OK, so what’s he missing?

Accounting is a logical subject. Certain rules can, therefore, be expected to apply to accounting disclosure. If they do not then it is reasonable to ask why that is the case. One such simple arithmetical rule is that if the opening balance of corporation tax due has the current tax charge added to it, and the amount of tax actually paid in the year is then taken off the resulting figure, then the balance remaining should be the tax due at the end of the year.

Well, maybe tax law changed? Say, people provisioning for CFC companies in the EU then Cadbury happens and they don’t have to? Just as an example.

My assumption is that the triùir ollamh has made a simple mistake because this is the P³. But what is it?

15 thoughts on “OK, so what’s he missing?”

  1. First thing that he is missing is the credit entry for future corporation tax in “non-current assets” when tax paid to date is greater than tax liability under GAAP/GAAS; second is that “corporation tax due” is an estimate which can be liable to amendment; third is,as you pointed out, the impact of changes in tax rates on deferred tax. I don’t want to actually read Murphy’s blog to find any more since “three strikes and you’re out”.

  2. I suspect also there’s a consolidation effect in there. Tax is due from the separate entities, but you consolidate everything into a single lump, quite possibly generating profits/losses that don’t exist in any of those entities.

    I’m amused to see he picked up the bit about tax in associates. He has effed that one up in the past – on Vodafone, I think.

  3. He doesn’t really describe his methodology in sufficient detail to enable anyone to audit it. He makes no reference to deferred tax, however. For example, if a company revalues a property, it would normally make a deferred tax provision for potential tax payable on the disposal of that property. When the company does sell it, then the deferred tax provision crystallises and might not be shown as part of the tax charge for the year but would be shown as part of the current year liability. Who knows what the buffoon is on about? Just defund the cretin

  4. Dennis, CPA to the Gods

    And, in fact, none of it matters, because the calculation of all tax-related amounts are both estimated and based on either the GAAP or IFRS accounting system. They are not based on any actual tax returns prepared using actual tax law from anyplace anywhere. But since Murphy doesn’t have access to actual tax related figures, he simply gathers up numbers that are purely hypothetical (and therefore useless for his purpose) and acts like there isn’t a problem.

    He’s using apples to try to discover the taste of oranges.

  5. He’s missing all sorts of things.

    Firstly, deferred tax isn’t in there. That shouldn’t make a difference, as this appears to be a current tax rec, but there’s a common view in the tax departments of large companies that you don’t need to worry about the difference between current and deferred tax as it all comes out in the wash. You therefore often find (and more so 20 years ago than now) that when they’re doing the accounts people will not take the deductions that may be due, as they only want a materially correct tax figure in the accounts, and then sharpen their pencils when it comes to the tax return. So current tax goes down, deferred tax goes up, no-one minds but the actual current tax charge is less than reported.

    The same is true for things like R&D tax relief, which don’t even go through deferred tax. People will quite happily not include the deduction because they haven’t done the work to support it yet, and R&D is a permanent difference in the tax computation. Note that the large company scheme started in 2002, and you had 6 years to claim it, and I know from experience that it took a long time to get the information for the claim from the R&D people. So you’d expect tax due to fall as that kicked in.

    Then you have to bear in mind that this is a provision against a liability, and not all amounts that you provide for come to pass. Again, this was more common 20 years ago – we used to have people keeping tax buffers in case something came out of the woodwork. FRS 16 tightened up on that, but didn’t do away with it. It all comes down to people being over-cautious when reporting their tax liabilities. If you’re providing for a worst case then your actual outcome is always going to be better than expected when you reported.

    And then there’s FRS17 making you shift pension tax charges around in the balance sheet, and FRS20 doing the same for share options, and the P&L charge becomes really quite hard to reconcile back, at least when done by aggregating numbers.

    Frankly, no-one cared as much about deferred tax and tax reconciliations then as they do now – and they don’t care much now. I should know: I helped re-draft the tax audit process for a Big 4 firm around the time Murphy’s talking about.

  6. Tré Professore Logic: Because E=mc² is simple, it must be possible to absolutely know both position and speed of a particle simultaneously, because the basic equation covers everything.

  7. Pellinor, here’s a pro bono offer you can’t refuse:

    “If anyone wants to look at the issue by doing some leg work on research with me (I have no funding for this) it would be fascinating to bring this up to date.”

    Simple answer is that man used to accounting for sweet shops and luvvies can’t follow accounting for multinationals.

    Or, barber surgeon finds it difficult to manage keyhole brain surgery.

  8. @Bravefart

    That’s insulting to barber surgeons to compare them to the Murphy. Barber surgeons at least had some idea about what they were doing, given sufficient training some of them might master keyhole surgery – they did trepanning back in the day. I’d suggest it’s more like asking a monkey to do brain surgery.

  9. He really doesn’t get the complexity in Multi-national corporations, it’s clear from some of his demands around CbC reporting etc that he has no idea the type of internal Management Accounting work that is done and the issues that arise from that. I’m sure just the issue of shared services and cost allocation is beyond him as he has no idea of the level of assumptions required to do granular reporting he demands

  10. He is just wrong! There is no sense in which they are logical. They are just rules, and like all rules they are arbitrary. He then goes on to describe double entry bookkeeping, which isn’t even accounting rules. Which is probably just as well given that most people who call themselves accountant have very little knowledge of what debits and credits are.

  11. BnIC

    I doubt he would understand the concept of a Legal entity if he were pummelled repeatedly around the head with it. But you are spot on. As with Finance there is no beginning to his knowledge hence his conclusions are utterly irrelevant

  12. @Braveheart

    So he expects other people to work for free while refusing to do so himself.

    Three ‘professorships’, various consultancies and grants just aren’t enough for him.

  13. The Pedant-General

    “I’m sure just the issue of shared services and cost allocation is beyond him ”

    Ah indeed. I used to run this for a major bank and it’s fiendishly hard. What, for example, is the driver of cost on a network?

    If Business Unit A uses 20% of total bandwidth available on a shared connection, 100% of the time, it might account for 90% of total traffic. Business Unit B has a burst transmission where it needs all the bandwidth it can get, but only for a tiny proportion of the time. It only accounts for 1% of total traffic.

    How much do you charge each business unit? These are not simple questions to answer in principle let alone in practice.

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