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Deferred tax : tax base confusion

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Deferred tax : tax base confusion

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by Stephen Widberg.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • August 7, 2023 at 7:30 am #689496
    parag
    Participant
    • Topics: 9
    • Replies: 16
    • ☆

    I was going thru this chapter and had clarity till i reached the section of handling deferred tax for lease.

    Tax base definition :

    Asset : ‘The tax base of an asset is the amount that will be deductible for tax
    purposes against any taxable economic benefits that will flow to an
    entity when it recovers the carrying amount of the asset.

    If those economic benefits will not be taxable, the tax base of the asset is
    equal to its carrying amount’

    Liability: The tax base of a liability is its carrying amount, less any amount
    that will be deductible for tax purposes in future periods.

    in the examples given for temporary difference calculations.

    Where no temporary difference arises

    An entity enters into a lease agreement and the present value of the
    payments to be made is $4 million. It records the following accounting
    entry:
    Dr Right-of-use asset $4m
    Cr Lease liability $4m
    The right-of-use asset and lease liability both have a carrying amount of
    $4 million.
    If the tax jurisdiction grants tax relief in respect of the leased asset
    then:
    ? the right-of use asset has a tax base of $4 million (the future
    allowable tax deduction)
    ? the lease liability has a tax base of $4 million (carrying amount
    less any amount that will be deductible for tax purposes in future
    periods i.e. $4m – nil).
    No temporary differences arise on initial recognition of the transaction
    and so no deferred tax is accounted for. Deferred tax will be recognised
    subsequently if temporary differences arise.

    There is difference in treatment when relief is given on leased asset or lease liability.

    My Question :

    When relief is given on leased asset why is the tax base 4m should it not be nil ? because in the initial example early in the chapter there was relief (capital allowance full amount) on asset and the tax base was taken as nil.

    why the liability has a nil tax base as its not even qualified for relief.

    really confused.

    August 7, 2023 at 8:25 am #689506
    Stephen Widberg
    Keymaster
    • Topics: 16
    • Replies: 3411
    • ☆☆☆☆☆

    Leases:

    DT asset = Tax rate x (carrying amount of right of use asset minus carrying amount of lease liability).

    End of required knowledge.

    🙂

    August 7, 2023 at 10:15 am #689527
    parag
    Participant
    • Topics: 9
    • Replies: 16
    • ☆

    this is much clearer sir.

    However why does kaplan go talking about all the tax bases and temporary differences while the CV of lease asset and liabilities are same (10m) @ tax rate 30%

    They have recommended to record :

    Dr Deferred tax assets $3m
    Cr Deferred tax liabilities $3m

    (technically this is also zero)

    As per your advise, since they have same value , 30% ( 10m – 10m) is zero.

    August 8, 2023 at 8:35 am #689574
    Stephen Widberg
    Keymaster
    • Topics: 16
    • Replies: 3411
    • ☆☆☆☆☆

    Not sure – in any case, DT assets and liabilities are offset if they relate to the same tax authority.

    I wouldn’t worry about it.

    🙂

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Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Deferred tax : tax base confusion’ is closed to new replies.

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