TEMPORARY DIFFERENCES AND ITS EFFECTS ON FAIR AND OBJECTIVE FINANCIAL REPORTING IN THE REPUBLIC OF CROATIA

Company financial statements record and present all financial effects of transactions related to assets, capital, liabilities, expenses and revenues. These elements should reveal real flow of transactions in a company and result in fair and objective presentation. In this way financial reporting achieves its basic aim of providing various users with information on the company financial position, performance, and changes in financial position. However, adhering to accounting principles in asset recognition and evaluation does not necessarily lead to fair and objective presentation in financial statements. In jurisdictions in which accounting principles for determining accounting profit before taxation are consistent with taxation principles used to determine the basis for recognition of the current period tax liability, the determined tax expense is also shown in the Profit and Loss Account as the item to be deducted from pre-tax profit. In economies in which temporary differences occur due to noncompliance of accounting principles and tax regulations, the effective tax rate is not identical to its nominal rate (can be either higher or lower). However, application of principles IAS 12 – Tax Profit allows reduction of effective tax rate to its nominal rate with which distribution result has to be charged (in temporary differences) and thus also the amount of net profit for distribution. The real economic consequence of temporary differences whose tax effects are not comprised according to the IAS 12 principles is underestimation or overestimation of profit after taxation. Overestimated or underestimated profit in the year in which the temporary difference arise means under- or overestimated capital, i.e. under- or overestimated net assets (with all the eventual financial effects on the volume and structure of profit distribution). In fact, the eventual consequence is that financial statements are neither fair nor objective.