No intention to bump this thread up, but popped up in unread threads and seems something valid worth answering and interested to remind myself. Companies, maintain two P&L always, one supposed to be filed to the Tax Authorities (where mostly revenue recognition differences, tax deductions, depreciation method etc. causes difference from the 2nd one) and One for Financial Reporting which is issued to the general public and Share holders. The purpose is to ensure that the company abide by the tax rules while reporting their Income and the Financial reporting standards are followed for Financial reporting. (Such as ‘Indian Accounting Standards (Ind-AS)’ and IFRS or US GAAP).
These two normally will have temporary differences in Tax reported (sometimes permanent differences too), since some of the revenue/loss recognized can not be reported at the same time in both (due to points mentioned earlier). Hence Financial Reporting Statements will have Tax Liability or Assets that gets reported in the Balance sheet. Later on, these get reversed through P&L adjustments.
Hope the following will give further clarity on the entry shown in the P&L of LaOpala.
- A reversal of Tax liability occurs when the circumstances that initially caused the deferred tax liability no longer exist or change, reducing or eliminating the liability. In the above case, the reversal is related to the change in the status of certain investments from short-term to long-term.
- Reclassification of Investments leading to the Reversal: When the company reclassified its investments from short-term to long-term, the tax implications changed (We have higher tax rate for Short-term Inv., vs Long term). Normally, long-term investments have benefit from favorable capital gains tax rates, or timing differences related to their treatment may no longer be relevant.
- This reclassification must have reduced the future taxable gains (or delayed their realization), meaning that the deferred tax liability set aside earlier is no longer required or needs to be reduced.
Hope this helps, regards.
