- This topic has 3 replies, 2 voices, and was last updated 3 years ago by
.
- Posts
Dear tutor,
The ACCA suggested answer says “Depending on the rate of tax which would be used to determine the necessary provision, it may not be material to the financial statements.”
Why it has used the word “provision” here as it should be deferred tax liability? Tax amounts are not material by nature? If not material by nature and if I assume 25% tax rate then it becomes 1% of total assets of $ 90 million which is material by amount (($3.5million * 0.25) / 90). Please comment.
Further if the government grant will be payable due to a breach then the accounting entry will be:
Dr. Deferred income
Cr. Provision
Please correct me if I am wrong.Thanks and regards,
See page 56 of the notes – it is >2% of total assets that would generally be material and <1% that would not be material according to the benchmarks. You can also calculate it as a % of profit – 8.9% – which lies between 5% and 10%. So it is correct to say that it may not be material – the “grey area” between the upper and lower amounts is a matter for professional judgment.
I don’t think anyone would be penalised for referring to a deferred tax liability as a provision – it is clear in context what is being referred to.
If a grant carried as deferred income becomes repayable it could simply be credit “trade and other payables” since it is presumably a current liability. It wouldn’t need to be separately itemised unless material and if separately itemised I would expect it to be called what it is “Government grant payable”.
Thank you,
In this question, the client is a leading supplier of machinery used in the quarrying industry. It means it a competitive market. Also “In recent weeks, several customers have returned equipment due to faults, and Dali Co offers a warranty to guarantee that defective items will be replaced free of charge.”
Can we write about inadequate going concern disclosures in answer, because this inventory (Bespoke and Generic machinery) is very important to the client and the reputation damage from the faults is high affecting going concern? I think ACCA suggested answers should have going concern point.
Regards,
You can’t infer material uncertainty relating to going concern from “competition” – for example. It is in the nature of business that there are risks – but that Dali has become a leader in 20 years is surely a success story? It also states “profit before tax of $9·8 million (2014 – $9·2 million) and total assets of $90 million (2014 – $85 million)” – so profits and net assets increasing – and it’s looking for a listing – hardly something a business would be planning for if there were serious going concern issues. In a similar vein risk to “reputation” alone does not mean the company is going down the swanee.
So no – I think presuming inadequate going concern disclosure is speculation.
- You must be logged in to reply to this topic.