Ch 13_Tax

Question 1

Provisions for unrealised profit

Answer 1

when within a group one company sells inventory to another group company , unrealised profits remaining within the group must be eliminated. Adj in coso: Dt COS Cr Inventory
this reduced carrying amount of the inventory in the group st-t, but tax base on inventory remains as its cost to the purchasing company . THUS deductible tempor difference is created, -> rise to deferred tax assets. tax change on the removed profit must be removed too

Question 1

Business combo and deferred tax

Answer 1

At consolidation of subsidiary assets and liabilities are recognised at FV, while for accounting purposes FS of the subsiairy is used. Thus, there is temp difference - thus deferred tax must be recognised at conso - it is treated as part of net assets of Subs and affects goodwill recognised
IAS 12 excludes goodwill from defferred tax - thus gw doesn’t give rise to def tax

Question 2

unremitted earnings

Answer 2

when there is difference between carrying amount of investments in subsidiaries, associates or joint ventures and tax bases

Carrying amount = investor’s share of net assets of the investee + purchased goodwill
Tax base = cost of investment

Difference is unremitted earnings (i.e. undistributed profits) of he sub, assoc, or joint venture.

IAS 12 says that deferred tax should be recognised except when
1. investor controls the timin gof reversal of the temp diff
2. and it is probable that profits will not be distributed in the future
Investor can control only dividend policy of subsid, but not of others - so no def tax in inv in subsid-es

Question 3

Duscl

Answer 3

1. major components of tax expense
2. tax recognised directly in equity
   3.tax relating to items recognised in equity
   4.tax relating to each component of OCI
3. an explanation of the relationship bn tax expense and accounting profit

Answer 4

users of FS need information to help them assess the entity’s future profits and future CF. The tax rate reconciliation is important for understanding the tax charge reported in FS and why the effective tax rate differs from reported
current tax adj are reason for difference between effective and statutory tax rate. Additional tax expense is incurred due to under-accrual of current tax in PY. Investors need to assess whether the effective tax is likely to be stable/statis or volatile and so must analyse comparative information to understand whether the Co has history of under-accruing (or over-accruing current tax). THis will inform profit and cash flow forecasts.

One off and unusual items can have significant effect on the effective interest rate. Depreciation of assets that don’t qualify for tax relief is likely to be recurring item on year-on-year. Other reconciling items should be explained so that investors can assess if they are likely to reccur. To provide transparency there should be minimal use of the ‘sundry disallowables’ category. in this company’s reconciliation there is relatively insignificant, although more information might be useful depdning on the nature of these items

Investors should also refer to CFS, which will specify the tax paid in the current period

Question 5

Offsetting

Answer 5

Ok if it reflects substance of transaction or other event
Offsetting detracts the ability of users to understand entity’s transactions and future cash flows
IAS presentation of FS entity shall not offset unless REQUIRED OR PERMITTED BY IFRS. ALLOWED ACCORDINF IAS 22 FIN INSTRUMENTS: PRESENTATION only when the entity has a legally enforceable right to set off the recognised amounts and intends either to settle on net basis, or to realise assets and liabilities simultaneously