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Dear all,
Could you please help me to understand the following:
1. Why is the tax base 0? I’m reading the answer, but i still don’t get it…
2. Why is it a deferred tax liability, and not deferred tax asset?Activity 3: Epsilon Co
During the year ended 31 March 20X4, Epsilon Co correctly capitalised development costs of $1.6 million in accordance with IAS 38. The development project began to generate economic benefits for Epsilon from 1 January 20X4. The directors of Epsilon Co estimated that the project would generate economic benefits for five years from that date. Amortisation is charged on a monthly pro-rata basis. The development expenditure was fully deductible against taxable profits for the year ended 31 March 20X4 and the rate of tax applicable is 25%.Required
Discuss the deferred tax implications of the above in the financial statements of Epsilon for the
year ended 31 March 20X4.Answer:
“….
The tax base of the development costs is nil since the relevant tax deduction has already been
claimed.
The deferred tax liability will be $380,000 ($1.52m × 25%).”Hi,
The tax base is nil because the tax authorities have allowed the costs in full as incurred and so there will be no asset on the tax authorities SFP.
Under IFRS we recognise an asset and hence the CV will always be greater than the tax base and hence a DT liability.
Thanks
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