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Property
Plant and equipment
Inventory
Trade receivables
Trade payables
Cash
78
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
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
Property
Plant and equipment
Inventory
Trade receivables
Trade payables
Cash
Carrying
value
1m
10
5
4
3
6
2
Tax base
1m
7
4
6
4
6
2
Temporary difference
1m
3
I
(2)
(I )
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 .
Case Study 2
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%.