IAS 12- Deferred Tax

Question 1

33.Bohai

Answer 1

• Consistency Principle in IAS 12:
  
  • Accounting for deferred tax effects should align with the accounting treatment of the underlying event itself.
  • At the end of each reporting period, reassessment of unrecognised deferred tax assets is required.
• Recognition of Deferred Tax:
  
  • Deferred tax related to items recognized in profit or loss should be recognized in profit or loss.
  • Deferred tax related to items recognized in other comprehensive income should be recognized in other comprehensive income.
  • Deferred tax related to items recognized directly in equity should be recognized directly in equity.
• Accounting Treatment for Deferred Taxes:
  
  • Adjustments to deferred taxes originally recognized should be appropriately accounted for, considering the specific circumstances and applicable accounting standards.
  • Impairment charges under IFRS 9 Financial Instruments are recognized in profit or loss, justifying the recognition of additional deferred tax assets in profit or loss.
• Offsetting Deferred Tax Assets and Liabilities:
  
  • Deferred tax assets and liabilities should generally be recognized gross unless specific criteria for offsetting are met.
  • Offsetting is permitted only if there is a legally enforceable right to set off current tax assets against current tax liabilities and if the deferred tax assets and liabilities relate to the same taxation authority and the same taxable entity.
  • Bohai Co should not offset the deferred tax liability of Yuyan Co in the consolidated financial statements, as they do not meet the criteria for offsetting. They are not part of the same taxable entity and do not intend to settle tax liabilities and assets on a net basis or simultaneously.

Question 2

q.3 Chuckle

Answer 2

• Goodwill Calculation:
  
  • Chuckle Co must measure identifiable assets acquired and liabilities assumed at their fair values on the acquisition date for goodwill calculation.
  • Consideration of IFRS 13 Fair Value Measurement is necessary for assessing fair values, ensuring they represent amounts market participants would accept in orderly transactions.
• Fair Value Adjustment for Land:
  
  • Fair value of land is $10 million above its carrying amount, creating an additional taxable temporary difference.
  • This results in an increase in carrying amount of land by $10 million with no change to the tax base, leading to a deferred tax liability of $2 million at acquisition date.
  • Deferred tax liability should be recognized on acquisition, increasing net assets by $8 million ($10m - $2m).
• Valuation of Finished Goods:
  
  • Finished goods should be valued at estimated sales price less costs of disposal and reasonable profit allowance.
  • Fair value of finished goods is $131 million, necessitating a fair value adjustment of $47 million ($131m - $84m).
  • This creates a further taxable temporary difference, resulting in a deferred tax liability of $9.4 million at 20%.
• Recognition of Database as Intangible Asset:
  
  • Chuckle Co should recognize the database as a separate intangible asset from goodwill in consolidated financial statements, provided it meets recognition criteria and a reliable estimate of fair value can be determined.
  • Although no contractual or legal rights are associated with the database, it appears identifiable as it could be sold separately.
  • Professional expert’s valuation of $5 million provides a reliable estimate of fair value, warranting recognition in consolidated financial statements and an increase to deferred tax liability of $1 million at 20%.