IAS 12 (Jun 2016)

•(a) A deferred tax liability is the amount of income tax payable in respect of taxable temporary differences. A deferred tax asset is the amount of income tax recoverable in future periods in respect of deductible temporary differences. A temporary difference is the difference between the carrying amount of an asset or liability in the statement of financial position and its tax base.

•Required:

•(i) Define the tax base of an asset as outlined in IAS 12 – Income Taxes. Use your definition to compute the tax base of the following assets:

•– A machine was purchased during the current accounting period for $250,000. Depreciation of $50,000 was charged in arriving at the accounting profit for the current period. A deduction of $100,000 was given against taxable profits by the local tax authorities against the taxable profits of the current period. The remaining cost will be deductible in future periods, either as depreciation or as a deduction on disposal.

•– A current asset of $60,000 relates to interest receivable. The related interest revenue will be taxed on a cash basis when it is received. (4 marks)

•(ii) Define the tax base of a liability as outlined in IAS 12. Use your definition to compute the tax base of the following liabilities:

•– $120,000 is included in trade payables. This amount relates to purchases which qualified for a tax deduction when the purchase was made.

•– $40,000 is included in accrued liabilities. A tax deduction relating to this liability will be given when the liability is settled. (4 marks)

Proposed Solution:

Tax base of an Asset : Amount available as deduction against any future benefits from the asset

(i) carrying amount +future deductions -future taxable amounts

$2,00,000 +$1,00,000 -0 =$3,00,000

carrying amount -tax base =tax asset

$ 60,000-$0 =$60,000

Tax base Liability : Carrying amount - amount deductible for tax purposes in the future periods

Formula as below :

carrying amount -Future deductions +future taxable amounts

a. $1,20,000 - $1,20,000=$0

b.$40,000- $40,000= $0

(b) Epsilon prepares financial statements to 31 March each year. The rate of income tax applicable to Epsilon is 20%. The following information relates to transactions, assets and liabilities of Epsilon during the year ended 31 March 2016:

(i) Epsilon has an investment property which it carries under the fair value model. The property originally cost $30 million. The property had an estimated fair value of $35 million on 31 March 2015 and $38 million on 31 March 2016. In the tax jurisdiction in which Epsilon operates, gains on the fair value of investment properties are not subject to income tax until the properties are disposed of.

(ii) Epsilon has a 40% shareholding in Lambda. Epsilon purchased this shareholding for $45 million. The shareholding gives Epsilon significant influence over Lambda but not control and therefore Epsilon accounts for its interest in Lambda using the equity method. The equity method carrying value of Epsilon’s investment in Lambda was $70 million on 31 March 2015 and $75 million on 31 March 2016. In the tax jurisdiction in which Epsilon operates, profits recognised under the equity method are taxed if and when they are distributed as a dividend or the relevant investment is disposed of.

(iii) Epsilon measures its head office property using the revaluation model. The property is revalued every year on 31 March. On 31 March 2015, the carrying value of the property (after revaluation) was $40 million and its tax base was $22 million. During the year ended 31 March 2016, Epsilon charged depreciation in its statement of profit or loss of $2 million and claimed a tax deduction for tax depreciation of $1·25 million.

On 31 March 2016, the property was revalued to $45 million. In the tax jurisdiction in which Epsilon operates, revaluation of property, plant and equipment does not affect taxable income at the time of revaluation.

Assuming that there are no other temporary differences other than those indicated above, compute:

– The deferred tax liability of Epsilon at 31 March 2016.

– The charge or credit to both profit or loss and other comprehensive income relating to deferred tax for the year ended 31 March 2016.

You should include brief explanations to support your computations. (12 marks)

Proposed Solution:

Deferred Tax consequences would be a result of taxable temporary differences. it exist because of the difference between accounting profits and taxable profits

Tax base of an asset is the amount that is available as deduction in future at the time of the carrying amount of the asset.

Scenario 1 : Investment Property

Since the gain are taxable at the time of disposal of investment property, the temporary difference result into taxable temporary differences. Step 1: Carrying amount on 31-3-2015 $35,000 Tax base on 31-3-2015 $30,000 Taxable Temporary difference on 31st March 2015 $5000 Deferred tax liability on 31st March 2015 (5000 x20%) $1000 Step:2 Carrying amount on 31-3-2016 $38,000 Tax base on 31-3-2016 $30,000 Taxable Temporary difference on 31st March 2016 $8000 Deferred tax liability on 31st March 2016 (8000 x20%) $1600 Increase during the year ended 31st March 16 =$1600-$1000=$600

Scenario II: Investment Property in other company Since the gains are taxable at the time of distribution of profits or disposal on investments the temporary difference result into taxable temporary difference Step 1: Carrying amount on 31-3-2015 $70,000 Tax base on 31-3-2015 $45,000 Taxable Temporary difference on 31st March 2015 $25000 Deferred tax liability on 31st March 2015 (25000 x20%) $5000 Step:2 Carrying amount on 31-3-2016 $75,000 Tax base on 31-3-2016 $45,000 Taxable Temporary difference on 31st March 2016 $30000 Deferred tax liability on 31st March 2016 (30000 x20%) $6000 Increase during the year ended 31st March 16 =$6000-$5000=$1000 Scenario III: Head office Since the gain are taxable at the time of disposal of property, the temporary difference result into taxable temporary differences. Step 1: Carrying amount on 31-3-2015 $40,000 Tax base on 31-3-2015 $22,000 Taxable Temporary difference on 31st March 2015 $18,000 Deferred tax liability on 31st March 2015 (18,000 x20%) $3600 Step:2 Since the depreciation of 2000 is charged the carrying amount on 31st March 2016 is $38000 ($40000-$2000) Opening tax base =$22000 Tax depreciation =$1250 Closing tax base =$20750 Revalued amount on 31-3-2016 $45,000 Tax base on 31-3-2016 $20,750 Taxable Temporary difference on 31st March 2016 $24250 Deferred tax liability on 31st March 2016 ($24250 x20%) $4850 Increase during the year ended 31st March 16 =$4850-$3600= $1250 Deferred Tax liability = $1600 +$6000+$4850 =$12450

B.

Scenario I: Investment Property

Increase during the year ended 31st March 16 =$1600-$1000=$600 charged to P & L account

Scenario II: Investment Property in other company

Increase during the year ended 31st March 16 =$6000-$5000=$1000 charged to other comprehensive income

Scenario III: Head office

Increase during the year ended 31st March 16 =$4850-$3600=$1250 charged to other comprehensive income