes up 12.000 GEL by the end of financial year. Financial year’s accumulated depreciation makes up 2.000 GEL. The depreciated cost of the fixed assets (12.000 – 2000) is deducted during the current accounting periods. The tax base of the fixed assets will be 10.000 GEL.
II. The balance cost of accounts receivable sums is 1.500 GEL. The corresponding income in the amount of 600 GEL is already included in the sum of tax losses, the remaining 900 GEL income is not considered as tax income, for on the date of making up a balance the 90 days since the submission has not expired. The tax base of the accounts receivable will be 600 GEL.
III. The current balance cost of the receivable loan is 200 GEL. Taxation does not matter for covering the loan. That is why the tax base of the loan is 200 GEL. Taxation does not matter for covering the loan. That is why tax base of the loan is 200 GEL.
According to the Standards, the balance cost represents liabilities’ tax base with the exception of the sum that, in connection with these liabilities, will be deducted for tax purposes in the next accounting period. If the income is received as an advance payment, the tax base of the liabilities will be equal to its balance cost, with deduction of the part of the income that will not be liable to taxation in future periods.
Example I
The current liabilities include added on tax fines in the amount of 150 GEL according to the current balance cost. The fines can not be used for tax purposes. The tax base of added on fines makes up 150 GEL.
II. It is necessary to pay the loan with balance cost of 150 GEL. Paying of the loan will not have any tax consequences. The tax base of the loan is equal to 150 GEL.
Based on the tax income of each accounting period, the calculated current income tax should be recognized in the form of liabilities.
According to the tax legislation, current tax payments during the financial year should be recognized in the form of assets.
The non-paid income tax for the current or previous accounting period should be shown in the accounts as liabilities. If the sum of the taxes paid for the current and previous accounting periods is more than the sum of the taxes to be paid during the accounting period, this difference should be shown in the form of assets.
According to any temporal difference it should be recognized: either deferred tax liabilities or deferred tax assets.
According to any temporal difference liable to taxation, deferred tax liabilities should be recognized.
For recognition of the asset it is important that its balance cost should be withdrawn at the enterprise during the following accounting periods by means of receipt of the economic profit. If the assets’ cost exceeds its tax base, the tax sum of the economic profit will exceed the allowed deducted sum assigned for taxation purposes. This difference is a temporal difference liable to taxation and the liability related to paying of the profit tax, which is called a deferred tax liability. When the enterprise withdraws the sum of the assets’ balance cost, the temporal difference liable to taxation will not exist, and the enterprise will have tax profits. Correspondingly, it will cause withdrawal of the economic profit from the enterprise in the form of paying of the tax. That is why all deferred tax liabilities should be recognized according to the requirements of the Standard.
Example I
The asset’s cost price is 1.500 GEL, its balance cost makes up 1.200 GEL. The accumulated depreciation assignments for the taxation purposes make up 800 GEL, and the tax rate – 20%.
The tax base of the asset – 700 GEL (1.500 – 800). So that the balance cost of the asset – 1200 GEL should be withdrawn, the enterprise should get 1200 GEL profit, but then the enterprise will be able to deduct only 700 GEL of depreciation cost for taxation purposes. Correspondingly, the enterprise should pay 100 GEL income tax (20% of 500) after withdrawing the asset’s balance cost. The difference of the asset’s balance cost (1200 GEL) and the tax base (700 GEL)is the temporal difference liable to taxation (500 GEL). That is why the enterprise should recognize the deferred tax liabilities in the amount of 100 GEL (20% of 500), which represents the income tax and its paying will take place after withdrawal of the asst’s balance cost.
II. On December 31, 20X2 the balance cost of the fixed assets makes up 14.000 GEL. With the taxation purposes, the fixed assets’ accumulated depreciation is added on by groups, and the group’s cost balance for the same period is 14.500 GEL. The sum of the accumulated depreciation for the financial year was 3.600 GEL.
Balance cost of the fixed assets is 14.000 GEL, and the tax base – 10.900 (14,500 – 3.600) GEL. The difference between them – 3.100 (14.000 – 10.900) GEL represents the temporal difference liable to taxation, which creates the deferred tax liability (if the cost of the fixed assets is 10.000 GEL, then based on the temporal difference of 900 GEL liable to deduction the deferred tax asset would be formed).
According to the Standards, the expenses incurred during the development activities are equated with capitalization. The enterprise will write them off in the form of amortization in the next accounting period and periodically recognize the expenses during calculation of the balance profits. In calculation of the tax profits, deduction of these expenses takes place in the tax period when these expenses were made. The tax base of the incurred expenses for this kind of development activities is equal to zero, since their deduction has already taken place in calculation of their tax profits. In this case the temporal difference does not represent the difference sum between the balance cost of the development activities and its zero tax base.
Example
At the end of the year 20X2 there took place capitalization of the expenses incurred during the development activities in the amount of 16.000 GEL. The enterprise’s accounting policy does not envisage adding on of accumulated depreciation in the year of recognition.
The expenses incurred for the development activities are concurrently deducted for the tax purposes.
The balance cost of the capitalized development activities’ expenses is 16.000 GEL. Its tax base is equal to zero. The temporal difference of 16.000 GEL represents a temporal difference liable to taxation and creates deferred tax liabilities.
90 day before striking the balance the buyer did not pay for the supplied goods. For the date of striking the balance the goods are not considered as delivered in respect of the tax profit. Correspondingly, the tax base of the trade demand will be less than its balance cost during 90 days before striking the balance. The difference represents the temporal difference liable to taxation that creates deferred tax liabilities.
Example
On December 31, 20X2 the remainder of the goods makes up 70.000 GEL, and accounts receivable – 22.000 GEL, which includes the supply cost of 20.000 GEL for the last 90 days. The cost price of the sold for 20.000 and not compensated goods made up 14.000 GEL.
The temporal differences will be as follows:
Balance Tax Temporal Cost Base Difference
The stock of goods 70.000 84.000 14.000
Trade accounts
receivable 22.000 2.000 20.000
Total Temporal
Difference 6.000
The total temporal difference of 6.000 stipulates the deferred tax liabilities.
If in the nearest accounting period there envisaged receiving of the tax profits and based on it using of the deducted temporal difference, the overdue tax asset should be recognized in accordance with all the temporal differences liable to deduction.
For example, in relation to the goods sold on guarantee the enterprise recognizes 200 GEL liabilities and, correspondingly, the guarantee expenses. For taxation purposes, the goods’ guarantee expenses are not equated to deduction till actual incurring of expenses, since by the origin of the financial liability the second party cannot recognize the profit. The tax rate is 20%.
The tax liabilities base is equal to zero (the sum liable to deduction for the tax purposes in the next accounting periods is deducted from 200 GEL balance cost). For covering of its liabilities, the enterprise should reduce the tax profit of the future period by 200 GEL, and correspondingly reduce its taxes by 40 GEL (20% from 200 GEL). The difference between the liabilities’ balance cost and the tax base that is equal to zero is the temporal difference liable to deduction (200 GEL). Thus the enterprise recognizes the 20 GEL deferred tax asset on condition it will have enough tax profits in the next accounting period.
According to the presented Standard, the recognition of the deferred tax asset, for the purpose of postponing of non-used tax loss and non-used tax credit till the following accounting periods, is possible only in case if it is expected that the future tax profits will be enough for using of the non-used tax loss and non-used tax credit.
Tax liabilities (assets) for the current and past accounting periods should be appraised by the sum that is equal to payment based on the tax rate in accordance with the Tax Code.
The deferred tax assets should be appraised based on the tax rates in accordance with the Tax Code, which correspond to selling of the asset and meeting the liabilities in the accounting period.
The enterprise should not allow discounting of the deferred tax assets and liabilities
The current and deferred taxes should be clearly shown in the owned capital if the tax is related to such elements that in this or other accounting period clearly shown in the owned capital.
In the balance, tax assets and liabilities should be shown separately from the other assets and liabilities. The deferred tax assets and liabilities should also be separated from the current tax assets and liabilities.
If the enterprise in its balance separates short-term and long-term accounts, it should present the deferred tax asset (liability) in the form of a long-term asset (liability).
The enterprise can balance out the current tax assets and current tax liabilities. It can also balance out the deferred tax assets and the deferred tax liabilities.
The tax expenditure (profit) related to gaining the profit (loss) as a result of economic activities, should be clearly shown in profit and expenditure accounts.
The tax expenditure related to special accounts should not be shown in profits and expenditure accounting.