Deferred tax–you either know it or you don't. Test yourself against one of our specialists, Cynthia Leung. You can find guidance to help you with the answers in our topic summary on taxation on pwcinform.com.
Q1: Deferred tax assets or liabilities that will be recovered within 12 months are presented as current assets or current liabilities in the balance sheet. True or false?
Q2: When the carrying amount of an asset is more than its tax base, is there a:
- C nil
Q4: Which of the following disclosures are required by IAS 12?
- The amount of each type of deferred tax asset and liability (for example, tax losses or accelerated tax depreciation)
- The amount of unused tax losses for which no deferred tax asset is recognized
- The amount of undistributed profits of subsidiaries, associates
or joint ventures for which no deferred tax liability is
- (i) and (ii)
- (i) and (iii)
- All of the above
Q4: Where can interest paid be classified?
- financing activities;
- operating activities;
- operating or financing activities; or
- operating, investing or financing activities.
Q5: When is a deferred tax liability recognized in a business combination?
- When there is a temporary difference on goodwill that is not tax deductible
- When there is temporary difference on acquisition accounting adjustments to the carrying amount of identifiable assets and liabilities
- When there are temporary differences both on goodwill that is not tax deductible and on acquisition accounting adjustments to the carrying amount identifiable assets and liabilities
Q6: When is a deferred tax liability recognized in consolidated financial statements for the temporary differences associated with investments in subsidiaries and associates?
- When the parent is able to control the dividend policy of the subsidiary, and the temporary difference will not reverse in the foreseeable future
- When management of an associate states it does not intend to distribute any dividend in the current year
- When the parent's management has announced a plan to sell
the subsidiary within two years
- (i) and (ii)
- (ii) and (iii)
- (i) and (iii)
- All of the above
Q7: A change in tax rate from 30% to 20% is enacted on December 31, 20XX. The new tax rate takes effect on April 1, 20XX. An entity has an accounting year-end on December 31, 20XX. How should the deferred tax be measured on temporary differences that are expected to reverse after April 20XX?
- At 20%
- At 30%
- At an average tax rate based on 20% and 30%
Q8: Where is the adjustment to the deferred tax balances arising from the change in tax rates in question 7 above recognized?
- In profit or loss, as it arises from a change in tax law that is independent of the activities of the entity
- In equity, as it relates to deferred taxes arising prior to the change in tax rates
- Either in profit or loss, other comprehensive income or equity depending on where deferred tax was previously recognized
Q9: Entity A has unused tax losses of C500 with no expiry date. Management believes that a future taxable profit of C200 is probable and there are taxable temporary differences of C400. The tax rate is 20%. What deferred tax asset is recognized?
- C80 (C400 x 20%)
- C40 (C200 x 20%)
- C100 (C500 x 20%)
Q10: The income tax rate for undistributed profits is 30%. The income tax rate for distributed profits is 40%. For many years, the entity has distributed 50% of its profits. How should the deferred tax of undistributed profits be measured when no dividends have been declared?
- At 30%
- At 40%
- At an average tax rate based on 30% and 40%
Question 1: (b) - IAS 1 states that deferred tax assets and liabilities are presented as non-current on the balance sheet. IAS 1 also requires the disclosure of the amount of deferred tax assets or liabilities expected to be recovered or settled within 12 months from the balance sheet date.
Question 2: (a) - When the carrying amount of an asset exceeds its tax base, the taxable economic benefit from recovering the asset will exceed the amount allowed as a deduction for tax purposes, creating a taxable temporary difference; and the obligation to pay additional income taxes in future periods is a deferred tax liability.
Question 3: (b) - The interest paid in cash will be deductible in the subsequent period. There will be no tax deduction. The tax base is therefore nil. The tax base of a liability is the carrying amount - future taxable amount CU nil = CU100 - CU100
Question 4: (c) IAS 12 requires the disclosures for the amount of unused tax losses and undistributed profits of subsidiaries, associates or joint ventures. Disclosing the deferred tax actually recognized does not meet this requirement.
Question 5: (b) - IAS 12 requires deferred tax to be recognized for all temporary differences, subject to limited exceptions. Deferred tax is not recognized, however, on any temporary difference on goodwill arising in a business combination that is not tax deductible. Deferred tax is recognized on temporary differences arising on identifiable assets and liabilities recognized at fair value at the date of acquisition.
Question 6: (b) - A deferred tax liability is not recognized for undistributed profits in consolidated financial statements when the parent controls the reversal of the temporary difference and reversal is not expected in the foreseeable future. No deferred tax is, therefore, recognized in situation (i).
The investor has significant influence over the associate in situation (ii) but does not have control the distribution policy. In the absence of an agreement requiring that the profits of the associate will not be distributed in the foreseeable future, an investor should recognize a deferred tax liability.
A deferred tax liability is recognized for the taxable temporary difference in situation (iii) because the parent controls the reversal of the temporary difference but expects the difference to reverse in the foreseeable future because of the sale.
Question 7: (a) - IAS 12 requires deferred tax assets and liabilities to be measured using tax rates that have been enacted or substantively enacted at the balance sheet date and will apply when the temporary differences reverse. An enacted change in rate is part of the tax law. When the legislative process is not finalized, it is necessary to consider whether the change is substantively enacted, which occurs when there are no future steps in the enactment process that could change the outcome.
Question 8: (c) - IAS 12 requires the change in deferred tax to be recognized in profit or loss, except to the extent that it relates to items that were previously recognized outside profit or loss. This is referred to as backwards-tracing.
Question 9: (c) - IAS 12 requires deferred tax assets to be recognized for unused tax losses to the extent that it is probable that future taxable profits will be available against which the unused tax losses can be utilized. It is presumed that taxable temporary differences that reverse in an appropriate period create taxable profits against which the tax losses can be utilized.
Question 10: (a) - The tax rates for distributed and undistributed profits are different in some jurisdictions. IAS 12 requires deferred tax to be measured at the tax rate applicable to undistributed profits until dividends are declared.
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