Consolidating financial statements is one of the most complicated issues in accounting. The preparation of such statements requires a great deal of work, as well as extensive accounting knowledge. The financial situation of a capital group is also valuable information for persons participating in consolidated financial statements. The final result of individual companies' statements can be influenced by controlling several separate entities in the legal sense, through the free transfer of profits and losses. An important issue in this respect is income tax and deferred income tax, as well as the presentation thereof in the separate and consolidated statements. This involves specific determination of mutual transfer prices.
Contemporary conditions of globalization and maximization of profits are becoming more and more clearly translated into significant changes in the financial and accounting sector. The merger of specific business entities into various capital or purchasing structures is gaining in popularity and significance. Rapid development of the market economy and capital market as well as rising share prices translate into favourable conditions for consolidation of enterprises. The motives of such mergers are different and depend mainly on the size of business units or the type of business. Such merger of entities requires the preparation of a consolidated report.
There are many incentives inspiring the emergence of capital groups - they can be financial, technical-operational, economic or managerial. Each of the motives aims to increase the efficiency of both the entire capital group and each individual enterprise that is part of it. International corporations pose increasing challenges to global financial reporting - they are, after all, operating all over the world and thus financial statements are drawn up in countries with different accounting standards and principles. Consolidation of financial statements requires the respecting of specific procedures and adaptation to the accounting policies of the entities subject to consolidation.
In matters relating to consolidation of financial statements, the issue of income tax, especially deferred income tax, is very important. In the reports of individual entities it can have a twofold aspect:
If the balance value of an investment or share becomes different from the tax value, temporary differences will arise as a result. If they are positive - the entity creates a provision for deferred income tax. The income tax itself is determined when drawing up the financial statements of a specific entity. Each of them in a given group pays income tax to a specific tax office. It must be determined in accordance with the provisions of tax law.
In the case of a consolidated report drawn up by the parent company, it may turn out, if the entity is treated as a whole, that the tax paid is either overpaid or underpaid. The established deferred income tax is determined by the value of assets and liabilities.
Recognition of deferred income tax is necessary primarily due to the fact that the accounting result of individual entities is not usually identical with the tax result. Such discrepancy results from factors that have a permanent or temporary character, and their source is the difference in the normative tax standards. In Poland, this is regulated by the Corporate Income Tax Act, as well as accounting standards, including International Accounting Standards and the Accounting Act.
Deferred income tax may be recognized as both revenue affecting the result and as a cost. The effects caused by the assets shown or the provisions created as a result of deferred income tax, depend on the operations. The Corporate Income Tax Act regulates the issues of tax settlements by capital groups, defining a Tax Capital Group as a suitably related commercial law company that has legal personality. These are, therefore, limited liability companies or joint-stock companies based in Poland.
Obtaining such a status means that the companies included in the Tax Group are no longer separate taxpayers of income tax. In such a case, tax liabilities burden the tax capital group and are settled by one of the companies which becomes the representative company. Group companies must meet certain criteria, which are regulated by the Income Tax Act. The key features of a Tax Capital Group include the joint settlement of income by all companies included in the group. If each of them generates profits, then the settlement does not translate into a reduction in tax. However, if any of the entities post losses, the tax paid by the group is lower than the total tax, which would normally be paid by the individual companies.
A Tax Capital Group is mainly dedicated to capital groups, some of which are susceptible to tax losses. It gives the opportunity to compensate losses and optimize the amount of income tax, and thus to eliminate the situation in which the effective rate of taxation of the result significantly exceeds the statutory rate.return