December 2015 Q2c Chemclean (IAS 12)

Hi,

In order to utilise the deferred tax asset we need to be making profits. If we made profits of $53.3 million then that tax would be $16 million, using the tax rate of 30% in the question, and we could use all of the deferred tax asset against this tax charge.

So the $53.3 million has come from the following calculation – $16 million / 0.3 (tax rate)

Thanks

In the year to 30 June 2015, Chemclean acquired a major subsidiary. The inventory acquired in this business
combination was valued at its fair value at the acquisition date in accordance with IFRS 3 Business
Combinations. The inventory increased in value as a result of the fair value exercise. A significant part of the
acquired inventory was sold in the post-acquisition period but before 30 June 2015, the year end.
In the consolidated statement of profit or loss and other comprehensive income, the cost of inventories acquired
in the business combination and sold by the acquirer after the business combination was disclosed on two
different lines. The inventory was partly shown as cost of goods sold and partly as a ‘non-recurring item’ within
operating income. The part presented under cost of goods sold corresponded to the inventory’s carrying amount
in the subsidiary’s financial statements. The part presented as a ‘non-recurring item’ corresponded to the fair
value increase recognised on the business combination. The ‘non-recurring item’ amounted to 25% of
Chemclean’s earnings before interest and tax (EBIT). Chemclean disclosed the accounting policy and explained
in the notes to the financial statements that showing the inventory at fair value would result in a fall in the gross
margin due to the fair value increase. Further, Chemclean argued that isolating this part of the margin in the
‘non-recurring items’, whose nature is transparently presented in the notes, enabled the user to evaluate the
structural evolution of its gross margin. (6 marks)

Please help me out with this part i am exactly not able to understand whats going on here please can u give me 6 simple points explaning the above part thanks in advance