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Hi Mr Mike,
I have had a question before about provision (impairment) for investments in subsidiaries and associates/ joint ventures. Now as I understand, such kind of provision, which in my country is tax deductible, is recognized in PL and BS of parent or sub (if D shape structure) but eliminated when consolidated.
I looked into the consolidation entries of a Big4 firm, they eliminated the provision but also made a deferred tax on total provision value (not only additional provision which is expense in the period). Their entry is:
Credit Deferred Tax Liability: Total Provision x tax rate (Ex: 100 x 22%)
Debit Deferred Tax Expenses: Provision Expenses (additional provision) x tax rate (Ex: 20 x 20%)
Debit Retained Earning: Balancing Figure (Ex: 80 x 20%).So, what is the logic behind this entry?
When carrying down a value in a provision account, we calculate the amount that we wish finally to show as the liability.
But we already have a liability brought forward. The difference between the two (brought forward compared with carry forward) is the movement in the deferred tax account attributable to more or fewer items requiring deferred tax and / or a change in the tax rate
You say that tax is calculated on the full amount of the provision. Well, it was last year too. If the provision has not increased or decreased, the carry forward will be the same as the brought forward.
But if there’s a change, then the carry forward on the new calculation compared with the brought forward on the old calculation will result in the difference representing the charge for the year
OK?
Hm, it is still confusing mr Mike 🙁
I still do not get why the audit firm made a deferred tax here? Is there any temporary difference? And if yes, when and in what case does the deferred tax liability decrease (unrecognized) ?
Tks you so much!
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