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Deferred tax – Adjusting for IC trading

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Deferred tax – Adjusting for IC trading

  • This topic has 7 replies, 2 voices, and was last updated 10 years ago by MikeLittle.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • October 23, 2014 at 9:13 am #205535
    mirelutza
    Member
    • Topics: 2
    • Replies: 6
    • ☆

    Dear P2 Tutor,

    When I adjust for an intra-company transaction and there are deferred taxes, if Subsidiary is the seller, shall I adjust its equity at reporting date ( W 2) ? Or, even if the Subsidiary is the seller, I should only adjust Parent’s equity for the deferred tax effect in W 3? I understood the rule when it comes to IFRS 3 but I have a problem with IC trading.
    Regards,

    October 23, 2014 at 11:22 am #205569
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    Firstly, working W2 in my method is the goodwill calculation as at date of acquisition so there would be no deferred tax implication arising as a result of any intra-group trading.

    W2 is an historic working and not a working as at “today” the reporting date. (This is in my method of consolidating that differs from others’ methods (slightly)

    Secondly, it would be an unusual exam question that involved deferred tax on an intra-group transaction – I don’t remember such a question (but is my memory fading?)

    But why would there be a deferred tax liability? We are not going to adjust the subsidiary’s financial statements for the effect of any intra-group transaction. The adjustment is for consolidation purposes only

    I think that answers your question

    October 23, 2014 at 12:07 pm #205583
    mirelutza
    Member
    • Topics: 2
    • Replies: 6
    • ☆

    Hello Mike

    And thanks for your answer.

    There is a deferred tax: if the Parent bought it ( it, the inventory) for 10 and the cost is 8, than I’ll adjust it at 8 for FS purposes but its tax base remains 10. So this is my question: Shall I adjust the Subsidiary’s equity or the Parent’s ? If I adjust against Sub’s equity, I’ll affect the value of NCI.

    What if the Parent is the seller ?

    Regards,

    October 23, 2014 at 12:22 pm #205585
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    The taxman will charge tax on the reported profits but the group has not realised the pup.

    So, calculate the pup. Calculate tax on the pup. Dr deferred tax asset and Cr the current tax account

    The deferred tax asset is debited and the current tax credited because there is a current liability so far as the taxman is concerned but, when the goods are sold next year, there will already have been shown as a liability the tax on those goods in the year of the intra-group sale

    October 23, 2014 at 12:27 pm #205586
    mirelutza
    Member
    • Topics: 2
    • Replies: 6
    • ☆

    I’ll try to find other sources of info and come back with a reply.

    However: the Sub already sold it ( it, of course, the inventory) for 10 and it was taxed for 2. The parent has it for 10 but for consolidation purposes will adjust it to 8. Tax base remains 10. When the inventory is sold outside the group, I’ll recognize an expense of 8, but deduct 10. This is a temporary difference. In my opinion.

    Once I am clear, I’ll come back to you, either I’m right or wrong.

    October 23, 2014 at 12:28 pm #205587
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    As for the adjustment, put it through the records of the selling company

    October 23, 2014 at 12:31 pm #205588
    mirelutza
    Member
    • Topics: 2
    • Replies: 6
    • ☆

    Sorry, My post went in the same time with yours.

    I’ll be back!

    October 23, 2014 at 12:42 pm #205590
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    I think my crossed post answers it!

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