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Hi Sir.
Thanks for your help on the questions before. Open tuition is great. I hope you do not mind me posting questions.. I am sure I will post frequently. This question has thrown me off a little.. I am thinking A and B might be when CB=TB so there is no temp difference.. hence deferred tax… but its just a guess.
Which THREE of the following are examples of assets or liabilities whose carrying amount is always equal to their tax base?
A Accrued expenses that will never be deductible for tax purposes
B Accrued income that will be taxed on a receipts basis
C Accrued expenses that have already been deducted in determining the current tax liability for current or earlier periods
D Accrued income that will never be taxable
E An allowance for doubtful debts where tax relief is granted when the debt goes bad
F Intangible asset relating to development costs which are granted tax relief when paid
Hi,
You can work this one out by looking at where the CV is not equal to the tax base to determine which is not the correct answer, the remaining answers must then be correct as the CV must be equal to the tax base.
F IAS 38 is cost less accumulated amortisation but the tax base will always be nil as the deduction is given immediately. The tax authorities do not recognise an asset in relation to development expenditure.
E The receivable is after the allowance on the SFP but the receivable in the tax authority’s books will always be gross, i.e. before any allowance, as it is only given when the debt is written off.
B The accrued income will by the carrying value of the liability on the SFP but if the income is only taxed on receipt then the tax authorities will not have recognised anything on their SFP and so there will be a temporary difference.
As none of these are therefore the correct answer then the correct answer must be A, C and D.
Hope that helps.
Thanks
Thanks. you have provided explanation for why F/B/E are wrong and so by default ACD must be correct.but i still do not really understand why?
I am not sure I would have done this in the exam.. which worries me.. where is this in the syllabus? or is it an application type question? I have seen another question like this on kaplan work book-
Which two of the following would result in a deferred tax liability?
1.Property, plant and equipment which has a carrying value greater than the tax base.
Yes that is obvious2.Property, plant and equipment which has a carrying value less than the tax base
No incorrect.
3.A warranty provision.
Can you explain why this would result in a tax liability? so where CV>TB
4.Held to maturity financial asset with an effective rate greater than coupon rate. Tax is payable on the interest received on a cash basis.
Can you explain why this would result in a tax liability? so where CV>TB
5.Share option scheme where tax is deductible upon exercise of options.
and why this is not a deferred tax liability.I am really confused by these kind of questions. how can I improve? aside from posting questions and asking you to help… how doe sone tackle these questions.
thanks Abigal
Hi,
The application questions where there are no numbers are usually the hardest type of question in the exam. Just keep working the questions and you will learn so much from doing them.
3 – Does this give a deferred tax liability? We need to put the liability in brackets so if it was $10 million it would be $(10) million, which is then less than the tax base of zero and so a deferred tax asset. We can also think that it will be a deferred tax asset in the future as when we pay the provision in the future we will get a deduction on our tax and therefore save tax in the future.
4 – If the effective rate is greater than the coupon rate, which it invariably always will be, then the value of the asset in the financial statements will always be greater than the tax base as the tax authorities ignore the effective rate of interest, this is just an accounting entry for the substance of the financial asset. In essence the accounts have interest income on the effective rate and the tax base will be based on the coupon rate.
5 – This gives a deferred tax asset, again similar to #3 above, in that the liability figure on the SFP is shown in brackets and so is therefore less than the tax base of zero. We therefore have a deferred tax asset as we are saving tax in the future.
Thanks
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