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Hello,
I am slightly confused from the model answer on the part b) regarding the deferred tax:
…Holls group has deductible tax difference of $4.5m which is expected to reverse next year and taxable temporary differences of $5m o/w $3m will reverse next year and $2m year after that…Holls can thus also recognize a deferred tax asset for $0·75 million ($3 million x 25%)…
I am struggling to understand why Holls can recognise a deferred tax asset for $0·75 million ($3 million x 25%) when the $3m is only reversing next year. Does it mean we actually only recognise part of the $4.5m (which happens to be the $3m that is “covered by next year’s reversal). In other words, that the full $4.5m cannot be recognised because of significant losses in prior year and hence no profits being available to offset these against in full? Could you please help to clarify this point?
Thank you in advance.
Hard to decipher the model answer.
This is mine:
Net taxable differences are 5 – 4.5 = 0.5
DT liability = tax rate x 0.5 = 0.125
That’s about as far as I would have gone. 🙂
What matters as always is that your explanations of current / deferred tax etc would be clear to the directors of the company.
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