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Solution
Zero, because the tax authority has already allowed the intangible asset costs to be deducted for tax purposes.
Temporary differences can also arise from adjustments on consolidation.
CONSOLIDATED FINANCIAL STATEMENTS
The tax base of an item is often determined by the value in the entity accounts, that is, for example, the subsidiary’s accounts.
Deferred tax is determined on the basis of the consolidated financial statements and not the individual entity accounts.
Therefore, the carrying value of an item in the consolidated accounts can be different from the carrying value in the individual entity accounts, thus giving rise to a
temporary difference.
An example is the consolidation adjustment that is required to eliminate unrealized profits and losses on intergroup transfer of inventory. Such an adjustment will
give rise to a temporary difference, which will reverse when the inventory is sold outside the group.
IAS 12 does not specifically address how intergroup profits and losses should be measured for tax purposes. It says that the expected manner of recovery or
settlement of tax should be taken into account.
Facts
CASE STUDY 5
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 statement of comprehensive income and from the consolidated
statement of financial position 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
carrying 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).
Facts
CASE STUDY 6
An entity has acquired a subsidiary on January 1, 20X9. Goodwill of $2 million has arisen on the purchase of this subsidiary. The subsidiary has
deductible temporary differences of $1 million and it is probable that future taxable profits are going to be available for the offset of this deductible
temporary difference. The tax rate during 20X4 is 30%. The deductible temporary difference has not been taken into account in calculating goodwill.
Required
What is the figure for goodwill that should be recognized in the consolidated statement of financial position of the parent?
Solution
$1.7 million. A deferred tax asset of $1 million × 30%, or $300,000, should be recognized because it is stated that future taxable profits will be available
for offset. Thus at the time of acquisition there is an additional deferred tax asset that has not as yet been taken into account. The result of this will be to
reduce goodwill from $2 million to $1.7 million.