IAS 12 - TAX - Thou shalt conquer this

Question 1

If the carrying amount exceeds the tax base, what is this, and what does this give rise to?

Answer 1

A taxable temporary difference

A deferred tax liability

Question 2

If the tax base exceeds the carrying amount , what is this, and what does this give rise to?

Answer 2

A deductible temporary difference

A deferred tax asset

Question 3

Where is a deferred tax liability presented?

Answer 3

Non current liabilities

Question 4

Under what circumstances can you offset a deferred tax asset/ liability?

Answer 4

• If the entity has a legal enforceable right to set off current tax assets and current tax liabilities.
• The deferred tax asset and liability relate to the same tax authority

Question 5

What tax rate should a deferred tax liability be measured at?

Answer 5

The rate expected to apply when the asset is realised.

This rate must have been enacted by the end of the reporting period.

Question 6

IAS 10 say changes in tax rates after the reporting period are….?

Answer 6

Non adjusting events

Question 7

Deferred tax should be recognised on the revaluation of property plant and equipment EVEN IF:

Answer 7

• There is no intention to sell the assets
• Any tax due on the gain made on any sale of the asset can be deferred by being rolled over against the cost of a replacement asset.

Question 8

Where should deferred tax on the revaluation of PPE go?

Answer 8

To OCI - but only the DTL on the revaluation gain. The rest goes to P&L.

Question 9

For share options, what is the tax base calculated on?

Answer 9

Intrinsic value of the share options

Question 10

What is the intrinsic value of a share option?

Answer 10

The difference between the market price and the exercise price.

Question 11

What is the pro-forma for calculating the deferred tax asset on share options?

Answer 11

Carry amount (Nil)
Less tax base (x)
x Tax rate

= Deferred tax asset

Question 12

When is tax relief granted on a share option?

Answer 12

When the option is exercised - this gives rise to a deferred tax asset.

Question 13

When the amount of the future tax deduction exceeds the accumulated renumeration expense, what does this indicate?

Answer 13

The Tax deduction relates partly to the renumeration and partly to equity. The DTA should therefore be split between the P&L and Equity

Dr Deferred tax
Cr P&L
CR Equity

Question 14

When can an entity recognise unused losses as a deferred tax asset?

Answer 14

• if there are sufficient taxable temporary differences against which the unused tax losses can be offset
• if it is probable that the entity will make taxable profits before the losses expire
• Whether tax planning is available

Question 15

If the entity appears to be making consistent losses, what is this STRONG EVIDENCE of?

(I put that in caps because they like the lingo)

Answer 15

that future taxable profits may not be available.

Question 16

Business combinations

Subsidiaries are consolidated at fair value but the tax base is derived from the value in the sub’s individual accounts giving rise to deferred tax in the consolidated financial statements.

How is this dealt with?

Answer 16

It is recognised and treated as part of the net assets acquired, and as a result, impacts the calculation of goodwill.

However, goodwill itself does not give rise to deferred tax.

Question 17

Provision for unrealised profits - This is removed from the financial statements on consolidation, but the tax base of inventory remains as its cost in the individual financial statements. What does this create?

Answer 17

A deductible temporary difference giving rise to a deferred tax asset.

Essential removing the tax associated with the profit on inventory which has been removed.

Question 18

A temporary difference arises when the carrying amount of investments in subs, associates, or joint ventures is different from the tax base. What cause the difference?

Answer 18

• The carrying amount in consolidated F/S is the investors share of the net assets plus purchased goodwill.
• The tax base is usually the cost of the investment.
• The differences is unremmitted earnings.

Question 19

IAS 12 says that deferred tax should be recognised EXCEPT WHEN?

Answer 19

• the investor controls the timing of the timing of the reversal.
• it’s probable that the profits will not be distributed in the foreseeable future.

Question 20

A investor can control the dividend policy of the subsidiary - what does this mean for deferred tax?

Answer 20

It does not arise on investments in subsidiaries.

Question 21

What should be disclosed?

Answer 21

• major components
• tax recognised directly in equity
• tax relating to items recognised directly in equity
• tax relating to each component of other comprehensive income
• an explanation of the relationship between the tax expense and accounting profit.