Compiled from the Topic 1–8 lecture slides. Emphasis on journal entries, calculations, and how accounts relate to each other.
(Ch1: Accounting regulation & Conceptual Framework; Ch19: Accounting policies and other disclosures)
Worked example (large vs small proprietary co.): Nature Walk Resort Pty Ltd: 88 employees, assets $28m, liabilities $10m, revenue $54m. Check the 3 small-company criteria: revenue $54m (fails, not <$50m); assets $28m (fails, not <$25m); employees 88 (passes, <100). Only 1 of 3 criteria satisfied → not a small proprietary company → it is a large proprietary company → must prepare a financial report.
| Section | Answers |
|---|---|
| Objective of financial reporting | Who uses the FS and why |
| Qualitative characteristics | What makes information useful |
| The elements | Definitions of assets, liabilities, equity, income, expenses |
| Recognition / Derecognition | When to bring on / take off the FS |
| Measurement | How to measure an item |
| Presentation & disclosure | P&L vs OCI split |
Objective of financial reporting (para 1.2): to provide information useful to existing and potential investors, lenders and other creditors (the “primary users”) for resource-allocation decisions — covering both financial performance (income/expenses) and financial position (assets/liabilities/equity).
Fundamental characteristics (must have): - Relevance — capable of making a difference to decisions. Has: - Predictive value (useful as an input to forecast future outcomes) - Confirmatory value (confirms/changes prior evaluations) - Faithful representation — must be: complete, neutral, free from error.
Enhancing characteristics (support the fundamentals): Verifiability, Comparability, Timeliness, Understandability.
Materiality (linked to relevance): information is material if its omission/misstatement could influence users’ decisions. Entity-specific — depends on size (e.g. $10,000 matters more to a small firm) and nature (e.g. a bribe is material regardless of size).
AASB 1031 materiality guidelines (3 steps): 1. Select a base amount (B/S: equity or an asset/liability class total; I/S: profit before tax; C/F: net operating/investing/financing cash flow). 2. Calculate the error/omission as a % of the base. 3. > 10% → material; < 5% → immaterial; 5–10% → apply judgement. - Some items (e.g. related-party transactions) are always treated as material regardless of amount.
(Ch1, Ch19)
| Body | Role |
|---|---|
| FRC (Financial Reporting Council) | Oversees the standard-setting framework; appoints AASB members (except chair); no power to direct AASB on a specific standard or veto a standard |
| AASB (Australian Accounting Standards Board) | Develops/issues Australian accounting standards (delegated authority from Parliament); reports to the FRC |
| ASIC (Australian Securities & Investments Commission) | Corporate/markets/financial-services regulator; enforces compliance with the Corporations Act & accounting standards; independent, reports to Parliament/Treasurer |
| ASX (Australian Securities Exchange) | Sets Listing Rules; oversees compliance; promotes corporate governance |
| APRA (Australian Prudential Regulation Authority) | Prudential regulator of banks, insurers, super funds etc.; promotes financial stability |
Time lag between reporting date (end of financial year) and the date the FS are authorised for issue — events in this window must be assessed.
| Type | Condition | Treatment (if material) |
|---|---|---|
| Adjusting event | Provides evidence of conditions that existed at reporting date (or reveals such a condition for the first time) | Adjust the amounts in the FS |
| Non-adjusting event | A new condition arising after reporting date | Disclose in notes only (nature + estimated financial effect) |
Decision process: Step 1 — did the condition exist at reporting date, or is it new? Step 2 — is it material? → adjust (if existed & material) or disclose (if new & material).
(Ch8; AASB 136/IAS 36)
Scope — NOT applied to: inventories (AASB 102), deferred tax assets (AASB 112), financial assets (AASB 9), assets held for sale (AASB 5) — these already use fair-value-style measurement with a “built-in” impairment test.
\[RA = \max(\text{Fair value less costs of disposal (FV−CD)}, \; \text{Value in use (VIU)})\] - FV − CD: fair value (exit price) minus incremental disposal costs (legal fees, stamp duty, removal costs). - VIU: present value of future cash flows expected from continued use (based on recent budgets/forecasts, max 5 years, discounted at a rate reflecting time value of money & asset-specific risk).
Worked example (motor vehicle): CA = $100 (after $60 accumulated depreciation); RA = $90. Impairment loss = $100 − $90 = $10.
Dr Impairment loss 10 Cr Accu. Depr. & Impairment losses 10Disclosed as: Motor vehicle $160 (gross) less Accu. Depr. & Impairment losses $70 (60+10) = CA $90.
Worked example (cargo plane): 1 Jul 2024: purchase for $220,000 cash, straight-line over 10 years.
Dr Plane 220,000 Cr Cash 220,00030 Jun 2025: depreciation = 220,000/10 = $22,000.
Dr Depreciation expense 22,000 Cr Accumulated depreciation 22,000CA = 220,000 − 22,000 = $198,000. FV−CD = $190,000; VIU = $193,000 → RA = higher of the two = $193,000. Impairment loss = 198,000 − 193,000 = $5,000.
Dr Impairment loss 5,000 Cr Depr. & Impairment losses 5,000
(Under the cost model, impairment loss → recognised immediately in P/L. Under the revaluation model, it’s treated as a revaluation decrease — see Topic 4.)
CGU without goodwill: impairment loss (CA of CGU assets > RA of CGU) is allocated pro-rata based on each asset’s CA ÷ total CA of the CGU. Limit: no individual asset’s CA can be reduced below the highest of FV−CD, VIU, or zero.
CGU with goodwill: 1. First, reduce goodwill’s CA (to zero if necessary). 2. Then, allocate any remaining loss to the other CGU assets pro-rata (subject to the same limit above).
Worked example (CGU impairment, A Ltd, no goodwill):
Asset CA Plant (net) 560,000 Land 300,000 Patent 240,000 Office equipment (net) 280,000 Inventory 220,000 Cash 180,000 Total 1,780,000 RA of CGU = $1,660,000 → Impairment loss = 1,780,000 − 1,660,000 = $120,000. No goodwill present. Allocatable assets exclude cash and inventory (outside AASB 136 scope) → allocatable CA base = 560,000+300,000+240,000+280,000 = $1,380,000.
Asset CA Proportion Loss allocated Net CA Plant 560,000 56/138 48,696 511,304 Land 300,000 30/138 26,087 273,913 Patent 240,000 24/138 20,870 219,130 Office equip. 280,000 28/138 24,347 255,653 Total 1,380,000 120,000 Check the limit: FV−CD of land = $280,913 → land cannot be written down below this → max loss allocable to land = 300,000 − 280,913 = $19,087 (not $26,087). The extra $7,000 (26,087−19,087) is reallocated pro-rata across the other assets (plant, patent, office equipment) based on their new CA ($511,304+219,130+255,653 = 986,087):
Asset CA Extra loss New CA Plant 511,304 3,630 507,674 Patent 219,130 1,555 217,575 Office equip. 255,653 1,815 253,838 Journal entry:
Dr Impairment loss 120,000 Cr Accu. Depr. & Impairment losses – Plant 52,326 Cr Accu. Impairment losses – Land 19,087 Cr Accu. Amort. & Impairment losses – Patent 22,425 Cr Accu. Depr. & Impairment losses – Office equip. 26,162(Plant total = 48,696+3,630=52,326; Patent total = 20,870+1,555=22,425; Office equip total = 24,347+1,815=26,162.)
Worked example (reversal): Equipment bought 1 Jul 2023 for $200 cash, SL over 20 years, $0 residual (depreciation $10/year). - 30 Jun 2024: CA before impairment = 200 − 10 = $190. RA = $150 → impairment loss = 190 − 150 = $40; asset written down to CA = $150. - Depreciation for 2024/25: recalculated on the new CA over the remaining useful life (19 years) = 150 ÷ 19 ≈ $7.89 → CA just before considering any reversal ≈ $142. - “Ceiling” = the CA that would exist at 30 Jun 2025 had the asset never been impaired = 200 − (10 × 2 years) = $180. - 30 Jun 2025, RA = $170: reversal recognised = min(RA, ceiling) − CA before reversal = min(170, 180) − 142 = $28. Revised CA = 142 + 28 = $170 (= RA, since RA is below the ceiling). - If instead RA had recovered to $190: reversal is capped at the ceiling, not RA → reversal = min(190, 180) − 142 = $38 (not the naive 190−142=$48). Revised CA = $180 (not $190) — you can never write an asset back up above what its CA would have been with no impairment.
(Ch6 [6.6]: Property, plant and equipment; AASB 116/IAS 16)
| Model | Carrying amount = |
|---|---|
| Cost model | Cost − accumulated depreciation − accumulated impairment losses |
| Revaluation model | Fair value at date of revaluation − subsequent accumulated depreciation − subsequent accumulated impairment losses |
| Direction | Recognised where | Journal entry pattern |
|---|---|---|
| Increase | Other Comprehensive Income (OCI) → accumulated in equity as Asset revaluation surplus | Dr Asset / Cr Gain on revaluation (OCI); then Dr Gain on revaluation (OCI) / Cr Asset revaluation surplus |
| Decrease | Profit or Loss (P/L) — asset written down to FV | Dr Loss – downward revaluation (P/L) / Cr Asset |
Worked example (revaluation increase — Land): 1 Jan 2020: Land bought for $400,000 cash. 30 Jun 2021: FV = $520,000 (increase of $120,000).
Dr Land 120,000 Cr Gain on revaluation of land (OCI) 120,000 (Recognition of revaluation increase) Dr Gain on revaluation of land (OCI) 120,000 Cr Asset revaluation surplus 120,000 (Accumulation of net revaluation gain in equity)
Worked example (revaluation decrease — Land): Same land, but FV falls from $400,000 to $380,000 (decrease of $20,000).
Dr Loss – downward revaluation of land (P/L) 20,000 Cr Land 20,000
Depreciable assets — two allowed approaches to adjust accumulated depreciation on revaluation (para 35): (a) proportional method, or (b) elimination method (this is the method used in this unit) — accumulated depreciation is first written off against the asset, then the asset is written up/down to FV.
Worked example (revaluation of a depreciable asset — elimination method): Plant: CA $50,000 (cost $60,000 − accum. depr. $10,000). Revalued down to $24,000.
Step 1 — write off accumulated depreciation: Dr Accu. Depr. 10,000 Cr Plant 10,000 Step 2 — write asset down to FV (asset now shows $50,000; needs to reach $24,000, a further $26,000 decrease): Dr Loss – downward revaluation of plant (P/L) 26,000 Cr Plant 26,000
| Situation | Treatment |
|---|---|
| Increase, no prior decrease on this asset | Recognise fully in OCI → revaluation surplus |
| Increase, following a prior decrease recognised in P/L | Recognise in P/L to the extent it reverses the prior P/L decrease; any remaining excess → OCI (surplus) |
| Decrease, no prior increase (surplus) on this asset | Recognise fully in P/L |
| Decrease, following a prior increase (existing revaluation surplus) | Recognise in OCI (reducing the surplus) to the extent of the existing surplus balance; any remaining excess → P/L |
Worked example (Land, continuing from above): 2021 FV $520,000 (surplus = $120,000 recognised, as above). 2022: FV falls to $380,000 (decrease of $140,000). - Of the $140,000 decrease: $120,000 is absorbed by the existing surplus (OCI), and the remaining $20,000 goes to P/L.
Dr Loss on revaluation of Land (OCI) 120,000 Dr Loss on revaluation of Land (P/L) 20,000 Cr Land 140,000 Dr Asset revaluation surplus 120,000 Cr Loss on revaluation of Land (OCI) 120,0002023: FV recovers to $415,000 — an increase of $35,000 from $380,000. Of this, $20,000 reverses the earlier P/L loss (recognised in P/L), and the remaining $15,000 is a fresh increase (OCI → surplus):
Dr Land 35,000 Cr Gain on Revaluation of Land (P/L) 20,000 Cr Gain on Revaluation of Land (OCI) 15,000 Dr Gain on revaluation of land (OCI) 15,000 Cr Asset revaluation surplus 15,000
After a revaluation, depreciation is recalculated using the revised carrying amount and the remaining useful life.
Worked example: Plant revalued to $1,000 at 30 Jun 2022; remaining useful life 5 years; residual value $100. At 30 Jun 2023, external valuers assess FV at $890.
30 Jun 2023: Dr Depreciation expense 180 [(1000-100)/5] Cr Accu. Depr. – Plant 180 Dr Accu. Depr. – Plant 180 Cr Plant 180 (write plant down to CA of $820) Dr Plant 70 Cr Gain on revaluation of plant (OCI) 70 (revalue $820 → $890) Dr Gain on revaluation of plant (OCI) 70 Cr Asset revaluation surplus 7030 Jun 2024: new remaining useful life = 4 years, new base = $890 (residual now assumed $0 in this example):
Dr Depreciation expense 222.5 [890/4] Cr Accu. Depr. – Plant 222.5
(Ch18; AASB 107/IAS 7)
Shows changes in cash & cash equivalents, classified into operating, investing, financing — helps users assess an entity’s ability to generate cash, its liquidity, and to reconcile profit with operating cash flow.
| Category | Definition | Typical items |
|---|---|---|
| Operating | Principal revenue-producing activities + anything not investing/financing | Cash from customers, payments to suppliers/employees, interest, tax paid |
| Investing | Acquisition/disposal of long-term assets & other investments | Proceeds from sale of non-current assets, purchase of PPE, interest received |
| Financing | Changes in the size/composition of equity and borrowings | Share issues, loan proceeds/repayments, dividends paid |
Operating → Investing → Financing, netted to the period’s net increase/decrease in cash, reconciled from opening to closing cash balance. - Direct method: gross cash receipts/payments shown directly. - Indirect method: starts from profit/loss, adjusted for non-cash items and accruals/deferrals.
Note: the statement of cash flows is not prepared from the trial balance — it is built from comparative balance sheets (to find the net change in each asset/liability/equity item) plus the income statement plus any additional information provided.
For every cash flow line, reconstruct a T-account for the related balance-sheet item using: Opening balance (O/B) + increases − decreases = Closing balance (C/B), then solve for the unknown cash flow.
| Cash flow | Relevant accounts | Relationship |
|---|---|---|
| Cash from customers | Accounts receivable + Sales | O/B + Sales − Cash received = C/B → Cash received = O/B + Sales − C/B |
| Payments to suppliers | Inventory, Accounts payable + COGS | Purchases = C/B(inv) + COGS − O/B(inv); Cash paid = O/B(AP) + Purchases − C/B(AP) |
| Wages paid | Wages payable + Wages expense | Wages paid = O/B + Wages expense − C/B |
| Rent paid | Prepaid rent + Rent expense | Cash paid = C/B − O/B + Rent expense |
| Interest paid | Interest payable + Interest expense | Interest paid = O/B + Interest expense − C/B |
| Income tax paid | Tax payable + Tax expense | Tax paid = O/B + Tax expense − C/B |
| Proceeds from asset sale | Non-current asset, Accum. depr., Gain/loss on sale | CA of asset sold = Cost sold − Accum. depr. on it sold; Proceeds = CA sold + Gain (or − Loss) |
| Proceeds from share issue | Share capital | Proceeds = C/B − O/B |
| Loan proceeds/(repayment) | Bank loan | Net proceeds = C/B − O/B |
| Dividends paid | Retained earnings, Dividend payable, Profit | Dividend declared = O/B(RE) + Profit − C/B(RE); Dividend paid = O/B(Div. payable) + Declared − C/B(Div. payable) |
Underlying journal-entry logic behind each reconstruction (why the T-account works): - A/R ↑ with credit sales (Dr A/R / Cr Sales); A/R ↓ with cash received (Dr Cash / Cr A/R). - A/P ↑ with credit purchases (Dr Inventory / Cr A/P); A/P ↓ with cash paid (Dr A/P / Cr Cash). - Wages payable ↑ with wages expense (Dr Wages exp / Cr Wages payable); ↓ when paid (Dr Wages payable / Cr Cash). - Prepaid rent ↑ when paid in advance (Dr Prepaid rent / Cr Cash); ↓ as it’s used up (Dr Rent expense / Cr Prepaid rent). - Interest payable ↑ with interest expense (Dr Interest exp / Cr Interest payable); ↓ when paid (Dr Interest payable / Cr Cash). - Tax payable ↑ with tax expense (Dr Tax exp / Cr Tax payable); ↓ when paid (Dr Tax payable / Cr Cash). - Share capital ↑ when shares issued for cash (Dr Cash / Cr Share capital). - Bank loan ↑ when borrowing (Dr Cash / Cr Bank loan); ↓ when repaid (Dr Bank loan / Cr Cash). - Retained earnings ↓ when dividends are declared (Dr Retained earnings / Cr Dividend payable); Dividend payable ↓ when paid (Dr Dividend payable / Cr Cash).
Worked example (Marsfield Ltd, full cash flow statement, year ended 30 June 2022):
Comparative B/S (2021 → 2022): Cash (15,000)→90,000; A/R 221,000→235,000; Inventory 55,000→73,000; Prepaid rent 5,000→6,000; Motor vehicles 102,000→75,000; Accum. depr.–MV (32,000)→(22,000); A/P 82,000→91,000; Dividend payable 15,000→13,000; Wages payable 7,000→6,000; Tax payable 13,000→15,000; Bank loan 52,000→80,000; Share capital 97,000→135,000; Retained earnings 70,000→117,000.
Income statement: Sales 1,200,000; COGS (500,000); Gross profit 700,000; Profit on sale of MV 2,000; Rent exp (51,000); Wages exp (530,000); Interest exp (8,000); Depreciation exp–MV (13,000); Profit before tax 100,000; Tax exp (30,000); Profit 70,000. (A motor vehicle costing $27,000 was sold for cash during the year.)
Operating activities: - Cash from customers = 221,000 + 1,200,000 − 235,000 = 1,186,000 - Purchases = 73,000(C/B inv) + 500,000(COGS) − 55,000(O/B inv) = 518,000; Cash paid to suppliers = 82,000(O/B AP) + 518,000 − 91,000(C/B AP) = (509,000) - Wages paid = 7,000 + 530,000 − 6,000 = (531,000) - Rent paid = 6,000(C/B) + 51,000(exp) − 5,000(O/B) = (52,000) - Interest paid = 0 + 8,000 − 0 = (8,000) - Tax paid = 13,000 + 30,000 − 15,000 = (28,000) - Net cash from operating activities = 1,186,000 − 509,000 − 531,000 − 52,000 − 8,000 − 28,000 = $58,000
Investing activities: - MV cost sold = 102,000(O/B) − 75,000(C/B) = 27,000; Accum. depr. on MV sold = 32,000(O/B) + 13,000(exp) − 22,000(C/B) = 23,000 → CA of MV sold = 27,000 − 23,000 = 4,000. Proceeds = CA + Gain = 4,000 + 2,000 = 6,000 - Net cash from investing activities = $6,000
Financing activities: - Share issue proceeds = 135,000 − 97,000 = 38,000 - Loan proceeds = 80,000 − 52,000 = 28,000 - Dividend declared = 70,000(O/B RE) + 70,000(profit) − 117,000(C/B RE) = 23,000; Dividend paid = 15,000(O/B payable) + 23,000 − 13,000(C/B payable) = (25,000) - Net cash from financing activities = 38,000 + 28,000 − 25,000 = $41,000
Net increase in cash = 58,000 + 6,000 + 41,000 = $105,000. Cash: opening (15,000) + 105,000 = closing $90,000 ✓ (matches the B/S).
(Ch13; AASB 112/IAS 12)
| Accounting profit | Taxable profit | |
|---|---|---|
| Based on | Accounting revenues − expenses (GAAP, accrual basis) | Taxable revenues − tax deductions (Income Tax Assessment Act, principally cash basis) |
| Governed by | AASBs & Corporations Act | ITAA |
Taxable profit ≠ accounting profit → Current tax liability = Taxable profit × Tax rate.
| # | Recognised as accounting item now? | Recognised as taxable item now? | Example | Current-period effect |
|---|---|---|---|---|
| 1 | No | Yes | Revenue received in advance (e.g. unearned rent — cash received now, but earned/recognised as accounting revenue later) | Taxable profit > accounting profit now |
| 2 | Yes | No | Receivables (e.g. rent/interest earned on accrual, cash not yet received) | Taxable profit < accounting profit now |
| 3 | No | Yes | Prepaid expenses (cash paid now = tax-deductible now; expensed for accounting later) | Taxable profit < accounting profit now |
| 4 | Yes | No | Accrued expenses (e.g. long service leave, incurred/expensed now for accounting; tax-deductible only when paid) | Taxable profit > accounting profit now |
Other temporary differences: depreciation (accounting rate ≠ tax depreciation rate) and bad/doubtful debts (expensed for accounting when doubtful; tax deduction only when actually written off as bad).
\[\text{Taxable profit} = \text{Accounting profit} + \text{acct. expenses not tax-deductible} + \text{taxable revenue not yet acct. revenue} - \text{tax-deductible amounts not yet acct. expenses} - \text{acct. revenue not yet taxable}\] \[\text{Current Tax Liability} = \text{Taxable profit} \times \text{Tax rate}\]
Dr Income Tax Expense (current) $XXX
Cr Current Tax Liability $XXXWorked example (Alpha Ltd, current tax worksheet, year ended 30 June 2024): Accounting profit before tax = $250,450. Additional info: (a) tax allows a 125% deduction on the $120,000 development spend; (b) accounting amortises development costs over 4 years; (c) tax depreciation rate for equipment is 20% p.a. (original cost $266,667); equipment sold 30 Jun 2024 for $30,000, original cost $66,667 (bought 3 yrs ago), accounting CA at sale $36,667; (d) entertainment expense & goodwill impairment are not tax-deductible; (e) tax rate 30%.
Adjustment item Add Deduct Amortisation exp. – development (accounting: 120,000/4 = $30,000) 30,000 Tax deduction for development (120,000 × 125%) 150,000 Goodwill impairment exp. 7,000 Depreciation exp. – equipment (accounting) 40,000 Tax deduction for depreciation (266,667 × 20%) 53,333 Entertainment expense 12,450 Insurance expense (accounting $24,000) 24,000 Insurance paid (cash, from prepaid-insurance T-account) 29,000 Doubtful debts expense (accounting $14,000) 14,000 Bad debts written off (actual, from allowance T-account) 16,000 Annual leave expense (accounting $54,000) 54,000 Annual leave paid (cash) 58,000 Loss on equipment sold (accounting $6,667) 6,667 Gain on equipment sold (tax — accounting CA $36,667 vs tax CA $26,667 [66,667 cost − 40,000 tax depr.]; tax gain = 30,000 − 26,667 = 3,333) 3,333 Rent revenue (accounting $25,000) 25,000 Rent received (cash, from receivable T-account) 27,000 Full reconciliation: Accounting profit $250,450 Add: 30,000 + 7,000 + 40,000 + 12,450 + 24,000 + 14,000 + 54,000 + 6,667 + 3,333 + 27,000 = 218,450 → subtotal 468,900 Less: 150,000 + 53,333 + 29,000 + 16,000 + 58,000 + 25,000 = (331,333) Taxable profit = $137,567 Current tax expense @ 30% = $41,270
Dr Income tax expense (current) 41,270 Cr Current tax liability 41,270(Note the pattern: any accounting expense not yet allowed for tax gets added back; any tax deduction bigger than the accounting expense gets deducted; accounting revenue not yet taxable gets deducted; cash/tax revenue bigger than accounting revenue gets added.)
(Ch13; AASB 112/IAS 12)
Differences between accounting and tax treatment create not just a current tax effect (Topic 6) but also a future tax effect → deferred tax assets (DTA) / deferred tax liabilities (DTL).
| Asset | Liability | → | |
|---|---|---|---|
| Taxable temporary difference (TTD) | CA > TB | CA < TB | → DTL (pay more tax later) |
| Deductible temporary difference (DTD) | CA < TB | CA > TB | → DTA (pay less tax later) |
TTD → DTL: Dr Income Tax Expense / Cr Deferred Tax Liability
DTD → DTA: Dr Deferred Tax Asset / Cr Income Tax ExpenseWorked mini-examples of TB: | Item | CA | TB | Reasoning | |—|—|—|—| | Plant (accounting 4yr life vs tax 3yr life) | after 1 yr: $45,000 | $40,000 | Higher tax depreciation now → lower TB → TTD $5,000 → DTL | | Prepaid insurance $3,000 | $3,000 | $0 | Already tax-deducted on payment; nothing left to deduct → DTD → DTA | | Interest receivable $1,000 | $1,000 | $0 | Taxed on receipt, nothing left deductible → DTD → DTA | | Loan receivable $25,000 | $25,000 | $25,000 (=CA) | No revenue/tax effect at all | | Provision for annual leave $3,900 | $3,900 | $0 | Future tax deduction = CA, so TB=0 → DTD → DTA | | Accrued expenses $6,700 | $6,700 | $0 | Same logic → DTD → DTA | | Accounts payable $34,000 | $34,000 | $34,000 (=CA) | Already deducted when inventory purchased; no future deduction | | Loan payable $20,000 | $20,000 | $20,000 (=CA) | Not related to any revenue/expense | | Accrued penalties (fines) $700 | $700 | $700 (=CA) | Never tax-deductible → no future deductible amount | | Subscriptions received in advance $500 | $500 | $0 | Taxed fully on receipt |
Worked example (Plant, full picture): Cost $60,000; accounting life 4 yrs; tax life 3 yrs; tax rate 30%. Year 1: accounting depreciation $15,000 → CA = $45,000; tax depreciation $20,000 → TB = $40,000. TTD = $5,000 → DTL = $5,000×30% = $1,500. If profit before tax (before considering depreciation adjustment) leads to: taxable profit $45,000 → current tax $13,500 ($45,000×30%). Total income tax expense on the accounting profit of $50,000 = $15,000 (50,000×30%), split as:
Dr Income Tax Expense 13,500 Cr Current Tax Payable 13,500 (current tax, on taxable profit) Dr Income Tax Expense 1,500 Cr Deferred Tax Liability 1,500 (deferred tax, on the $5,000 TTD)i.e. Total income tax expense ($15,000) = Current tax payable ($13,500) + Deferred tax liability movement ($1,500) — this reconciles income tax expense back to 30% of accounting profit.
Worked example (Kerry Ltd deferred tax worksheet, full company, as at 30 June 2017):
Item CA Future deductible amt TB TTD DTD Plant (net) 75,000 50,000 50,000 25,000 — Land – revalued 500,000 220,000 220,000 280,000 — Accounts receivable 40,000 — 40,000 — — Interest receivable 15,000 — — 15,000 — Prepaid insurance 9,000 — — 9,000 — Development asset 130,000 — — 130,000 — Research costs — 120,000 120,000 — 120,000 Loan receivable 100,000 — 100,000 — — Inventory 80,000 80,000 80,000 — — Accounts payable 75,000 — 75,000 — — Interest payable 3,000 3,000 — — 3,000 Fines payable 20,000 — 20,000 — — Provision for employee benefits 16,000 16,000 — — 16,000 Provision for warranty 8,000 8,000 — — 8,000 Unearned revenue 25,000 25,000 — — 25,000 Loan payable 170,000 — 170,000 — — Total temporary differences $459,000 $172,000 Closing balance: DTL (×30%) $137,700 Closing balance: DTA (×30%) $51,600 Step 4(b) — compare to opening balances: DTL opening = $100,000, DTA opening = $41,600. Adjustment needed: DTL movement = 137,700 − 100,000 = $37,700 Cr; DTA movement = 51,600 − 41,600 = $10,000 Dr.
Step 4(c) — journal entry:
Dr Deferred Tax Asset 10,000 Dr Income Tax Expense 27,700 (balancing figure) Cr Deferred Tax Liability 37,700
When a new tax rate is enacted, restate existing DTA/DTL balances to the new rate; the adjustment goes through income tax expense. \[\text{Adjustment} = \frac{|\text{Old rate} - \text{New rate}|}{\text{Old rate}} \times \text{Existing balance of account}\]
Worked example (Ironman Ltd): Opening (30 Jun 2023, at 40%): DTA $29,600; DTL $72,800. Tax rate cut from 40% to 30% (Sept 2023, effective 1 Jul 2023). - DTA adjustment = (40−30)/40 × 29,600 = $7,400 decrease → restated DTA = $22,200. - DTL adjustment = (40−30)/40 × 72,800 = $18,200 decrease → restated DTL = $54,600.
Dr Deferred tax liability 18,200 Cr Deferred tax asset 7,400 Cr Income tax expense 10,800
Dr Deferred tax asset (tax loss) $XXX
Cr Income tax revenue $XXXWorked example (Delta Designs Ltd — creation of the loss, year ended 30 June 2022): Accounting loss \((5,600)\); exempt income $2,000 (already included in the accounting loss); depreciation expense $14,700; depreciation for tax $20,300; entertainment expense (non-deductible) $10,000; tax rate 30%.
Accounting loss \((5,600)\) Add: depreciation expense 14,700 + entertainment expense 10,000 = 19,100 → subtotal 13,500 Deduct: depreciation for tax 20,300 + exempt income 2,000 = 22,300 → Tax loss before exempt income = \((3,200)\) Add back exempt income 2,000 (can’t contribute to the loss) → Tax loss after exempt income = \((1,200)\) DTA @ 30% = $360
Dr Deferred tax asset (tax loss) 360 Cr Income tax revenue 360
Worked example (recoupment of the loss, year ended 30 June 2023): Delta Designs makes taxable profit of $23,600 (after already accounting for $800 exempt income in the current year). Prior tax loss of $1,200 is now recouped.
Taxable profit before tax loss $23,600 Add exempt income $800 (can’t be sheltered by the loss — added back first) → subtotal $24,400 Less tax loss recouped \((1,200)\) → Taxable profit = $23,200 Current tax liability @ 30% = $6,960
Dr Income tax expense (current) 7,320 Cr Deferred tax asset (tax loss) 360 Cr Current tax liability 6,960(Income tax expense $7,320 = tax on the full $24,400 pre-loss-recoupment figure at 30%; the DTA of $360 built up last year is now used up/reversed, and the balance is the actual cash liability.)
Must disclose: current tax expense; deferred tax expense; deferred tax expense from rate changes; benefit from a previously unrecognised tax loss; tax relating to each OCI component; and an explanation of the relationship between tax expense and accounting profit.
Revaluing an asset upward creates a taxable temporary difference (new CA > tax base, which stays at original cost) → a DTL must be raised, and the amount added to the revaluation surplus in equity is the net-of-tax amount.
Dr Non-Current Asset XXX (full revaluation increase)
Cr Deferred Tax Liability XXX (revaluation increase × tax rate)
Cr Asset Revaluation Surplus XXX (revaluation increase × (1 − tax rate))Worked example: Land cost $100,000, revalued to $120,000 (tax rate 30%). Tax base stays $100,000. TTD = $20,000 → DTL = $6,000. Net surplus = 20,000 − 6,000 = $14,000.
Dr Land 20,000 Cr Gain on Revaluation of Land (OCI) 20,000 Dr Income tax expense (OCI) 6,000 Cr Deferred Tax Liability 6,000 Dr Gain on Revaluation of Land (OCI) 20,000 Cr Income tax expense (OCI) 6,000 Cr Asset revaluation surplus 14,000Net/combined entry (same result):
Dr Land 20,000 Cr Deferred Tax Liability 6,000 Cr Asset Revaluation Surplus 14,000
(Ch26; AASB 3/IFRS 3)
A transaction/event in which an acquirer obtains control of one or more businesses. - Direct acquisition: acquirer buys the assets (and assumes liabilities) directly, recognising them in its own books (this topic’s focus). - Indirect acquisition: acquirer buys shares in another entity to obtain control of its net assets (covered in later weeks — consolidation). Same accounting principles apply either way (same economic substance).
Two conditions for a business combination: 1. The assets/net assets acquired must constitute a “business” (an integrated set of activities/assets capable of providing a return) — not just a random group of assets. 2. The acquirer must obtain control.
If assets acquired do not constitute a business → it’s an asset acquisition (apply AASB 116, cost model) instead — two key differences from a business combination: assets are recorded at cost (not fair value), and no goodwill or bargain purchase gain can arise.
Worked example (deferred cash consideration): A Ltd acquires M Ltd’s net assets for $3.8m cash, of which $1.8m is deferred 1 year, borrowing rate 10%. Immediate cash = $2.0m. PV of deferred amount = 1.8m / 1.1 = $1.636m. Total consideration = 2.0m + 1.636m = $3.636m (not the undiscounted $3.8m).
Worked example (non-monetary consideration — equipment transferred): Equipment transferred at FV $155; original cost $180, accum. depr. $30 (CA = $150). Gain on transfer = 155 − 150 = $5 (recognised by the acquirer).
Acquisition-related costs (advisory, legal, accounting, valuation fees) are expensed as incurred — they are not part of the consideration transferred.
| Condition | Result |
|---|---|
| Consideration transferred > FVINA | Goodwill (an asset; recognised only on acquisition — internally generated goodwill is never recognised) |
| Consideration transferred < FVINA | Gain on bargain purchase — recognised immediately in profit or loss |
Worked example (Goodwill): A Ltd acquires B Ltd on 1 Jul 2024 for $860 cash. FV of identifiable net assets of B Ltd: Equipment 360 + Inventory 200 + Receivables 90 + Patents 140 + Furniture 60 = 850, less Payables 80 = FVINA $770. Goodwill = 860 − 770 = $90.
Dr Equipment 360 Dr Inventory 200 Dr Receivables 90 Dr Patents 140 Dr Furniture 60 Dr Goodwill 90 Cr Payables 80 Cr Cash 860
Worked example (Gain on bargain purchase): A Ltd acquires all identifiable net assets of W Ltd on 1 Jul 2024 for $1,470,000 cash. FV of assets/liabilities: Plant 300 + Inventory 150 + Receivables 200 + Land 900 + Trademarks 150 + Government bonds 50 − Payables (130) = FVINA $1,620,000 (all figures $’000). Goodwill/(Gain) = 1,470,000 − 1,620,000 = −$150,000 → Gain on bargain purchase of $150,000, recognised immediately in profit or loss.
Name/description of acquiree; acquisition date; primary reasons for the combination; qualitative description of what makes up goodwill; FV of consideration transferred (total and by class); contingent consideration details; amounts recognised for each class of assets/liabilities at acquisition date; any gain on bargain purchase and why it arose.
End of Topics 1–8 summary. Topic 8 leads into Consolidation (indirect acquisitions) in later weeks.