A legal wrangle developed between the Australian Taxation Office (ATO) and Box Hill Ltd con¬cerning the treatment of certain disputed income tax payments. This prompted ASIC to seek a formal ruling on the dispute and call for full disclosure of the effects of tax disputes in the com¬pany’s financial statements.

Box Hill Ltd and several other leading companies operated an in-house, tax-minimisation scheme which was unacceptable to the ATO. As a result, the ATO assessed Box Hill Ltd as owing $15 million in tax stemming from the use of the scheme. The company paid the tax to the ATO but then challenged the ATO in court and won its challenge to the assessment in the state Supreme Court. Since then, the ATO has appealed against the decision to the Federal Court, but no decision has yet been made.

In its financial statements at the end of the financial year, Box Hill Ltd included the amount of $15 million as an asset, refundable from the ATO. On reviewing the financial statements, ASIC expressed concern about the treatment of the money expected to be recovered from the ATO as an ‘asset’, as the amount appeared to affect materially the reported profits of the company. ASIC sug¬gested that disputed taxation assessments do not qualify as items resulting from past transactions or to which a company has a definite legal right.

Required

Discuss whether the disputed amount should be recognised as an asset and as income in the financial statements of Box Hill Ltd.