Abstract:

This course enables us in deep understanding of all

accounting concepts. Effect of Tax treatment in financial
statements is deeply analyzed in this course. This report
is based on the financial report of Woolworth’s group
limited company for year 2018 and 2019. Woolworth’s
group limited is an Australian based firm with second
largest amount of revenues in Australia and Newziland.
This company deals with many product lines and
producing satisfies customers and investors in all years.
This firm shows sound financial health and growth By
analyzing financial statements of these two years, we
have found difference in taxable income and accounting
income along with cause of these differences and
ultimate effect of these permanent and temporary
differences.

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Introduction:
Accounting is used to prepare financial statements. Tax
treatment is one of the essential part in accounting. There

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are three objectives for income tax in accounting.
Optimizing profit, timing of payment, funding
considerations. Tax treatment is most crucial part while
analyzing the criteria for deferred tax liability or deferred
tax asset recognition for financial statements. There are
many tax policies and firms must follow codes. There are
different terminologies that must be familiar before
analyzing financial statements. In this report, before
analyzing financial statements, key term like accounting
profit, taxable profit, permanent and temporary
differences in accounting, deferred taxes assets and
liabilities are explained briefly. For analyzing financial
statements, I have chosen Woolworths group limited
company. This is an Australian based firm with second
largest amount of revenues in Australia and Newziland.
This company is founded in 1924, 95 years before. This
company deals with many product lines and producing
satisfies customers and investors in all years. This firm
shows sound financial health and growth. In this report,
deferred tax assets, liabilities, and their effect on net
income and taxable profit is explained for the Woolworths
group limited company.

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 1.
Accounting profit:
Financial health of any business can be determined by
calculating profit. Every organization publish different
versions of profit in their financial reports by analyzing
revenues and expenses. Total earning of a company
when considered in accord to GAAP is named as
accounting profit. Accounting profit can be termed as net
income, bookkeeping profit or financial profit. It depicts
the money left after deducting all the explicit cost of doing
business from total revenues.

Cost of goods sold is deducted from total revenues to

calculate gross profit. Then explicit operating expenses
like utilities, depreciation, salaries, rent, interest,
amortization and other daily operation expenses used in
running the business is deducted from gross profit to
derive accounting profit. Accounting profit is used to
determine overall business profitability for financial
reporting. Data of current financial year is used to
calculate accounting profit. (Gaffikin 2003)

Taxable profit:
Taxable profit is the profit upon which income tax is
applicable. It is based on the operating earnings but there
are the others taxable earnings which include dividend
income and interest income.Taxable profit is composed
according to taxation rules of concerned authority

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depending upon its locality and nature of business. For
example, there are many businesses that are declared as
non-profit business and they have tax exemption for
certain time period.

Taxable profit is mainly based upon operating profit but

some other income sources can also come under this
category like dividend income, capital gain and interest
income. Different taxable income are taxed at different
rates. To calculate taxable profit, previous year income is
used. (Gaffikin 2003)

Difference between the accounting and taxable

profit:
Here are some ways which differentiate accounting profit
and taxable income are given below.

Accounting profit is used to calculate profitability of any

firm while taxable profit is used to find the tax payable of
the company.

Accounting profit is financial profit of any business while

the part of profit that is taxable is known as taxable profit.

Accounting profit is measured by using current year

financial data while taxable profit is calculated with the
previous year data.

Taxable profit is reported in balance sheet as tax

payables while accounting profit is reported in profit and

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loss statement as net profit/income.

Temporary differences:
The differences that occur due to different accounting and
taxation rules to record different accounts. Temporary
differences is easily smoothed out with time. Temporary
differences are the differences which occur due to
carrying amount of any account and tax applicable of that
account.Temporary differences can be reversed in future
and can cause creation of deferred tax asset and
deferred tax liability. Examples of temporary differences
are bad debt expense, installment sales, depreciation
expenses etc.

When carrying amount of assets is bigger than the tax

base. Deferred tax liability is generated and when
carrying amount of asset is a smaller amount than tax
bases deferred tax asset is generated. In case if
liabilities, carrying amount of liability id greater than its tax
bases results in deferred tax asset and lower carrying
amount of liability than its tax base results in deferred tax
liability.

Taxable temporary differences:

The difference between pretax profit and taxable profit
that is reversible is called temporary difference.

These timing differences result in lower taxable income

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for the current year than the pretax accounting profit
subjected to taxes. These differences generate lower
income tax which is payable in current year than real
income tax expenses.This temporary difference yields
taxable amount for future while calculating taxable profits.
Difference between accrued income tax expenses and
income tax which is payable results in delayed tax
liability.

Deferred tax liability:

Deferred means payment is made in future. Deferred tax
liability arises when tax is assessed or due but has not
paid yet. It is formulated by multiplying tax rate to the
taxable temporary difference.

Deductible temporary difference:

If carrying amount is greater as compared to the tax

base, then temporary difference will be deductible. It
causes higher income tax payable for current period than
accrued income tax.

Deferred tax asset:

Deferred tax asset is utilized in future to balance
difference between income tax and taxable income in
future time periods while this asset is created by
deductible temporary difference.It is calculated by
multiplying tax rate to deductible temporary difference

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amount. (Gaffikin 2003)

Deferred tax asset belongs to the deductible temporary

differences. Moreover, deferred tax asset can be reduced
with the probability of not realization of all or some portion
of deferred tax asset. It can be recognized for all
deductible temporary difference with the extent of
probability of utilization of deductible temporary
differences for calculation of taxable profit. IAS 12:24
excludes the recognition of deferred tax asset, if the asset
is not a business combination and has no effect on the
accounting profit and taxable profit.
Deferred tax liability recognition:

Deferred tax liability arises due to all taxable temporary

differences. According to international accounting
standard 12;15 , there is a exclusion in recognizing
deferred tax for taxable temporary differences that will
arise from good will initial recongnisition and initial
recognition of liability that will not affect the accounting
profit and taxation profit.
We can summaries that, deferred tax liability and asset
can be accepted in balance sheet until organization can
legally set off both.
Deferred income tax amount is calculated by using tax

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rates substantive or enacted.( Meigs 1998)

2.
I have chosen Woolworths group limited company that
is second largest organization in Austria in term of
revenues. Financial statements of 2018 and 2019 are
deeply studied for this company.
From 2018 , profit and loss statement shows that the
income tax expenses of company is 718 million. In 2019,
profit and loss statement shows the income tax expenses
of company is 668.

3.
The company is taxed at rate of 30% for both years,
2018 and 2019. Company accounting profit in 2018 is
2394 million and when tax rate applied, tax expense
should be 718 million. In 2019, accounting income is
3427, and when tax rate applied, the tax expense should
be 1028. In profit and the loss statement, the tax
expense of both years are 798 and 668 respectively.
The difference allying the actual tax expense and
calculated tax expense is due to income from
discontinued operations. Some income amounts are
nontaxable or tax-deductible for the company.
When we calculate the accounting income, we cannot
add income from discontinued operations in our total
taxable income.

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 Year 2018 2019
Profit from continuing 2394 2227
operations
Profits from 193 1200
discontinued
operations

Total profit 2587 3427

Calculated tax on 776 1028
profit @30%

Income tax expense in 792 668

PLS
There is an adjustment of some amounts for tax effects;
such as capital gain counterbalance by the capital loss,
derecognition of tax liability, non-deductible expense,
unrecognized tax losses for the current year, offshore tax
rates. (Woolworths Limited 2019)

4.

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 Year 2018 2019
Deferred tax 940 990
assets
Deferred tax 669 679
liabilities

Deferred tax assets include the cash flow hedges,

provisions and articulation, plant, property and the
equipment which are going to sale in future. Deferred tax
liabilities include intangible assets, unrealized foreign
exchange difference, prepayments and some other
liabilities. These deferred taxes are designed by using
balance sheet method. Temporary differences arise due
to difference in shoring up amount of assets and the
liabilities for taxation purpose and financial reporting.
Deferred tax asset and the liability comes in to light from
the temporary differences of tax consolidated groups is
recognized by subsidiary of company. Subsidiary
company recognize these taxes on standalone basis. The
company charged from its subsidiaries 104 million of
income tax expense in 2019 and 35 million in 2018
through call intercompany accounts. (Woolworths
Limited 2019)

5.

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There is current tax payable reported in balance sheet of
the company.

Year 2018 2019

Income tax 792 668
expense
Income tax 699 730
payable
Current tax 110 84
payable

Income tax which is payable and income tax expense is

different for both year. This difference is due to
adjustments of current tax for prior periods and net
deferred tax benefits is adjusted in tax payable amounts.

Income tax expense is amount which is calculated

according to standard accounting rules for the company.
Income tax which is payable is amount that you actually
owes as taxes basis upon the rules of taxation code of
your country. Payable income tax appear as the liability
in your balance sheet while income tax expenses are
stated in income statement. (Woolworths Limited 2019)

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 6.

year 2018 2019

Income tax expense 792 668
Income tax paid( cash 661 744
flow statement)

7. Income tax expense are those expenses which are

acknowledged by the firm of an accounting period
on taxable income.
8. Income tax paid means actual amount that is paid
by the company to government, and this income
tax paid amount is calculated by keeping in mind
the actual tax payable reported in balance sheet
and we can analyses that these are the
differences allying the income tax payable and the
actual income tax paid. Few taxes are paid in
advance and firm collects the tax back from the
government. We can summarize by these words
that income tax paid means real tax paid by the
company for the current years and tax expense
means tax owes by the company applying tax rate
to the taxable income. In addition, income tax
payable means, actual amount of tax that is due

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 on the company for the current year. (Woolworths
Limited 2019)

9.

Permanent difference:
When revenue or expenses are entered in book income
but is not recognized in the taxable income, that
difference is called as permanent difference. This type of
difference can never be reversed in future. Book income
and taxable income can never be equalized.
Due to permanent difference, there is not ant deferred tax
creation. Due to permanent tax difference, there is
difference allying effective tax rate and statutory tax rate.
Permanent differences are political contributions, fines
and penalties, officers life insurance, meals and
entertainments and tax exempt interest.
Temporary difference:
Revenues and expenses recorded in book income of
period can affect the taxable income of different
accounting periods. This difference is known as
temporary difference. Temporary differences can be
reversed in future and can cause creation of deferred tax
asset and deferred tax liability. Examples of temporary
differences are bad debt expense, installment sales,
depreciation expenses etc.
When carrying amount of assets is bigger than the tax

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base. Deferred tax liability is generated and when
carrying amount of asset is a smaller amount than tax
bases deferred tax asset is generated. In case if
liabilities, carrying amount of liability id greater than its tax
bases results in deferred tax asset and lower carrying
amount of liability than its tax base results in deferred tax
liability.
Taxable temporary differences do result in future taxable
income. Deductible temporary difference results in future
tax deduction. (Scott and O’Brien 2003)

Permanent differences in Woolworth’s group limited:

Nontaxable income and nondeductible expenses are part
of permanent differences.
There are nontaxable accounts in financial statements
that are adjusted while calculating income tax expense.

year 2018 2019

Profit from continuing 2394 2227
operations
Profits from discontinued 193 1200
operations

Total profit 2587 3427

Calculated tax on profit @30% 776 1028

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 Nontaxable amounts in taxation
a. Capital gain offset by capital - (327)
losses
b. De-recognized deferred tax - (33)
liability on sale of business
c. Non-deductible expenses 4 9
d. Unrecognized tax losses 1 4
from the current year
e. Impact of differences in (5) (5)
offshore tax rates
f. Other 22 3
g. Adjustments relating to prior (6) (11)
periods
Income tax expense in PLS 792 668

These accounts described in above table (a, b, c, d, e, f ,

g) are permanent differences in financial statement of
Woolworths limited company. (Woolworths Limited 2019)

10.
Woolworth’s group limited is second largest company in
Australia based on its revenues. This company operates
in Australia and Newziland. This company deals in food,
general merchandise retails, liquor, gaming sector and
hospitality.
By analyzing the financial statements of Woolworth’s

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group limited, I have analyzed that there is difference
between the tax expense and taxable income in both
years. Company has showed good profit from 2018 to
2019. Profit increases from 1724 million to 2693 but
surprising thing is that tax expense decreases from 718
to 668million. This is due to profit earned from
discontinued operations that is nontaxable . Therefore,
taxable income is less than the accounting income.
Although tax expense for year 2018 is greater than the
year 2019. However, the most shocking reality is that
according to cash flow statement, income tax paid id 661
million for year 2018, which is less than the 744 for year
2019. These differences are due to deferred tax liabilities
and asset caused because of some temporary
differences between accounting revenue and taxable
income.

Summary:
Woolworth’s group limited is an Australian based
company, which is showing good profit growth from the
previous year. By analyzing balance sheet, income
statement, notes to financial statements and cash flow
statements we have analyzed that the company is
following fair taxation policies and rules. There is effect of
temporary and permanent differences in the accounting
income and taxable income. These differences effect the
income tax expense and income tax payable amounts of

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company. Overall, the company is showing sound
financial health and prospective growth in future. Good
taxation policy means that company has good corporate
governance and showing corporate social responsibility.
Good corporate governance with fair taxation treatment
keep its stakeholders satisfied with the firm.

References:

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