DipIFR Syllabus B. Elements of financial statements - Miscellaneous Deferred Tax Items - Notes ^{3 / 4}

Here you need to check the Net Assets at acquisition (from your equity table) and compare it to the tax base of the NA (this will be given in the exam)

Again you just look to see if the accounts are showing more or less assets and create a deferred tax liability / asset at acquisition also. This will affect goodwill.

Illustration 1

H acquires 100% S for 1,000. At that date the FV of S’s NA was 800 and the tax base 700. Tax is 30%.

How much is goodwill?

Un-remitted Earnings of Group Companies

H always has the right to receive profits (and dividends from them) from S or A. However not all profits are immediately paid out as dividends.

This creates deferred tax as H will receive the full amount one day and when it does it will be taxed. Therefore, a deferred tax liability should be created to match against the profits shown from S and A

However, for Subsidiaries only, H might control its dividend policy and have no intention of paying dividends out and no intention of selling S either in the foreseeable future.

Therefore when this is the case NO deferred tax liability is created (this can not be the case for Associates as H does not control A)

Unrealised Profit Adjustments

Here, the group makes an adjustment and decreases profits, in the group accounts only.

However, tax is charged on the individual companies and not the group. So, the group accounts will be showing less profits and so the tax needs adjusting by creating a deferred tax asset

The issue though is what tax rate to use - that of the selling company or that of the buyer who holds the stock? 

IAS 12 says you should use the tax rate of the buyer

Setting Off

A deferred tax asset can normally be set off against a deferred tax liability (to the same tax jurisdiction) as the liability gives strong evidence that profits are being made and so the asset will come to fruition

If, however, the deferred tax asset is more than the liability then the deferred tax asset can only be recognised if is probable that it will be recovered in the near future