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Tax base – development costs

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Tax base – development costs

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by P2-D2.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • August 16, 2022 at 9:00 pm #663212
    vikipulka
    Participant
    • Topics: 19
    • Replies: 21
    • ☆

    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%).”

    August 20, 2022 at 1:28 pm #663761
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 6702
    • ☆☆☆☆☆

    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

  • Author
    Posts
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