It is often argued that cash flows can not be manipulated because cash flow is a matter of fact. It is not subject to estimates and it can be treated in one way. However, there is still some scope for cash flow manipulation.
Cash balances are measured at a point in time. This means that it is possible to arrange receipts and payments of cash so that the cash balance is some particular amount. A business may make a special effort to collect debts just before the year end, likewise, it may also delay paying creditors until just year end. A business may also structure transactions so that the cash balance is favourably affected
Ethical issues
Arranging transactions to window dress the FS and make them look better than actually is the case not an ethical way of preparing FS. In preparing FS, the preparer must ensure that the information is prepared honestly and fairly and that is can be relied on by the users of those FS. If the FS are altered so that they do not present fairly the financial position and performance of the entity then they may be misleading to users
Question 2
(a) The differences between the IFRS carrying amounts for the non-current assets and tax bases will represent temporary differences.
The general principle in IAS12 ‘Income Taxes’ is that deferred tax liabilities should be recognised for all taxable temporary differences. A deferred tax asset should be recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised.
A deferred tax asset cannot be recognised where it arises from negative goodwill or the initial recognition of an asset/liability other than in a business combination. The carrying amount of deferred tax assets should be reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction should be subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available
The recognition of deferred tax assets will result in the recognition of income, in the income statement. This amount cannot be reported in equity as IAS12 only allows deferred tax to be recognised in equity if the corresponding entry is recognised in equity. This is not the case in this situation as the revaluation was not recognised for IFRS purposes.
Carrying Tax Temporary
Amount Base Difference
$m $m $m
Property 50 65 15
Vehicles 30 35 5
Other taxable temporary differences (5)
15
The deferred tax asset would be $15 million x 30%, i.e. $45 million subject to there being sufficient taxable profit. The deferred tax provision relating to these assets would have been:
Carrying Tax Temporary
Amount Base Difference
$m $m $m
Property 50 48 2
Vehicles 30 28 2
4
Other taxable temporary differences 5
9
$9 million at 30%, i.e. $27 million
The impact on the income statement would be significant as the deferred tax provision of $27 million would be released and a deferred tax asset of $45 million credited to it.
(b) The shares issued to the management of Hash by Abbott (three million ordinary shares of $1) for the purchase of the company would not be accounted for under IFRS2 ‘Share-based payment’ but would be dealt with under IFRS3 ‘Business Combinations’.