Object: Report on issues concerning consolidated financial statements

The following report deals with the issues and problems concerning the consolidated financial statements. The first concern was about the meaning of deferred income taxes and deferred tax assets. As you know, the accounting income in income statement may be not equal to the taxable income in tax reporting. This can be explained by the fact that the rules in accounting and in tax regulations may differ. Often differences in the timing of the recognition of revenues and expenses occur. These differences lead to a gap between tax payable and tax expense and create temporary differences. A temporary difference is called taxable when it creates a future amount of tax payable. It is called deductible on the opposite side. IAS 12 requires that these temporary differences be recognized in the balance sheet using the Balance Sheet Liability method. Under this method, for each asset and liability a comparison is made between the tax base, i.e. the amount associated for tax purposes, and the amount recorded on the balance sheet. Then, temporary differences are recognized. For example, in the case of a deferred income tax, the amount on the balance sheet is greater than its tax base. So tax expense exceeds tax payable. Thus, a taxable temporary difference appears. In the income statement, a liability equal to the amount of this difference is recorded as a deferred income tax. On the contrary, a deferred tax asset occurs when the amount of an asset on the balance sheet is lower than its tax base. As a consequence, the tax expense is lower than the tax payable. More taxes than needed are paid for the period. A deductible temporary difference appears and is recorded as a deferred tax asset on the balance sheet. The refund will not occur this year but in the future as a deduction of