Question 3b
Epsilon prepares financial statements to 31 March each year. The rate of income tax applicable to Epsilon is 20%. The following information relates to transactions, assets and liabilities of Epsilon during the year ended 31 March 2016:
(i) Epsilon has an investment property which it carries under the fair value model. The property originally cost $30 million. The property had an estimated fair value of $35 million on 31 March 2015 and $38 million on 31 March 2016. In the tax jurisdiction in which Epsilon operates, gains on the fair value of investment properties are not subject to income tax until the properties are disposed of.
(ii) Epsilon has a 40% shareholding in Lambda. Epsilon purchased this shareholding for $45 million. The shareholding gives Epsilon significant influence over Lambda but not control and therefore Epsilon accounts for its interest in Lambda using the equity method. The equity method carrying value of Epsilon’s investment in Lambda was $70 million on 31 March 2015 and $75 million on 31 March 2016. In the tax jurisdiction in which Epsilon operates, profits recognised under the equity method are taxed if and when they are distributed as a dividend or the relevant investment is disposed of.
(iii) Epsilon measures its head office property using the revaluation model. The property is revalued every year on 31 March. On 31 March 2015, the carrying value of the property (after revaluation) was $40 million and its tax base was $22 million. During the year ended 31 March 2016, Epsilon charged depreciation in its statement of profit or loss of $2 million and claimed a tax deduction for tax depreciation of $1·25 million. On 31 March 2016, the property was revalued to $45 million. In the tax jurisdiction in which Epsilon operates, revaluation of property, plant and equipment does not affect taxable income at the time of revaluation.
Required:
Assuming that there are no other temporary differences other than those indicated above, compute:
– The deferred tax liability of Epsilon at 31 March 2016.
– The charge or credit to both profit or loss and other comprehensive income relating to deferred tax for the year ended 31 March 2016.
You should include brief explanations to support your computations. (12 marks)