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Cohort is a private limited company and has two 100% owned subsidiaries, Legion and Air, both themselves private limited companies. Cohort acquired Air on 1 January 20X2 for $5 million when the fair value of the net assets was $4 million, and the tax base of the net assets was $3.5 million. The acquisition of Air and Legion was part of a business strategy whereby Cohort would build up the ‘value’ of the group over a three year period and then list its existing share capital on the stock exchange.
Legion was acquired on 1 June 20X1 and is a company which undertakes various projects ranging from debt factoring to investing in property and commodities. The following details relate to Legion for the year ending 31 May 20X2.
“Legion has calculated that it requires a specific allowance of $2 million against loans in its portfolio. Tax relief is available when the specific loan is written off.”
Am I right in stating that:
CV of loan = ($2m minus $2m allowance), so CV is equal to zero
Tax Base = $2m since tax relief is available when the specific loan is written off.Therefore, temporary diff = -2m, a -ve temporary diff for a liability gives rise to a deferred tax liability, so the entry would be dr p/l and cr dt liability?
frafiq – I’m puzzled! Why are you asking this when it’s presumably answered within the BPP revision kit?
From what you have posted, it sounds to me like a deferred tax asset. What does BPP say it is?
I apologize for the late reply.
I am asking because I cannot understand the answer provided by BPP.
It first states “However, a deferred tax liability should still be recognized” and in the next sentence it states “The temporary difference gives rise to a deferred tax asset”
Actual answer from BPP:
A temporary difference arises when the provision for the loss on the loan portfolio is first recognised. The general allowance is expected to increase and therefore it is unlikely that the temporary difference will reverse in the near future. However, a deferred tax liability should still be recognised. The temporary difference gives rise to a deferred tax asset. IAS 12 states that deferred tax assets should not be recognised unless it is probable that taxable profits will be available against which the taxable profits can be utilised. This is affected by the situation in point (c) below.
No, I can’t help without a sight of the quote you have given in context. Is there a deferred tax liability anywhere else to which the quotation relates and the rest of your quote is merely stating that, although I was correct in spotting that it was a deferred tax asset, it shouldn’t be recognised where there is no probability of reversal?
The following link contains the question on page 37 and the answer on page 139, I hope you will be able to give your time. You can enter the page number in the box to jump to a particular page.
https://www.docstoc.com/docs/166641817/ACCA-P2-Exam-Kit-2012-BPPpdf
Thanks
There must surely be a misprint here:-
“IAS 12 states that deferred tax assets should not be recognised unless it is probable that taxable profits will be available against which the taxable profits can be utilised.”
That really should read:-
“unless it is probable that taxable profits will be available against which the taxable LOSSES can be utilised”
I suppose that it’s no wonder that you cannot understand the BPP printed solution! Whoever would have thought that a platinum provider could be guilty of such questionable quality proof-reading?
Does that clear this issue up for you?
so actually what does the question means for the specific allowance?
“Legion has calculated that it requires a specific allowance of $2 million against loans in its portfolio. Tax relief is available when the specific loan is written off.”how much is the carrying amount for the loan and how much is the tax base?
Hi,
The carrying amout is the amount in the SFP (nil due to the allowance) but the tax base is $2m as the tax authorities don’t recognise the specific allowance. This temporary difference will reverse out when the loan is written off as it is then allowable for tax purposes and the tax base becomes nil too.
Thanks
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