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Wiley IFRS: Practical Implementation Guide and Workbook
Solution
$1.2 million. The carryi ng value after revaluation is $10 million, the tax base is $6 million, and the rate
of tax applicable to the sale of property is 30%; therefore, the answer is $10 million minus $6 million
mult iplied by 30%, or $1.2 million.
Case Study 4
Facts
An entity has spent $600,000 in developing a new product. These costs meet the definition of an intangi–
ble asset under lAS 38 and have been recognized in the balance sheet. Local tax legislation allows these
costs to be deducted for tax purposes when they are incurred. Therefore, they have been recog nized as an
expense for tax purposes. At the year-end the intangible asset is deemed to be impaired by $50,000.
Required
Calculate the tax base of the intangible asset at the accounting year-end.
Solution
Zero , because the tax authority has already allowed the intangible asset costs to be deducted for tax
purposes.
5.
CONSOLIDATED FINANCIAL STATEMENTS
5.1 Temporary differences ca n a lso ari se from adjustments on consolidatio n.
5.2 The tax base of an item is often determ ined by the va lue in the entity accounts, that is, for
ex ample, the subsidiary ' s accounts.
5.3 Deferred tax is determined on the bas is of the consolidated fina ncial sta tements and not the
indivi dua l entity accounts .
5.4 Therefore , the carrying val ue of an item in the co nso lidated accounts can be differe nt from
the carrying va lue in the ind ividual entity accounts , thus giving rise to a temporary di fferen ce.
5.5 An example is the consolida tion adj ust ment that is req uired to elimi na te unrealized profit s
and losses on intergroup transfer of inventory. Such an adj us tme nt will give rise to a temporary
di ffe rence, wh ic h will reverse whe n the inventory is sold ou tside the group.
5.6 lAS
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does not specifically add ress how intragroup profits and losses should be measured
for tax purposes. It says th at the expec ted manner of rec overy or settleme nt of tax sho uld be taken
into account.
Case Study 5
Facts
A subsidiary sold goods costing $ 10 million to its parent for $11 million, and all of these goods are still
held in inventory at the year-end. Assume a tax rate of 30%.
Required
Explain the deferred tax implications.
Solution
The unrealized profit of $ 1 million will have to be eliminated from the consolidated income statement
and from the conso lidated balance sheet in group inventory. The sale of the inventory is a taxable event,
and it causes a change in the tax base of the inventory. The carryi ng amount in the consolidated financial
statements of the inventory will be $ 10 million, but the tax base is $ 11 million. This gives rise to a
deferred tax asset of $ 1 million at the tax rate of 30%, which is $300,000 (assuming that both the parent
and subsidiary are resident in the same tax jurisdiction).