Fm - ipcc - prov for taxation

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

31 July 2012 Should we take prov for taxation in funds from operations or statement showing working capital changes and why ?

very urgent

CA Lokesh Pokharna

CA Lokesh Pokharna (Expert)
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31 July 2012 Provision for taxation (if it is not taken as current liability) to be added in funds from operation.

Querist : Anonymous

Querist : Anonymous (Querist)

31 July 2012 IN SOME QUESTIONS OF IPCC, IT IS TAKEN IN FUNDS FROM OPERATIONS AND IN SOME, UNDER STATEMENT FROM OPERATIONS - I DO NOT UNDERSTAND WHY ?

PLS CLARIFY

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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25 July 2024 The decision to take provision for taxation in Funds from Operations (FFO) or in the Statement of Cash Flows (specifically, changes in working capital) can vary based on accounting principles, reporting standards, and the specific context of the financial statements. Here’s a deeper look into why this might vary:

### Funds from Operations (FFO):

1. **Focus on Operational Cash Flow**: FFO is often used in industries like real estate and REITs to highlight the cash generated from core operations. It starts with net income and adjusts for non-cash items like depreciation and amortization.

2. **Tax Provision in FFO**:
- In FFO, the provision for taxation is typically based on the cash taxes paid or payable during the reporting period. This aligns with the focus on operational cash flow and the actual cash impact of taxes related to operations.

3. **Relevance for Investors**: Investors in sectors where FFO is emphasized (like REITs) are interested in understanding the cash flow available for distribution, which includes cash taxes paid.

### Statement of Cash Flows (Working Capital Changes):

1. **Cash Flow Perspective**: The Statement of Cash Flows details the cash inflows and outflows categorized into operating, investing, and financing activities.

2. **Tax Provision on Cash Basis**:
- Changes in working capital impact cash flows from operations directly. Tax provision here reflects actual cash payments made for taxes during the period.

3. **General Applicability**: Suitable for all types of entities to show the actual cash impact of taxes paid or payable. It provides transparency on cash flow utilization and liquidity.

### Reasons for Variation:

1. **Industry Practices**: Certain industries or sectors may have established practices where FFO is the preferred measure of cash flow and thus the tax provision is aligned with this metric.

2. **Reporting Standards**: Different reporting standards or regulatory requirements may influence where the tax provision is disclosed. For example, specific guidelines or interpretations by accounting bodies may suggest different approaches.

3. **Entity-Specific Considerations**: The nature of the entity (such as its primary operations, investor expectations, and regulatory environment) can influence the choice between FFO and the Statement of Cash Flows for tax provision disclosure.

### Conclusion:

The variation you observe in IPCC questions regarding the treatment of tax provision in FFO versus the Statement of Cash Flows likely reflects different scenarios or contexts being tested. Understanding the underlying principles of each approach (cash flow focus in Statement of Cash Flows vs. operational cash flow in FFO) helps in applying the correct method based on the given circumstances. In practice, entities choose the method that best aligns with their reporting objectives, industry practices, and regulatory requirements to provide transparent and informative financial statements.

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