- November 27, 2015 at 10:38 pm #285819greg70Member
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There is a question in the BPP p2 study pack called Bravado. It’s a change of group structure with an equity investment in a subsidiary of 6% increasing to 70%. Net assets of the subsidiary at aqn are £176 million but these do not include deferred tax liabilities of the subsidiary which are $3m. The tax base is £166m.
There are two things I don’t understand. The deferred tax arising due to the business combination is calculated as (176-166)*30%(tax rate)= $3m. Why do they not deduct the $3m deferred tax liability of the subsidiary when calculating this deferred tax? In calculating the goodwill it is deducted from net assets so why not here?
The second thing is that property plant and equipment is depreciated over 7 years. The acquisition took place at the beginning of the year so fair value movements are calculated at 1/7th of the fair value adjustment. Because of this the movement of the deferred tax arising from the business combination is amortised over 7 years as well and 1/7th credited to retained earnings. Why is that? I would have thought that would depend on the tax depreciation rate as well.November 28, 2015 at 2:41 am #285834MikeLittleKeymaster
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I don’t know the question but, if I can’t answer you to your satisfaction, I’ll look it up
When dealing with a deferred tax movement or finding the deferred tax liability to carry forward (the same question – just two different ways of approaching it) we’re not initially interested in the brought forward amount.
Instead we need to either (dependent upon what information you are given in the question)
i) calculate the liability to carry forward and then the “missing” figure is transferred to the current tax account and thus to profit or loss, or
ii) account for the movement in the account (if that’s the information that is given) and then balance the account and carry forward the liability
Your question about the existing $3 million deferred tax liability falls into the first of the two points that I have raised above ie calculate the carry forward and the “missing” figure goes to current tax account
With reference to the second query, as the asset’s 7 year life passes, so too will its carrying value and the difference between carrying value and tax base will decrease by 1/7 each year.
The deferred tax liability will thus also decrease so there will be a debit in the deferred tax account credited to current tax account representing the extent of the deferred tax provision no longer required
Does that do it for you?
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