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Does the provision for unrealised profits result in a deferred tax asset . It has been mentioned as such in the Test your understanding 2 of the Chapter 18 from the Kaplan text book. I would like to know why it is classified as such.
Hema
Yes,
There is Temporary Difference of amount equal to UP and a Deffered tax asset wil be recognised.Temporary difference is because different amounts are recognised in the Group statements and the individual statements.
Mike sir please correct me if i am wrong.
I’m looking at BPP study text, page 164, paragraph 6.1.2, second bullet point where it states “Circumstances that give rise to deductible temporary differences: Unrealised profits resulting from intra-group transactions are eliminated from the carrying amount of assets, such as inventory or property, plant or equipment, but no equivalent adjustment is made for tax purposes”
Their answer is “As in above”!!! but refers to a similar problem higher up the page where the answer for an unrealised loss situation was “The tax bases of the assets are unaltered”
I think, from that, that there is no deferred tax asset nor liability arising on the unrealised profits resulting from an intra-group transaction! It’s a deductible temporary difference rather than a taxable temporary difference … and if you want the distinction explained for those two descriptions, I’m going to refer you to page 153, section 3 ( taxable temporary differences ) and page 156, section 4 ( deductible temporary differences )
Hi Mike sir,
As per my understanding it does give rise to a deffered tax asset.Beacasue there will be a negative temporary difference between the carrying value of the inventory and it s tax base and this amount is equal to the UP that has been eliminated from the group inventory.So therefore we recognise Deffered tax asset> i have done some past exam questions on this and it was right.
I’m still ( sorry ) inclined to think that this is merely a consolidation adjustment and the tax base doesn’t change.
However, if you have done past exam questions on this and they agree with the BPP answer, then “go for it”
But if you’re correct, then I have to claim confusion within the BPP text
well sir the tax base does not change but the carrying amount of the inventory in the group statement is changing because we are doing the adjustment and this gives rise to a temporary difference.
MikeLittle2p said 16 seconds ago:
OK, I hear what you’re saying, but I still …..
For the purposes of the P2 exam in 3 weeks time – I really would move on and get to grips with other areas. IF ( and it really is a big IF) this point came up, then treat it as requiring a deferred tax adjustment.
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