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Dear P2 Tutor,
When I adjust for an intra-company transaction and there are deferred taxes, if Subsidiary is the seller, shall I adjust its equity at reporting date ( W 2) ? Or, even if the Subsidiary is the seller, I should only adjust Parent’s equity for the deferred tax effect in W 3? I understood the rule when it comes to IFRS 3 but I have a problem with IC trading.
Regards,Firstly, working W2 in my method is the goodwill calculation as at date of acquisition so there would be no deferred tax implication arising as a result of any intra-group trading.
W2 is an historic working and not a working as at “today” the reporting date. (This is in my method of consolidating that differs from others’ methods (slightly)
Secondly, it would be an unusual exam question that involved deferred tax on an intra-group transaction – I don’t remember such a question (but is my memory fading?)
But why would there be a deferred tax liability? We are not going to adjust the subsidiary’s financial statements for the effect of any intra-group transaction. The adjustment is for consolidation purposes only
I think that answers your question
Hello Mike
And thanks for your answer.
There is a deferred tax: if the Parent bought it ( it, the inventory) for 10 and the cost is 8, than I’ll adjust it at 8 for FS purposes but its tax base remains 10. So this is my question: Shall I adjust the Subsidiary’s equity or the Parent’s ? If I adjust against Sub’s equity, I’ll affect the value of NCI.
What if the Parent is the seller ?
Regards,
The taxman will charge tax on the reported profits but the group has not realised the pup.
So, calculate the pup. Calculate tax on the pup. Dr deferred tax asset and Cr the current tax account
The deferred tax asset is debited and the current tax credited because there is a current liability so far as the taxman is concerned but, when the goods are sold next year, there will already have been shown as a liability the tax on those goods in the year of the intra-group sale
I’ll try to find other sources of info and come back with a reply.
However: the Sub already sold it ( it, of course, the inventory) for 10 and it was taxed for 2. The parent has it for 10 but for consolidation purposes will adjust it to 8. Tax base remains 10. When the inventory is sold outside the group, I’ll recognize an expense of 8, but deduct 10. This is a temporary difference. In my opinion.
Once I am clear, I’ll come back to you, either I’m right or wrong.
As for the adjustment, put it through the records of the selling company
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