#84- Market capitalization vs book value

In accounting, we look at net asset of the Company as an estimated guide of the value of the Company. However, the market value of the Company might differ from the book value (i.e. net asset of the accounting record).

Auditor can request management to analyze the difference between market capitalization and book value.

If market capitalization > book value. Auditors should consider what are the premium the investors are paying? Any figures on the balance sheet does not reflect true picture? Does the figure stated in accordance to accounting standards?

If market capitalization < book value. Auditors should consider the impairment issue for all assets and goodwill.

#76 Classification of Tax Refund

Should tax refund be classified as Income in financial statement?

Let's look at the double entries of tax refund upon receipt of advice / monies from the Income Tax Authority of the country:

Dr. Cash
Cr. Taxation Expense

Let's illustrate with example. Company XYZ made provision for tax in relation to Year of Assessment 2008 amouned to US$200 based on its tax computation, full payment of US$200 has been made. US$200 has been charged to its income statement as taxation expense.

In the same year/ subsequent year, Comptroller of Income Tax inform the Company that there's a computation error, and the actual tax for YA 2008 should be US$180 (ie overpaid by S$20). The Company should have recorded a credit to its taxation expense account (i.e. a gain to income statement) as tax refund.

In short, tax refund should not be classified as income in financial statement. It should be considered a credit to taxation expense account.