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Hi Chris,
Could you please help me understand the following: it says in the book: Development costs are capitalised under IAS 38, but are often tax deductible in the period incurred. IN such cases, the temporary difference is the full carrying amount of the development expenditure since the tax base is nil ( the costs have already been deducted from taxable profits), generating a deferred tax liability when multiplied by the tax rate.
I cannot understand, when the costs have already been deducted from taxable profits? why the tax base is nil?
Thanks a lot,
NataliaThe tax base of an asset is the amount that will be DEDUCTIBLE in the future.
The tax base of a liability is the amount that will be taxable in the future.Development costs that are capitalised are an asset and these costs have already been deducted in determining the taxes. Hence none of the capitalised amounts are deductible anymore. So a nil tax base.
Hi,
The explanation above is a bit too technical. Remember the way to think about the tax base is to think what the tax authorities would include in their SFP if they were preparing one.
Given that the costs incurred have been fully allowable for tax purposes then they won’t be capitalising them for any future tax deduction as they’ve already been written off.
Hope that helps.
Thanks
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