IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFR S: Practical Implementation Guide and Workbo ok

Case Study 1

Facts An entity has the following assets and liabilities recorded in its balance sheet at December 3 1, 20X5: Carrying value $lIl illion 10

Property Plant and equipment Inventory Trade receivables Trade payables Cash

5 4 3 6 2

The value for tax purposes of property and for plant and equipme nt are $7 million and $4 million re– spectively. The entity has made a provision for inventory obsolescence of $2 million, which is not allowable for tax purposes until the inventory is sold. Further, an impairment charge against trade receivables of $ 1 million has been made. This charge does not relate to any specific trade receivable but to the entity' s assessment of the overall collectibility of the amount. This charge will not be allowed in the current year for tax purposes but will be allowed in the future. Income tax paid is at 30%. Required Calculate the deferred tax provision at December 3 1, 20X5. Solution

Carrying value 1m 10

Tax base 1m 7

Temporary difference 1m 3 I (2) (I )

Property Plant and equipment Inventory Trade receivables Trade payables Cash

4 6 4 6 2

5 4

3 6 2

The deferred tax provision will be $ 1 million x 30%, or $300,000. Because the provision against inventory and the impairment charge are not current ly allowed, the tax base will be higher than the carrying value by the respective amounts. 2.8 Every asset or liability is assumed to have a tax base. Normall y th is tax base will be the amo unt that is allowed for tax purpose s. 2.9 So me items of income and ex pe nd iture may not be taxabl e or tax ded uctibl e. and they will never enter into the computa tio n of taxabl e pro fit. Th ese items sometimes are ca lled permanent differences. 2.10 Generally speaking , these items will have the same tax ba se as their ca rr yi ng amount; that is, no temporary difference will arise. 2.11 For example , if an entity has on its balance shee t inte rest receivab le of $2 milli on tha t is not taxabl e, the n its tax base will be the same as its carry ing value, or $2 milli on . There is no tempo– rary di fference in thi s case. Therefore , no deferred taxation will arise . Facts An entity acquired plant and equipment for $1 million on January I, 20X4. The asset is depreciated at 25% a year on the straight-line basis, and local tax legislation permits the management to depreciate the asset at 30% a year for tax purposes. Required Calculate any deferred tax liability that might arise on the plant and equipment at December 31, 20X4, assuming a tax rate of 30%. Case Study 2