Accounting standards are standard set by IASB, IFRS and other accounting bodies to ath accounting practice and following these accounting standards globally. These principles are circulated globally and made changes in rules time to time so that it corporate and companies carry on their operational and financial function smoothly. In this report the accounting and tax scandal made by Caterpillar Company which is US biggest engineering and machinery equipments company scandal have been discussed. Moreover its accounting principal set by these accounting bodies and violation and exposure draft and comment letter of few experts have been discussed. The aim of the report is to clear the concept of International accounting standard and implementation in organisation can be learned.
Caterpillar failed to comply the US taxes and financial reporting in an effort to keep its stock price high as per government investigation and reports by The New York Times. Caterpillar returned $7.9 billion in fund structured as loans but did not report them for tax ar accounting purpose.
Who is Involved?
Caterpillar Inc is an American company who design, manufacture, market and sell engines, machinery and financial products & insurance to the consumers all around the world. It is a leading establishments listed on New York Stock Exchange (NYSE) and operates in Industry Equipment, Engines and Financial Service Company (De Simone, L. 2016). According to the recent report, Caterpillar has been accused by the Australian statutory bodies for the accounting scandals to reduce the amount of taxes on billions of dollars (Jansen, J. 2016). It did not comply with the US taxation legislation as well as regulations on financial reporting. The main target of the company by non-compliance with the accounting standards is to fraudulently maintain their share price at high level.
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In the accounting scandals and fraudulently cooking of the books has resulted a cut-down of tax bill by 2.4 billion by moving out its US earnings to the subsidiary firm in Swiss. Caterpillar Inc inaccurately reported their cash movement among domestic as well as overseas subsidaries, more importantly, Swiss subsidaries and also did not comply the taxation acounting standards in the financial reoprting. As per the legislations, US companies are taxed at 35% but they are permitted to defer their taxation duties on those profitability that has been generated offshore untill they are brought back to the States, called repatriation. Once when the money is brought
What actions was taken?
As per the story cited a report prepared by dartmouth College that investigated heavy machinery makers tax practice. The main finding was that caterpillar avoided on billions of dolar it brought to the US from its Swiss unit and affiliates. Caterpillar returns $7.9 billion in fund restructure as loan but did not report them for tax or accounting purpose as per Times Report. So Law enforcement officer with internal revenue service executed a search warrant at Caterpillar's facilities in the Peoria, Illinois are. Multinational like caterpillar faces a 35% tax rate in the US vessel then the appropriate rate in other mostly developed economies. This down courage them from deport of foreign earnings and facing US taxes. President Donald trump has suggested that companies with large cache of overseas will be able to return at 10% interest rate. Caterpillar strategies for reducing the taxes it must pay in the United States have saved the company billion of dollars. Federal agent raided three caterpillar building near its headquarter Peoria as a part of investigation (Oydele, 2017). Caterpillar said that they will co operating with Law officers and necessary information provided to Officers. As per company statement said Caterpillar was cooperating with the officer. Companies report has not been published among public. Spokeswomen said that company has not been provided with the copy but as per New York time reported it outlines a complex corporate strategy for returning billion of dollar in offshore account to US account without payment of federal income tax earnings.
Accounting principles, standards and concepts
Tax accounting is accounting technique that emphasises on tax inspite of appearance of public financial statement. Tax accounting is conducted by Internal revenue code which dictates the specific rules that companies and individuals must follow when preparing tax return. Tax principles generally differ from generally accepted accounting principle. Violence opf accounting and taxation principle first came in exist when the three year back when Senate permanent subcommittee on the investigation published a report on Caterpillar offshore tax strategy, the questionable method to move most of its profit from the US to Switzerland, where it only pays 4-6% tax rate. After the government raid the stock of caterpillar lost $4.2 billion in market capital.
As per the IFRS accounting standards recognition of current income tax Interpretation committee noted that:
- Paragraph 12 of IAS 12 provides the guidelines on the recognition of the current taxes and current liabilities.
- In the specific facts pattern described the submission, an assets is recognised if the amount of cash paid which is certain amount exceeds the amount tax expected to be due which is uncertain amount.
- The timing of the payment should not affect the amount of current tax expenses recognised.
- As per interpretation committee mentioned in paragraph 88 of IAS 12 provide guidelines on disclosure required for such items. In the light of existing IFRS guidelines contingent Liabilities and Contingent Assets should be applied to determine whether to recognise an assets in which tax position is uncertain.
So caterpillar have violated the IFRS and IAS accounting standard provisions in Income tax and accounting principle of moving billions of dollars in cash from Switzerland to US and paid tax only 4-6%. Now after actions of Law officers they have to pay with interest 10% and penalty. So In specific pattern described the submission assets which are recognised if the amount of cash paid ehich certain amount exceeds the amount tax accepted to be due which is uncertain. So caterpillar should have disclosed actual revenue to government and paid all taxes on moving cashes but they not did it and falsely mentioned the revenue and paid only 4 to 6% interest. Secondly IFRS standard said that the timing of the current payment should not affect the current tax expenses recognised. So they have also broken this rule and did not paid timely taxes for current assessment year.
Tax Concept: Income tax consequences of payment on financial instrument classified as equity. The issues related to the presentation of income tax and issues of cost financial instruments that are classified as equity that is whether an entity recognised the relevant income tax consequences directly in equity or in profit and loss. Consequently the interpretation committee decided to propose an amendment to IAS 12 which clarifies that all payments on financial instrument classified as equity that distribute profit and are not limited to circumstances described in paragraph 52 A of IAS 12. The income tax consequences of dividends are linked more directly to past transactions or events then to distribution of owner, therefore an entity recognise the income tax consequences of dividend in profit or loss for the period, except the transactions are described in accounting standard (Kvaal, E. (2017). An entity recognise the income tax consequences of dividend when to recognise the a liability to pay dividend.
IFRIC interpretation Uncertainty over Income tax Treatment draft interpretation: Draft proposed on income tax treatment proposed are interpretation treatment would apply to income tax within the scope of IAS 12 income tax, An entity would determine whether to consider uncertain tax position separately or collectively, An entity would assume that a tax authority have right to examine the amount reported to it will examine those amount and have full knowledge of relevant information when making those examination.
Experts comment: As per ACSB CNC a Canadian company comment later received to ifrs. ACSB is Canadian national accounting standard setting body holding a legal authority to set accounting standard in Canada. As per their responds interpretation committee efforts to address the diversity in practice related the recognition and measurement of the uncertainty over income tax treatment. They support the proposal in draft interpretation and their respond include several sugestion for interpretation committee to consider. The interaction between IAS 10 after reporting period and draft interpretation in term of new development and uncertain income tax treatment arising after the reporting period date should be reflected on reporting date.
From overall evaluation, it has been assessed that Caterpillar failed to record and disclose transactions according to financial reporting standards. Investigation report shows that Caterpillar returned funds such as $7.9 billion in the form of structured loan. However, concerned parties were not reported regarding such aspect due to having tax or accounting purposes. The main intention of firm behind hiding information related to the payment of loan amount was to maintain high market share (Baadsgaard & Quitzau, 2011). Hence, major issues take place in the accounting standard related to the aspect of income tax. The main objectives of accounting for income taxes are to recognize the amount of tax payable or refund for the current year.
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Besides this, deferred tax assets and liabilities for the purpose of future tax must be recognized in the enterprise financial statements. Further, it has been identified that tax consequences for most of the events which are recognized in the financial statements undertaken for the determination of tax payable amount. However, tax laws differ to the significant level from recognition to the measurement requirements. Due to all such aspects differences occur between the amount of taxable income and prê-tax profit level. In addition to this, variations also take place between the bases which are undertaken for calculating tax regarding assets or liabilities. Hence , due to the all such aspects existing taxation rules do not facilitate fair disclosure of accounting information.
In this report the accounting and tax scandal by Caterpillar company has been analysed and accounting principle standards set by IFRS and IAS on income tax treatment and income tax consequences are explained. Industrial expert comment by Canadian accounting company and comment letter is described and violation of tax laws and accounting principal and action of US governments and reaction of Caterpillar Company is detailed.
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