Chator 0

|NCONE 1AXE5 (|A5 12)

BACKCROuND AND |N1RODuC1|ON
1ho 5tandard AIioa to tho Accounting tor |ncomo 1axoa

lA3 12 usos a ||ab|||ty mothod and adopts a statomont ot t|nanc|a| pos|t|on approach. lnstoad ot account|ng tor tho t|m|ng d|ttoroncos botwoon
tho account|ng and tax consoquoncos ot rovonuo and oxponsos, |t accounts tor tho tomporary d|ttoroncos botwoon tho account|ng and tax basos ot
assots and ||ab|||t|os. 1ho Account|ng 3tandard adopts a tu||-prov|s|on statomont ot t|nanc|a| pos|t|on approach to account|ng tor tax.
lt |s assumod that tho rocovory ot a|| assots and tho sott|omont ot a|| ||ab|||t|os havo tax consoquoncos and that thoso consoquoncos can bo
ost|matod ro||ab|y and aro unavo|dab|o.
1ho ma|n roason why dotorrod tax has to bo prov|dod tor |s that lntornat|ona| ||nanc|a| loport|ng 3tandards (l|l3) rocogn|t|on cr|tor|a aro
d|ttoront trom thoso that aro norma||y sot out |n tax |aw. 1hus thoro w||| bo |ncomo and oxpond|turo |n t|nanc|a| statomonts that w||| not bo a||owod tor
taxat|on purposos |n many jur|sd|ct|ons.
A dotorrod tax ||ab|||ty or assot |s rocogn|zod tor tuturo tax consoquoncos ot past transact|ons. 1horo aro somo oxompt|ons to th|s gonora| ru|o.
DEF|N|1|ON5 OF KEY 1ERN5
1ax baao. va|uo that tho 3tandard assumos that oach assot and ||ab|||ty has tor tax purposos.
1omorary dittoroncoa. 0|ttoroncos botwoon tho carry|ng amount ot an assot and ||ab|||ty and |ts tax baso.
1ho bo||ot |s that an ont|ty w||| sott|o |ts ||ab|||t|os and rocovor |ts assots ovontua||y ovor t|mo and at that po|nt tho tax consoquoncos w|||
crysta|||zo. |or oxamp|o, |t a mach|no has a carry|ng va|uo |n tho t|nanc|a| statomonts ot $b m||||on and |ts tax va|uo |s $2 m||||on, thon thoro |s
a taxab|o tomporary d|ttoronco ot $8 m||||on.
1ho tax baso ot a ||ab|||ty |s norma||y |ts carry|ng amount |oss amounts that w||| bo doduct|b|o tor tax |n tho tuturo. 1ho tax baso ot an assot
|s tho amount that w||| bo doduct|b|o tor tax purposos aga|nst tuturo prot|ts gonoratod by tho assot.
1ho 3tandard sots out two k|nds ot tomporary d|ttoroncos: a toxob|o tompototy olotooco and a ooooctlb|o tompototy olotooco.
A taxab|o tomporary d|ttoronco rosu|ts |n tho paymont ot tax whon tho carry|ng amount ot tho assot or ||ab|||ty |s sott|od.
ln s|mp|o torms, th|s moans that a dotorrod tax ||ab|||ty w||| ar|so whon tho carry|ng va|uo ot tho assot |s groator than |ts tax baso or whon
tho carry|ng va|uo ot tho ||ab|||ty |s |oss than |ts tax baso.
0oduct|b|o tomporary d|ttoroncos aro d|ttoroncos that rosu|t |n amounts bo|ng doduct|b|o |n dotorm|n|ng taxab|o prot|t or |oss |n tuturo
por|ods whon tho carry|ng va|uo ot tho assot or ||ab|||ty |s rocovorod or sott|od. Whon tho carry|ng va|uo ot tho ||ab|||ty |s groator than |ts tax
baso or whon tho carry|ng va|uo ot tho assot |s |oss than |ts tax baso, a dotorrod tax assot may ar|so.
1h|s moans, tor oxamp|o, that whon an accruod ||ab|||ty |s pa|d |n tuturo por|ods, part or a|| ot that paymont may bocomo a||owab|o tor tax
purposos.
CA5E 51uDY 1
Facta

An ont|ty has tho to||ow|ng assots and ||ab|||t|os rocordod |n |ts statomont ot t|nanc|a| pos|t|on at 0ocombor 81, 20X0:
CarryIng value $ mIllIon
lroporty 10
l|ant and oqu|pmont b
lnvontory 4
1rado roco|vab|os 8
1rado payab|os 0
Cash 2
1ho va|uo tor tax purposos ot proporty and tor p|ant and oqu|pmont aro $7 m||||on and $4 m||||on rospoct|vo|y. 1ho ont|ty has mado a
prov|s|on tor |nvontory obso|osconco ot $2 m||||on, wh|ch |s not a||owab|o tor tax purposos unt|| tho |nvontory |s so|d. |urthor, an
|mpa|rmont chargo aga|nst trado roco|vab|os ot $1 m||||on has boon mado. 1h|s chargo doos not ro|ato to any spoc|t|c trado roco|vab|o
but to tho ont|ty's assossmont ot tho ovora|| co||octab|||ty ot tho amount. 1h|s chargo w||| not bo a||owod |n tho curront yoar tor tax
purposos but w||| bo a||owod |n tho tuturo. lncomo tax pa|d |s at 80%.

Roquirod

Ca|cu|ato tho dotorrod tax prov|s|on at 0ocombor 81, 20X0.

5oIution
1ho dotorrod tax prov|s|on w||| bo $1 m||||on 80%, or $800,000.

3ocauso tho prov|s|on aga|nst |nvontory and tho |mpa|rmont chargo aro not curront|y a||owod, tho tax baso w||| bo h|ghor than tho
carry|ng va|uo by tho rospoct|vo amounts.
Evory assot or ||ab|||ty |s assumod to havo a tax baso. lorma||y th|s tax baso w||| bo tho amount that |s a||owod tor tax purposos.
3omo |toms ot |ncomo and oxpond|turo may not bo taxab|o or tax doduct|b|o, and thoy w||| novor ontor |nto tho computat|on ot taxab|o prot|t.
1hoso |toms somot|mos aro ca||od pormanont d|ttoroncos.
Gonora||y spoak|ng, thoso |toms w||| havo tho samo tax baso as tho|r carry|ng amount, that |s, no tomporary d|ttoronco w||| ar|so.
|or oxamp|o, |t an ont|ty has on |ts statomont ot t|nanc|a| pos|t|on |ntorost roco|vab|o ot $2 m||||on that |s not taxab|o, thon |ts tax baso w||| bo tho
samo as |ts carry|ng va|uo, or $2 m||||on. 1horo |s no tomporary d|ttoronco |n th|s caso. 1horotoro, no dotorrod taxat|on w||| ar|so.
CA5E 51uDY 2
Facta

An ont|ty acqu|rod p|ant and oqu|pmont tor $1 m||||on on 1anuary 1, 20X0. 1ho assot |s doproc|atod at 2b% a yoar on tho stra|ght-||no
bas|s, and |oca| tax |og|s|at|on porm|ts tho managomont to doproc|ato tho assot at 80% a yoar tor tax purposos.

Roquirod

Ca|cu|ato any dotorrod tax ||ab|||ty that m|ght ar|so on tho p|ant and oqu|pmont at 0ocombor 81, 20X0, assum|ng a tax rato ot 80%.

5oIution

$1b,000 (80% ot tho tomporary d|ttoronco ot $b0,000). 1ho carry|ng va|uo ot tho p|ant and oqu|pmont |s $7b0,000 and tho tax wr|tton
down va|uo w||| bo $700,000, thus g|v|ng a taxab|o tomporary d|ttoronco ot $b0,000.
CuRREN1 1AX L|AB|L|1|E5 AND A55E15
1ho 3tandard a|so doa|s w|th curront tax ||ab|||t|os and curront tax assots.
An ont|ty shou|d rocogn|zo a ||ab|||ty |n tho statomont ot t|nanc|a| pos|t|on |n rospoct ot |ts curront tax oxponso both tor tho curront and pr|or yoars
to tho oxtont that |t |s not yot pa|d.
ACCOuN1|NC FOR DEFERRED 1AX
1o account tor dotorrod tax undor lA3 12, t|rst proparo a statomont ot t|nanc|a| pos|t|on that shows a|| tho assots and ||ab|||t|os |n tho account|ng
statomont ot t|nanc|a| pos|t|on and tho|r tax baso.
A|so show any othor |toms that may not havo boon rocogn|zod as assots or ||ab|||t|os |n tho account|ng statomont ot t|nanc|a| pos|t|on but that
may havo a tax baso. 1hon tako tho d|ttoronco botwoon thoso va|uos and tho account|ng va|uos, and ca|cu|ato tho dotorrod tax basod on thoso
d|ttoroncos.
Vost taxab|o d|ttoroncos ar|so bocauso ot d|ttoroncos |n tho t|m|ng ot tho rocogn|t|on ot tho transact|on tor account|ng and tax purposos.

ExamIoa
1. Accumu|atod doproc|at|on that d|ttors trom accumu|atod tax doproc|at|on
2. Emp|oyoo oxpond|turo rocogn|zod whon |ncurrod tor account|ng purposos and whon pa|d tor tax purposos
8. Costs ot rosoarch and dovo|opmont, wh|ch may bo oxponsod |n ono por|od tor account|ng purposos but a||owod tor tax purposos |n |ator
por|ods
Otton whoro assots and ||ab|||t|os aro va|uod at ta|r va|uo tor account|ng purposos, thoro |s no oqu|va|ont moasuromont tor tax purposos. |or
oxamp|o, proporty, p|ant, and oqu|pmont may bo rova|uod to ta|r va|uo, but thoro may bo no adjustmont to tho tax va|uo tor th|s |ncroaso or
docroaso. 3|m||ar|y, assots and ||ab|||t|os can bo rova|uod on a bus|noss acqu|s|t|on, but tor tax purposos, aga|n, thoro may bo no adjustmont to tho
va|uo.
5ummary ot Accounting tor Dotorrod 1ax
1ho procoss ot account|ng tor dotorrod tax |s shown |n tho to||ow|ng sovon stops:
1. 0otorm|no tho tax baso ot tho assots and ||ab|||t|os |n tho statomont ot t|nanc|a| pos|t|on.
2. Comparo tho carry|ng amounts |n tho statomont ot t|nanc|a| pos|t|on w|th tho tax baso. Any d|ttoroncos w||| norma||y attoct tho dotorrod
taxat|on ca|cu|at|on.
8. ldont|ty tho tomporary d|ttoroncos that havo not boon rocogn|zod duo to oxcopt|ons |n lA3 12.
4. App|y tho tax ratos to tho tomporary d|ttoroncos.
b. 0otorm|no tho movomont botwoon opon|ng and c|os|ng dotorrod tax ba|ancos.
0. 0oc|do whothor tho ottsot ot dotorrod tax assots and ||ab|||t|os botwoon d|ttoront compan|os |s accoptab|o |n tho conso||datod t|nanc|a|
statomonts.
7. locogn|zo tho not chango |n dotorrod taxat|on.
CA5E 51uDY 8
Facta

An ont|ty has rova|uod |ts proporty and has rocogn|zod tho |ncroaso |n tho rova|uat|on rosorvo |n |ts t|nanc|a| statomonts. 1ho carry|ng
va|uo ot tho proporty was $8 m||||on and tho rova|uod amount was $10 m||||on. 1ax baso ot tho proporty was $0 m||||on. ln th|s country, tho
tax rato app||cab|o to prot|ts |s 8b% and tho tax rato app||cab|o to prot|ts mado on tho sa|o ot proporty |s 80%.

Roquirod

lt tho rova|uat|on took p|aco at tho ont|ty's yoar-ond ot 0ocombor 81, 20X0, ca|cu|ato tho dotorrod tax ||ab|||ty on tho proporty as ot that
dato.

5oIution

$1.2 m||||on. 1ho carry|ng va|uo attor rova|uat|on |s $10 m||||on, tho tax baso |s $0 m||||on, and tho rato ot tax app||cab|o to tho sa|o ot
proporty |s 80%, thorotoro, tho answor |s $10 m||||on m|nus $0 m||||on mu|t|p||od by 80%, or $1.2 m||||on.
CA5E 51uDY 4
Facta

An ont|ty has spont $000,000 |n dovo|op|ng a now product. 1hoso costs moot tho dot|n|t|on ot an |ntang|b|o assot undor lA3 88 and havo
boon rocogn|zod |n tho statomont ot t|nanc|a| pos|t|on. loca| tax |og|s|at|on a||ows thoso costs to bo doductod tor tax purposos whon
thoy aro |ncurrod. 1horotoro, thoy havo boon rocogn|zod as an oxponso tor tax purposos. At tho yoar-ond tho |ntang|b|o assot |s doomod
to bo |mpa|rod by $b0,000.

Roquirod

Ca|cu|ato tho tax baso ot tho |ntang|b|o assot at tho account|ng yoar-ond.

5oIution

Zoro, bocauso tho tax author|ty has a|roady a||owod tho |ntang|b|o assot costs to bo doductod tor tax purposos.
CON5OL|DA1ED F|NANC|AL 51A1ENEN15
1omporary d|ttoroncos can a|so ar|so trom adjustmonts on conso||dat|on.
1ho tax baso ot an |tom |s otton dotorm|nod by tho va|uo |n tho ont|ty accounts, that |s, tor oxamp|o, tho subs|d|ary's accounts.
0otorrod tax |s dotorm|nod on tho bas|s ot tho conso||datod t|nanc|a| statomonts and not tho |nd|v|dua| ont|ty accounts.
1horotoro, tho carry|ng va|uo ot an |tom |n tho conso||datod accounts can bo d|ttoront trom tho carry|ng va|uo |n tho |nd|v|dua| ont|ty accounts, thus
g|v|ng r|so to a tomporary d|ttoronco.
An oxamp|o |s tho conso||dat|on adjustmont that |s roqu|rod to o||m|nato unroa||zod prot|ts and |ossos on |ntorgroup transtor ot |nvontory. 3uch an
adjustmont w||| g|vo r|so to a tomporary d|ttoronco, wh|ch w||| rovorso whon tho |nvontory |s so|d outs|do tho group.
lA3 12 doos not spoc|t|ca||y addross how |ntorgroup prot|ts and |ossos shou|d bo moasurod tor tax purposos. lt says that tho oxpoctod mannor ot
rocovory or sott|omont ot tax shou|d bo takon |nto account.
CA5E 51uDY 5
Facta

A subs|d|ary so|d goods cost|ng $10 m||||on to |ts paront tor $11 m||||on, and a|| ot thoso goods aro st||| ho|d |n |nvontory at tho yoar-ond.
Assumo a tax rato ot 80%.

Roquirod

Exp|a|n tho dotorrod tax |mp||cat|ons.

5oIution

1ho unroa||zod prot|t ot $1 m||||on w||| havo to bo o||m|natod trom tho conso||datod statomont ot comprohons|vo |ncomo and trom tho
conso||datod statomont ot t|nanc|a| pos|t|on |n group |nvontory. 1ho sa|o ot tho |nvontory |s a taxab|o ovont, and |t causos a chango |n tho
tax baso ot tho |nvontory. 1ho carry|ng amount |n tho conso||datod t|nanc|a| statomonts ot tho |nvontory w||| bo $10 m||||on, but tho tax
baso |s $11 m||||on. 1h|s g|vos r|so to a dotorrod tax assot ot $1 m||||on at tho tax rato ot 80%, wh|ch |s $800,000 (assum|ng that both tho
paront and subs|d|ary aro ros|dont |n tho samo tax jur|sd|ct|on).
CA5E 51uDY 0
Facta

An ont|ty has acqu|rod a subs|d|ary on 1anuary 1, 20X0. Goodw||| ot $2 m||||on has ar|son on tho purchaso ot th|s subs|d|ary. 1ho
subs|d|ary has doduct|b|o tomporary d|ttoroncos ot $1 m||||on and |t |s probab|o that tuturo taxab|o prot|ts aro go|ng to bo ava||ab|o tor
tho ottsot ot th|s doduct|b|o tomporary d|ttoronco. 1ho tax rato dur|ng 20X4 |s 80%. 1ho doduct|b|o tomporary d|ttoronco has not boon
takon |nto account |n ca|cu|at|ng goodw|||.

Roquirod

What |s tho t|guro tor goodw||| that shou|d bo rocogn|zod |n tho conso||datod statomont ot t|nanc|a| pos|t|on ot tho paront?

5oIution

$1.7 m||||on. A dotorrod tax assot ot $1 m||||on 80%, or $800,000, shou|d bo rocogn|zod bocauso |t |s statod that tuturo taxab|o prot|ts
w||| bo ava||ab|o tor ottsot. 1hus at tho t|mo ot acqu|s|t|on thoro |s an add|t|ona| dotorrod tax assot that has not as yot boon takon |nto
account. 1ho rosu|t ot th|s w||| bo to roduco goodw||| trom $2 m||||on to $1.7 m||||on.
1ENPORARY D|FFERENCE5 NO1 RECOCN|ZED FOR DEFERRED 1AX
1horo aro somo tomporary d|ttoroncos that aro not rocogn|zod tor dotorrod tax purposos. 1hoso ar|so
1. |rom goodw|||
2. |rom tho |n|t|a| rocogn|t|on ot corta|n assots and ||ab|||t|os
8. |rom |nvostmonts whon corta|n cond|t|ons app|y
1ho lA3 doos not a||ow a dotorrod tax ||ab|||ty tor goodw||| on |n|t|a| rocogn|t|on or whoro any roduct|on |n tho va|uo ot goodw||| |s not a||owod tor
tax purposos. 3ocauso goodw||| |s tho ros|dua| amount attor rocogn|z|ng assots and ||ab|||t|os at ta|r va|uo, rocogn|z|ng a dotorrod tax ||ab|||ty |n
rospoct ot goodw||| wou|d s|mp|y |ncroaso tho va|uo ot goodw|||, thorotoro, tho rocogn|t|on ot a dotorrod tax ||ab|||ty |n th|s rogard |s not a||owod.
0otorrod tax ||ab|||t|os tor goodw||| cou|d bo rocogn|zod to tho oxtont that thoy do not ar|so trom |n|t|a| rocogn|t|on.
CA5E 51uDY 7
Facta

An ont|ty has acqu|rod a subs|d|ary, and goodw||| ar|s|ng on tho transact|on amounts to $20 m||||on. Goodw||| |s not a||owab|o tor tax
purposos |n tho ont|ty's jur|sd|ct|on. 1ax rato tor tho ont|ty |s 80% and tho subs|d|ary |s 00%-ownod.

Roquirod

Ca|cu|ato tho dotorrod tax ||ab|||ty ro|at|ng to goodw||| and oxp|a|n whothor a taxab|o tomporary d|ttoronco wou|d ar|so |t goodw||| was
a||owab|o tor tax purposos on an amort|zod bas|s.

5oIution

Zoro. A dotorrod tax ||ab|||ty shou|d not bo rocogn|zod tor any taxab|o tomporary d|ttoronco, wh|ch ar|sos on tho |n|t|a| rocogn|t|on ot
goodw|||. Whoro goodw||| |s doduct|b|o tor tax purposos on an amort|zod bas|s, a taxab|o tomporary d|ttoronco w||| ar|so |n tuturo yoars
bo|ng tho d|ttoronco botwoon tho carry|ng va|uo |n tho ont|ty's accounts and tho tax baso.
1ho socond tomporary d|ttoronco not rocogn|zod |s on tho |n|t|a| rocogn|t|on ot corta|n assots and ||ab|||t|os, wh|ch aro not tu||y doduct|b|o or
||ab|o tor tax purposos. |or oxamp|o, |t tho cost ot an assot |s not doduct|b|o tor tax purposos thon th|s has a tax baso ot n||.
Gonora||y spoak|ng th|s g|vos r|so to a taxab|o tomporary d|ttoronco. |owovor, tho 3tandard doos not a||ow an ont|ty to rocogn|zo any dotorrod
tax that occurs as a rosu|t ot th|s |n|t|a| rocogn|t|on. 1hus no dotorrod tax ||ab|||ty or assot |s rocogn|zod whoro tho carry|ng va|uo ot tho |tom on |n|t|a|
rocogn|t|on d|ttors trom |ts |n|t|a| tax baso. An oxamp|o ot th|s |s a nontaxab|o govornmont grant that |s ro|atod to tho acqu|s|t|on ot an assot. loto,
howovor, that |t tho |n|t|a| rocogn|t|on occurs on a bus|noss comb|nat|on, or an account|ng or taxab|o prot|t or |oss ar|sos, thon dotorrod tax shou|d
bo rocogn|zod.
CA5E 51uDY 8
Facta

An ont|ty purchasos p|ant and oqu|pmont tor $2 m||||on. ln tho tax jur|sd|ct|on, thoro aro no tax a||owancos ava||ab|o tor tho doproc|at|on ot
th|s assot, no|thor aro any prot|ts or |ossos on d|sposa| takon |nto account tor taxat|on purposos. 1ho ont|ty doproc|atos tho assot at 2b%
por annum. 1axat|on |s 80%.

Roquirod

Exp|a|n tho dotorrod tax pos|t|on ot tho p|ant and oqu|pmont on |n|t|a| rocogn|t|on and at tho t|rst yoar-ond attor |n|t|a| rocogn|t|on.

5oIution

1ho assot wou|d havo a tax baso ot zoro on |n|t|a| rocogn|t|on, and th|s wou|d norma||y g|vo r|so to a dotorrod tax ||ab|||ty ot $2 m||||on Q
80%, or $000,000. 1h|s wou|d moan that an |mmod|ato tax oxponso has ar|son botoro tho assot was usod. lA3 12 proh|b|ts tho
rocogn|t|on ot th|s oxponso. 1h|s cou|d bo c|ass|t|od as a pormanont d|ttoronco.

At tho dato ot tho t|rst accounts, tho assot wou|d havo boon doproc|atod by, say, 2b% ot $2 m||||on, or $b00,000. As tho tax baso |s zoro,
th|s wou|d norma||y causo a dotorrod tax ||ab|||ty ot $1.b m||||on at 80%, or $4b0,000. |owovor, th|s ||ab|||ty has ar|son trom tho |n|t|a|
rocogn|t|on ot tho assot and thorotoro |s not prov|dod tor.
A turthor tomporary d|ttoronco not rocogn|zod ro|atos to |nvostmonts |n subs|d|ar|os, assoc|atos, and jo|nt vonturos. lorma||y dotorrod tax assots
and ||ab|||t|os shou|d bo rocogn|zod on thoso |nvostmonts. 3uch tomporary d|ttoroncos otton w||| bo as a rosu|t ot tho und|str|butod prot|ts ot such
ont|t|os. |owovor, whoro tho paront or tho |nvostor can contro| tho t|m|ng ot tho rovorsa| ot a taxab|o tomporary d|ttoronco and |t |s probab|o that tho
tomporary d|ttoronco w||| not rovorso |n tho torosooab|o tuturo, thon a dotorrod tax ||ab|||ty shou|d not bo rocogn|zod. 1h|s wou|d bo tho caso whoro
tho paront |s ab|o to contro| whon and |t tho rota|nod prot|ts ot tho subs|d|ary aro to bo d|str|butod.
3|m||ar|y, a dotorrod tax assot shou|d not bo rocogn|zod |t tho tomporary d|ttoronco |s oxpoctod to cont|nuo |nto tho torosooab|o tuturo and thoro
aro no taxab|o prot|ts ava||ab|o aga|nst wh|ch tho tomporary d|ttoronco can bo ottsot.
ln tho caso ot a jo|nt vonturo or an assoc|ato, norma||y a dotorrod tax ||ab|||ty wou|d bo rocogn|zod, bocauso norma||y tho |nvostor cannot contro|
tho d|v|dond po||cy. |owovor, |t thoro |s an agroomont botwoon tho part|os that tho prot|ts w||| not bo d|str|butod, thon a dotorrod tax ||ab|||ty wou|d
not bo prov|dod tor.
DEFERRED 1AX A55E15
0oduct|b|o tomporary d|ttoroncos g|vo r|so to dotorrod tax assots. Examp|os ot th|s aro tax |ossos carr|od torward or tomporary d|ttoroncos
ar|s|ng on prov|s|ons that aro not a||owab|o tor taxat|on unt|| tho tuturo.
1hoso dotorrod tax assots can bo rocogn|zod |t |t |s probab|o that tho assot w||| bo roa||zod.
loa||zat|on ot tho assot w||| dopond on whothor thoro aro sutt|c|ont taxab|o prot|ts ava||ab|o |n tho tuturo.
3utt|c|ont taxab|o prot|ts can ar|so trom throo d|ttoront sourcos:
1. 1hoy can ar|so trom ox|st|ng taxab|o tomporary d|ttoroncos. ln pr|nc|p|o, thoso d|ttoroncos shou|d rovorso |n tho samo account|ng por|od as
tho rovorsa| ot tho doduct|b|o tomporary d|ttoronco or |n tho por|od |n wh|ch a tax |oss |s oxpoctod to bo usod.
2. lt thoro aro |nsutt|c|ont taxab|o tomporary d|ttoroncos, tho ont|ty may rocogn|zo tho dotorrod tax assot whoro |t too|s that thoro w||| bo tuturo
taxab|o prot|ts, othor than thoso ar|s|ng trom taxab|o tomporary d|ttoroncos. 1hoso prot|ts shou|d ro|ato to tho samo taxab|o author|ty and
ont|ty.
8. 1ho ont|ty may bo ab|o to provo that |t can croato tax p|ann|ng opportun|t|os whoroby tho doduct|b|o tomporary d|ttoroncos can bo ut|||zod.
Whorovor tax p|ann|ng opportun|t|os aro cons|dorod, managomont must havo tho capab|||ty and ab|||ty to |mp|omont thom.
3|m||ar|y, an ont|ty can rocogn|zo a dotorrod tax assot ar|s|ng trom unusod tax |ossos or crod|ts whon |t |s probab|o that tuturo taxab|o prot|ts w|||
bo ava||ab|o aga|nst wh|ch thoso can bo ottsot. |owovor, tho ox|stonco ot curront tax |ossos |s probab|y ov|donco that tuturo taxab|o prot|t w||| not
bo ava||ab|o.
1ho ov|donco to suggost that tuturo taxab|o prot|ts aro ava||ab|o must bo ro|ovant and ro||ab|o. |or oxamp|o, tho ox|stonco ot s|gnod sa|os
contracts and a good prot|t h|story may prov|do such ov|donco. 1ho por|od tor wh|ch thoso tax |ossos can bo carr|od torward undor tho tax
rogu|at|ons must bo takon |nto account a|so.
PRAC1|CAL |N5|CE1
lsot|s 3A, a 3w|ss ont|ty, d|sc|osod |n |ts t|nanc|a| statomonts that |t has ava||ab|o tax |ossos ot 02 m||||on. Ot that amount, 40 m||||on
ro|atos to 0utch compan|os and 48 m||||on to 3w|ss compan|os. 1ho 0utch |ossos can bo carr|od torward |ndot|n|to|y, but tho 3w|ss
|ossos aro ava||ab|o tor on|y sovon yoars. 1ho ont|ty too|s that |t |s un||ko|y to ut|||zo a|| tho |ossos and, thorotoro, doos not rocogn|zo a
dotorrod tax assot.
Whoro an ont|ty has not boon ab|o to rocogn|zo a dotorrod tax assot bocauso ot |nsutt|c|ont ov|donco concorn|ng tuturo taxab|o prot|t, |t shou|d
rov|ow tho s|tuat|on at oach subsoquont statomont ot t|nanc|a| pos|t|on dato to soo whothor somo or a|| ot tho unrocogn|zod assot can bo
rocogn|zod.
CA5E 51uDY 0
Facta

As a consoquonco ot tho roorgan|zat|on, and a chango |n govornmont |og|s|at|on, tho tax author|t|os havo a||owod a rova|uat|on ot tho
noncurront assots ot 1osoy tor tax purposos to markot va|uo at 0ocombor 81, 20X0. 1horo has boon no chango |n tho carry|ng va|uos ot
tho noncurront assots |n tho t|nanc|a| statomonts.

1ho tax baso and tho carry|ng va|uos attor tho rova|uat|on aro as to||ows:
Othor taxab|o tomporary d|ttoroncos amountod to $1.2b m||||on at 0ocombor 81, 20X0. Assumo |ncomo tax |s pa|d at 80%. 1ho
dotorrod tax prov|s|on at 0ocombor 81, 20X0, had boon ca|cu|atod us|ng tho tax va|uos botoro rova|uat|on.

Roquirod

3how tho |mpact on tho t|nanc|a| statomonts ot tho abovo.

5oIution

1ho d|ttoroncos botwoon l|l3 carry|ng amounts tor tho noncurront assots and tax basos w||| roprosont tomporary d|ttoroncos. 1ho
gonora| pr|nc|p|o |n lA3 12, locomo 7oxos, |s that dotorrod tax ||ab|||t|os shou|d bo rocogn|zod tor a|| taxab|o tomporary d|ttoroncos. A
dotorrod tax assot shou|d bo rocogn|zod tor doduct|b|o tomporary d|ttoroncos, unusod tax |ossos and unusod tax crod|ts to tho oxtont
that |t |s probab|o that taxab|o prot|t w||| bo ava||ab|o aga|nst wh|ch tho doduct|b|o tomporary d|ttoroncos can bo ut|||zod.

A dotorrod tax assot cannot bo rocogn|zod whoro |t ar|sos trom nogat|vo goodw||| or tho |n|t|a| rocogn|t|on ot an assot/||ab|||ty othor than
|n a bus|noss comb|nat|on. 1ho carry|ng amount ot dotorrod tax assots shou|d bo rov|owod at oach statomont ot t|nanc|a| pos|t|on dato
and roducod to tho oxtont that |t |s no |ongor probab|o that sutt|c|ont taxab|o prot|t w||| bo ava||ab|o to a||ow tho bonot|t ot part or a|| ot that
dotorrod tax assot to bo ut|||zod. Any such roduct|on shou|d bo subsoquont|y rovorsod to tho oxtont that |t bocomos probab|o that
sutt|c|ont taxab|o prot|t w||| bo ava||ab|o.

1ho rocogn|t|on ot dotorrod tax assots w||| rosu|t |n tho rocogn|t|on ot |ncomo. 1h|s amount cannot bo roportod |n oqu|ty, as lA3 12 on|y
a||ows dotorrod tax to bo rocogn|zod |n oqu|ty |t tho corrospond|ng ontry |s rocogn|zod |n oqu|ty as wo||. 1h|s |s not tho caso |n th|s
s|tuat|on, as tho rova|uat|on was not rocogn|zod tor l|l3 purposos.
1ho dotorrod tax assot wou|d bo $0.7b m||||on 80% (|.o., $0.22b m||||on subjoct to thoro bo|ng sutt|c|ont taxab|o prot|t).

1ho dotorrod tax prov|s|on ro|at|ng to thoso assots wou|d havo boon
1ho |mpact on tho statomont ot comprohons|vo |ncomo wou|d bo s|gn|t|cant, as tho dotorrod tax prov|s|on ot $0.48b m||||on wou|d bo
ro|oasod and a dotorrod tax assot ot $0.22b m||||on crod|tod to |t.
1AX RA1E5
1ho tax ratos that shou|d bo usod to ca|cu|ato dotorrod tax aro tho onos that aro oxpoctod to app|y |n tho por|od whon tho assot |s roa||zod or tho
||ab|||ty sott|od. 1ho bost ost|mato ot th|s tax rato |s tho rato that has boon onactod or substant|a||y onactod by tho ond ot tho roport|ng por|od.
1ho tax rato that shou|d bo usod shou|d bo that wh|ch was app||cab|o to tho part|cu|ar tax that has boon |ov|od. |or oxamp|o, |t tax |s go|ng to bo
|ov|od on a ga|n on a part|cu|ar assot, thon tho rato ot tax ro|at|ng to thoso typos ot ga|n shou|d bo usod |n ordor to ca|cu|ato tho dotorrod taxat|on
amount.
D|5COuN1|NC
0otorrod tax assots and ||ab|||t|os shou|d not bo d|scountod. 1ho roason tor th|s |s gonora||y bocauso |t |s d|tt|cu|t to accurato|y prod|ct tho t|m|ng
ot tho rovorsa| ot oach tomporary d|ttoronco.
CA5E 51uDY 10
Facta

An ont|ty oporatos |n a jur|sd|ct|on whoro tho tax rato |s 80% tor rota|nod prot|ts and 40% tor d|str|butod prot|ts. Vanagomont has
doc|arod a d|v|dond ot $10 m||||on, wh|ch |s payab|o attor tho yoar-ond. A ||ab|||ty has not boon rocogn|zod |n tho t|nanc|a| statomonts at
tho yoar-ond. 1ho taxab|o prot|t botoro tax ot tho ont|ty was $100 m||||on.

Roquirod

Ca|cu|ato tho curront |ncomo tax oxponso tor tho ont|ty tor tho curront yoar.

5oIution

$80 m||||on (80% ot $100 m||||on). 1ho tax rato that shou|d bo app||od shou|d bo that ro|at|ng to rota|nod prot|ts.
CuRREN1 AND DEFERRED 1AX RECOCN|1|ON
Curront and dotorrod tax shou|d both bo rocogn|zod as |ncomo or oxponso and |nc|udod |n tho not prot|t or |oss tor tho por|od.
|owovor, to tho oxtont that tho tax ar|sos trom a transact|on or ovont that |s rocogn|zod outs|do prot|t or |oss, o|thor |n othor comprohons|vo
|ncomo or d|roct|y |n oqu|ty, thon tho tax that ro|atos to thoso |toms shou|d a|so bo rocogn|zod |n othor comprohons|vo |ncomo or d|roct|y |n oqu|ty.
|or oxamp|o, a chango |n tho carry|ng amount ot proporty duo to a rova|uat|on may |oad to tax consoquoncos, wh|ch w||| bo rocogn|zod |n othor
comprohons|vo |ncomo.
Any tax ar|s|ng trom a bus|noss comb|nat|on shou|d bo rocogn|zod as an |dont|t|ab|o assot or ||ab|||ty at tho dato ot acqu|s|t|on.
Curront tax assots and curront tax ||ab|||t|os shou|d bo ottsot |n tho statomont ot t|nanc|a| pos|t|on on|y |t tho ontorpr|so has tho |oga| r|ght and tho
|ntont|on to sott|o thoso on a not bas|s and thoy aro |ov|od by tho samo taxat|on author|ty.
1ho tax oxponso ro|at|ng to prot|t or |oss tor tho por|od shou|d bo prosontod on tho taco ot tho statomont ot comprohons|vo |ncomo, and tho
pr|nc|pa| o|omonts ot tho oxponso shou|d a|so bo d|sc|osod.
PRAC1|CAL |N5|CE1
lockwood lntornat|ona| A/3, a 0an|sh ont|ty, d|sc|osos that |n |ts t|nanc|a| statomonts w|th|n dotorrod tax assots, a sotott ot 08 m||||on
has takon p|aco, w|th|n dotorrod tax ||ab|||t|os, a sot-ott ot 87 m||||on has occurrod. 1horo aro corta|n cond|t|ons sot out |n lA3 12 as to
tho s|tuat|ons whoro sototts ot dotorrod tax assots and ||ab|||t|os can occur.
D|V|DEND5
1horo aro corta|n tax consoquoncos ot d|v|donds. ln somo countr|os, |ncomo taxos aro payab|o at d|ttoront ratos |t part ot tho not prot|t |s pa|d out
as d|v|dond.
lA3 12 roqu|ros d|sc|osuro ot tho potont|a| tax consoquoncos ot tho paymont ot d|v|donds.
1ho Ettoct ot 5haro-Baaod Paymont 1ranaactiona
ln somo jur|sd|ct|ons, tax ro||ot |s g|von on sharo-basod paymont transact|ons. A doduct|b|o tomporary d|ttoronco may ar|so botwoon tho carry|ng
amount, wh|ch w||| bo zoro and |ts tax baso wh|ch w||| bo tho tax ro||ot |n tuturo por|ods. A dotorrod tax assot may thorotoro bo rocogn|zod.
CA5E 51uDY 11
Facta

A paront has rocogn|zod |n |ts own t|nanc|a| statomonts a d|v|dond roco|vab|o ot $b00,000 trom an 80%-ownod subs|d|ary. 1ho d|v|dond
|s not taxab|o |n tho country |n wh|ch tho ont|ty oporatos.

Roquirod

Ca|cu|ato tho tomporary d|ttoronco ar|s|ng trom tho rocogn|t|on ot tho d|v|dond roco|vab|o |n tho accounts ot tho paront.

5oIution

Zoro. 1horo |s no tomporary d|ttoronco ar|s|ng |n rospoct ot tho d|v|dond, as tho carry|ng amount ot $b00,000 |s tho samo as tho tax
baso.
D|5CLO5uRE: KEY ELENEN15
|or d|sc|osuro, roqu|romonts to tho 3tandard aro qu|to oxtons|vo. |or oxamp|o:
1. lA3 12 roqu|ros an oxp|anat|on ot tho ro|at|onsh|p botwoon tax oxponso and account|ng prot|t.
2. 1ho bas|s on wh|ch tho tax rato has boon computod shou|d bo d|sc|osod, as wo|| as an oxp|anat|on ot any changos |n tho app||cab|o tax rato.
8. 1ho aggrogato curront and dotorrod tax that ro|atos to |toms that aro rocogn|zod d|roct|y |n oqu|ty and tho amount ot incomo tax roIating
to oach comonont ot othor comrohonaivo incomo shou|d bo d|sc|osod.
4. 1ho aggrogato amount ot tomporary d|ttoroncos assoc|atod w|th compan|os tor wh|ch no dotorrod tax ||ab|||t|os havo boon rocogn|zod
shou|d bo d|sc|osod.
b. 1ho not dotorrod tax ba|ancos ot tho curront and tho prov|ous por|od shou|d bo ana|yzod by typos ot tomporary d|ttoronco and typos ot
unusod tax |oss and unusod tax crod|ts.
lA3 12 sots out many othor d|sc|osuro roqu|romonts.
REV|5|ON OF |A5 12
1ho lA33 |s to attompt to roso|vo prob|oms |n pract|co undor lA3 12, locomo 7ox, w|thout chang|ng tho tundamonta| approach and ostons|b|y
w|thout |ncroas|ng d|vorgonco trom U3 GAAl.
1ho l|llC and lA33 statts havo doa|t w|th many |ssuos on lA3 12, wh|ch sooms to |nd|cato that |t |s a standard that |s d|tt|cu|t to app|y. lncomo
tax |s a|so troquont|y |dont|t|od as a sourco ot s|gn|t|cant roconc|||ng |toms tor U3-||stod toro|gn rog|strants app|y|ng l|l3.
1ho projoct or|g|na||y startod as a convorgonco projoct w|th U3 GAAl. 1ho Exposuro 0ratt ot an l|l3 to rop|aco lA3 12 was |ssuod |n Varch
2000. |owovor, tho lA33 has doc|dod to cons|dor a tundamonta| rov|ow ot tho account|ng tor |ncomo tax and has changod tho projoct objoct|vo |n
ordor to roso|vo prob|oms |n pract|co undor lA3 12.
ln Varch 2010, tho 3oard doc|dod that tho scopo ot tho projoct shou|d bo to cons|dor tho to||ow|ng pract|co |ssuos:
1. Uncorta|n tax pos|t|ons, but on|y attor tho rov|s|on ot lA3 87 |s t|na||zod
2. 0otorrod tax on proporty romoasuromont at ta|r va|uo
1ho 3oard a|so doc|dod to |ntroduco tho to||ow|ng proposa|s that woro gonora||y supportod by rospondonts to tho Exposuro 0ratt |ssuod |n
Varch 2000:
1. 1ho |ntroduct|on ot an |n|t|a| stop to cons|dor whothor tho rocovory ot an assot or sott|omont ot a ||ab|||ty w||| attoct taxab|o prot|t
2. 1ho rocogn|t|on ot a dotorrod tax assot |n tu|| and an ottsott|ng va|uat|on a||owanco to tho oxtont nocossary
8. Gu|danco on assoss|ng tho nood tor a va|uat|on a||owanco
4. Gu|danco on substant|vo onactmont
b. 1ho a||ocat|on ot curront and dotorrod taxos w|th|n a group that t||os a conso||datod tax roturn
1ho 3oard a|so |nd|catod that |t wou|d oxp|oro tho poss|b|||ty ot roso|v|ng tho |ssuo ot tho tax ottoct ot d|v|donds by corta|n ont|t|os such as roa|
ostato |nvostmont trusts and cooporat|vo soc|ot|os.
ln 3optombor 2010, tho lA33 pub||shod an Exposuro 0ratt, Loottoo 7ox. Rocovoty o Uooot|ylog Assots. 1h|s proposos an oxcopt|on to tho
norma| ru|o |n lA3 12 that moasuromont ot dotorrod tax |n rospoct ot an assot doponds on tho assot's oxpoctod mannor ot rocovory. 1ho proposa|
|ntroducos a robuttab|o prosumpt|on that corta|n assots moasurod at ta|r va|uo aro rocovorod ont|ro|y by sa|o. 1ho robuttab|o prosumpt|on app||os
to tho dotorrod tax ||ab|||t|os or assots that ar|so trom |nvostmont proport|os, proporty, p|ant, and oqu|pmont or |ntang|b|o assots that aro moasurod
on an ongo|ng bas|s us|ng tho ta|r va|uo modo| or rova|uat|on modo|. 1ho prosumpt|on cou|d bo robuttod on|y whon thoro |s c|oar ov|donco that tho
undor|y|ng assot's oconom|c bonot|ts w||| bo consumod by tho ont|ty throughout tho assot's oconom|c ||to.
CA5E 51uDY 12
Facta
5tatomont ot FinanciaI Poaition at January 1, 20X0
Local GAAP $m
lroporty, p|ant, and oqu|pmont 7,000
Goodw||| 8,000
lntang|b|o assots 2,000
||nanc|a| assots 0,000
1ota| noncurront assots 18,000
1rado and othor roco|vab|os 7,000
Othor roco|vab|os 1,000
Cash and cash oqu|va|onts 700
1ota| curront assots 0,800
1ota| assots 27,800
lssuod cap|ta| 0,000
lova|uat|on rosorvo 1,b00
lota|nod oarn|ngs 0,180
1ota| oqu|ty 18,080
lntorost-boar|ng |oans 8,000
1rado and othor payab|os 4,000
Emp|oyoo bonot|ts 1,000
Curront tax ||ab|||ty 70
0otorrod tax ||ab|||ty 000
1ota| ||ab|||t|os 18,070
1ota| oqu|ty and ||ab|||t|os 27,800
1. 1ax basos ot tho abovo assots and ||ab|||t|os aro tho samo as tho|r carry|ng amounts oxcopt tor
1ax base $m
lroporty, p|ant, and oqu|pmont 1,400
1rado roco|vab|os 7,b00
lntorost-boar|ng |oans 8,b00
||nanc|a| assots 7,000
1ho |ntang|b|o assots aro dovo|opmont costs that aro a||owod tor tax purposos whon tho cost |s |ncurrod. 1ho costs woro
|ncurrod |n 20X7.
lnc|udod |n trado and othor payab|os |s an accrua| tor componsat|on to bo pa|d to omp|oyoos. lt |s a||owod tor taxat|on
whon tho paymont |s mado and tota|s $200 m||||on.
2. 0ur|ng 20X8, a bu||d|ng was rova|uod. At 1anuary 1, 20X0, thoro was $1b00 m||||on roma|n|ng |n tho rova|uat|on rosorvo |n
rospoct ot th|s bu||d|ng.
8. 1ho to||ow|ng adjustmonts to tho t|nanc|a| statomonts w||| havo to bo mado to comp|y w|th l|l3 1, lltst-7lmo Aooptloo o llR5,
on 1anuary 1, 20X0:
lntang|b|o assots ot $400 m||||on do not qua||ty tor rocogn|t|on undor l|l3 1.
1ho t|nanc|a| assots aro a|| c|ass|t|od as at ta|r va|uo through prot|t or |oss and tho|r ta|r va|uo |s $0,b00 m||||on, wh|ch |s to
bo |nc|udod |n tho l|l3 accounts.
A pons|on ||ab|||ty ot $b0 m||||on |s to bo rocogn|zod undor l|l3 1 that was not rocogn|zod undor |oca| gonora||y
accoptod account|ng pr|nc|p|os (GAAl). 1ho tax baso ot tho ||ab|||ty |s zoro.
4. 1ho ont|ty |s ||ko|y to bo vory prot|tab|o |n tho tuturo.
Roquirod

Ca|cu|ato tho dotorrod tax prov|s|on at 1anuary 1, 20X0, show|ng tho amount ot tho adjustmont roqu|rod to tho dotorrod tax prov|s|on and any
amounts to bo chargod to rova|uat|on rosorvo. (Assumo a tax rato ot 80%.)

5oIution
CA5E 51uDY 18
Facta

East |s a pr|vato ont|ty, and |t has rocont|y acqu|rod two 100% ownod subs|d|ar|os, Wost and lorth. Wost and lorth aro thomso|vos
pr|vato ont|t|os. East has a bus|noss p|an whoroby |n a tow yoars |t |s go|ng to acqu|ro a stock oxchango ||st|ng tor |ts sharos and cap|ta|.
East acqu|rod Wost on 1u|y 1, 20X0. Whon East acqu|rod Wost, |t had unusod tax |ossos. On 1u|y 1, 20X0, |t soomod that Wost wou|d
havo sutt|c|ont taxab|o prot|t |n tho tuturo to roa||zo tho dotorrod tax assot croatod by thoso |ossos. |owovor, subsoquont ovonts havo
shown that tho tuturo taxab|o prot|t w||| not bo sutt|c|ont to roa||zo a|| ot tho unusod tax |ossos.

Wost has mado a gonora| |mpa|rmont chargo ot $4 m||||on aga|nst |ts tota| accounts roco|vab|o. Wost gots tax ro||ot on |mpa|rmont ot
spoc|t|c accounts roco|vab|o. 3ocauso ot tho curront oconom|c s|tuat|on, Wost too|s that |mpa|rmont chargos w||| |ncroaso |n tho tuturo.

Wost has |nvostmonts that aro va|uod at ta|r va|uo |n tho statomont ot t|nanc|a| pos|t|on and any ga|n or |oss |s takon to tho statomont ot
comprohons|vo |ncomo. 1ho ga|ns and |ossos bocomo taxab|o whon tho |nvostmonts aro so|d.

East acqu|rod lorth on 1u|y 1, 20X0, tor $10 m||||on, whon tho ta|r va|uo ot tho not assots was $8 m||||on. 1ho tax baso ot tho not assots
acqu|rod was $7 m||||on. Any |mpa|rmont |oss on goodw||| |s not a||owod as a doduct|on |n dotorm|n|ng taxab|o prot|t.

0ur|ng tho curront yoar, lorth has so|d goods to East ot $10 m||||on. lorth has mado a prot|t ot 20% on tho so|||ng pr|co on tho
transact|on. East has $b m||||on worth ot thoso goods rocordod |n |ts statomont ot t|nanc|a| pos|t|on at tho curront yoar-ond.

1ho d|roctors ot East havo doc|dod that dur|ng tho por|od up to tho dato thoy |ntond to ||st tho sharos ot tho ont|ty, thoy w||| roa||zo tho
oarn|ngs ot tho subs|d|ary, lorth, through d|v|dond paymonts. 1ax |s payab|o on any rom|ttanco ot d|v|donds to tho ho|d|ng ont|ty. ln tho
curront yoar no d|v|donds havo boon doc|arod or pa|d.

1axat|on |s payab|o tor ||stod ont|t|os at 40% and tor pr|vato ont|t|os at 8b% |n tho jur|sd|ct|on.

Roquirod

lroparo a momorandum that sots out tho dotorrod tax |mp||cat|ons ot tho abovo |ntormat|on tor tho East Group.

5oIution

1ho croat|on ot a group through tho purchaso ot subs|d|ar|os dur|ng tho por|od has a major |mpact on tho dotorrod taxat|on chargo.
0otorrod taxat|on |s |ookod at trom tho po|nt ot v|ow ot tho group as a who|o. lnd|v|dua| compan|os may not havo sutt|c|ont tuturo taxab|o
prot|ts to ottsot any unusod tax |ossos, but |n tho group s|tuat|on, a dotorrod tax assot may bo rocogn|zod |t thoro aro sutt|c|ont taxab|o
prot|ts w|th|n tho group.

0|ttoroncos ar|so botwoon tho ta|r va|uos ot tho not assots bo|ng rocogn|zod and tho|r tax basos. ln tho caso ot tho acqu|s|t|on ot lorth,
dotorrod taxat|on w||| bo ca|cu|atod on tho bas|s ot tho d|ttoronco botwoon tho ta|r va|uo ot tho not assots ot $8 m||||on and tho tax baso ot
$7 m||||on, g|v|ng taxab|o tomporary d|ttoroncos ot $1 m||||on.

lo prov|s|on |s roqu|rod tor dotorrod taxat|on rogard|ng tho tomporary d|ttoronco ar|s|ng on tho rocogn|t|on ot non-tax-doduct|b|o
goodw||| ot $2 m||||on, but goodw||| w||| |ncroaso by tho dotorrod tax ar|s|ng on tho acqu|s|t|on ot lorth.

East |s hop|ng to ach|ovo a stock oxchango ||st|ng ot |ts sharos |n tho noar tuturo. 1h|s may attoct tho tax rato usod to ca|cu|ato dotorrod
tax. 1ho curront tax rato tor pr|vato compan|os |s 8b%, tor pub||c compan|os, |t |s 40%. 1horotoro, a doc|s|on w||| havo to bo mado as to
whothor tho tomporary d|ttoroncos aro go|ng to rovorso at tho h|ghor tax rato, |t so, dotorrod tax w||| bo prov|dod tor at th|s rato.

ln tho caso ot Wost, tho ont|ty has |nvostmonts that aro statod at ta|r va|uo |n tho statomont ot t|nanc|a| pos|t|on. 1ho ga|ns and |ossos aro
taxod whon tho |nvostmonts aro so|d, thorotoro, a tomporary d|ttoronco w||| ar|so, as tho tax troatmont |s d|ttoront trom tho account|ng
troatmont. 1ho tax baso |s not adjustod tor any surp|us on tho |nvostmonts. 1horotoro, tho d|ttoronco botwoon tho carry|ng amount ot tho
|nvostmonts and tho tax baso w||| g|vo r|so to a dotorrod tax ||ab|||ty. 1ho rosu|tant dotorrod tax oxponso w||| bo chargod aga|nst tho
statomont ot comprohons|vo |ncomo, not oqu|ty, as tho surp|us on tho |nvostmonts has a|roady gono to tho statomont ot comprohons|vo
|ncomo.

ln tho caso ot tho |mpa|rmont ot trado roco|vab|os, bocauso tho tax ro||ot |s ava||ab|o on|y on tho spoc|t|c |mpa|rmont ot an account, a
doduct|b|o tomporary d|ttoronco ar|sos that roprosonts tho d|ttoronco botwoon tho carry|ng amount ot tho trado roco|vab|os and tho|r tax
baso, wh|ch |n th|s caso w||| bo zoro. lt appoars that tho |mpa|rmont |oss |s ||ko|y to |ncroaso |n tho tuturo. 1horotoro, |t |s un||ko|y that tho
tomporary d|ttoronco w||| actua||y rovorso soon. lt doos not attoct tho tact that a prov|s|on tor dotorrod tax ought to bo mado. A dotorrod
tax assot w||| ar|so at tho va|uo ot tho d|ttoronco botwoon tho tax baso and carry|ng va|uo ot tho trado roco|vab|os at tho tax rato
app||cab|o tor tho East Group ot compan|os. 1h|s |s subjoct to tho gonora| ru|o |n lA3 12 that thoro w||| bo sutt|c|ont taxab|o prot|ts
ava||ab|o |n tho tuturo aga|nst wh|ch th|s doduct|b|o tomporary d|ttoronco can bo ottsot.

East has unusod tax |ossos brought torward. 1hoso can croato a dotorrod taxod assot. |owovor, dotorrod tax assots shou|d bo
rocogn|zod on|y to tho oxtont that thoy can bo rocovorod |n tho tuturo. 1hus tho dotorrod tax assots must bo capab|o ot bo|ng roa||zod. lt a
dotorrod tax assot can bo roa||zod, thon |t can bo rocogn|zod tor that amount. Gonora||y spoak|ng, tho tuturo roa||zat|on ot tho dotorrod
tax assot |s dopondont on tho ox|stonco ot sutt|c|ont taxab|o prot|t ot tho appropr|ato typo bo|ng ava||ab|o |n tho tuturo. 1ho appropr|ato
typo wou|d norma||y bo taxab|o oporat|ng prot|t or taxab|o ga|n. ln gonora|, su|tab|o taxab|o prot|ts w||| bo croatod on|y |n tho samo
taxab|o ont|ty and w||| bo assossod by tho samo taxat|on author|ty as tho |ncomo. lt |s poss|b|o that tax p|ann|ng opportun|t|os may bo
ava||ab|o to tho group |n ordor that thoso unro||ovod tax |ossos may bo ut|||zod. 1ax p|ann|ng opportun|t|os shou|d bo cons|dorod on|y |n
dotorm|n|ng tho oxtont to wh|ch a dotorrod tax assot w||| bo roa||zod. 1hoy shou|d novor bo usod to roduco a dotorrod tax ||ab|||ty. Any
assot rocogn|zod as a rosu|t ot |mp|omont|ng a tax p|ann|ng stratogy shou|d bo roducod by tho costs ot |mp|omont|ng |t. ln th|s caso, any
dotorrod tax assot ar|s|ng shou|d bo rocogn|zod togothor w|th tho corrospond|ng adjustmont to goodw|||.

lntorgroup prot|ts aro o||m|natod on conso||dat|on. 1horotoro, $1 m||||on shou|d bo takon trom tho va|uo ot |nvontory |n tho group
statomont ot t|nanc|a| pos|t|on at yoar-ond. |owovor, bocauso an oqu|va|ont adjustmont has not boon mado tor tax purposos, a
tomporary d|ttoronco w||| ar|so botwoon tho carry|ng amount ot tho |nvontory |n tho group accounts and |ts va|uo |n East's statomont ot
t|nanc|a| pos|t|on. 1ho tax baso ot tho |nvontory w||| bo $b m||||on and tho carry|ng va|uo w||| bo $4 m||||on, g|v|ng r|so to a tomporary
d|ttoronco ot $1 m||||on.

1omporary d|ttoroncos can ar|so botwoon tho carry|ng amount ot tho paront's |nvostmont |n a subs|d|ary and |ts tax baso. Otton th|s
d|ttoronco |s causod by tho und|str|butod oarn|ngs |n tho subs|d|ary. 1h|s tomporary d|ttoronco can bo d|ttoront trom tho ono that ar|sos
|n tho soparato t|nanc|a| statomonts ot tho paront, whoro tho paront carr|os |ts |nvostmont at cost |oss |mpa|rmont or at a rova|uod
amount. lA3 12 roqu|ros rocogn|t|on ot a|| taxab|o tomporary d|ttoroncos assoc|atod w|th tho paront's |nvostmonts |n |ts subs|d|ar|os,
oxcopt whon tho paront can actua||y contro| tho t|m|ng ot tho rovorsa| ot tho tomporary d|ttoronco and |t |s probab|o that tho tomporary
d|ttoronco w||| not rovorso |n tho noar tuturo. 1ho prov|s|on |s roqu|rod |t tho paront ont|ty cannot contro| tho t|m|ng ot tho rom|ttanco ot
und|str|butod prot|ts or |t |s probab|o a rom|ttanco w||| tako p|aco |n tho noar tuturo.

1ho paront, East, appoars to bo rocovor|ng tho carry|ng va|uo ot |ts |nvostmont |n lorth through tho paymont ot d|v|donds. 1ho mothod ot
rocovor|ng tho va|uo ot tho |nvostmont |n tho subs|d|ary |s obv|ous|y undor contro| ot tho paront ont|ty. 3ocauso tho paymont ot d|v|donds
|s undor tho contro| ot East, lA3 12 wou|d not roqu|ro tho rocogn|t|on ot a dotorrod tax ||ab|||ty |n rospoct ot tho und|str|butod prot|ts ot
lorth.
CA5E 51uDY 14
Facta

ln accordanco w|th nat|ona| rogu|at|on, |ront|or app||od l|l3 rocogn|t|on and moasuromont pr|nc|p|os |n |ts |ntor|m conso||datod
t|nanc|a| statomonts tor tho t|rst s|x months ot 20X0 and |oca| GAAl tor prosontat|on and d|sc|osuro. |ront|or dovo|ops and so||s
sottwaro.

3|nco 20X4, |ront|or has |ncurrod substant|a| annua| |ossos oxcopt tor 20X7 and 20X8, whon |t mado a sma|| prot|t botoro tax. ln thoso
two yoars, most ot tho prot|t cons|stod ot |ncomo rocogn|zod on rova|uat|on ot a dotorrod tax assot. |ront|or announcod oar|y |n 20X0
that |t ant|c|patod substant|a| growth and prot|t. lator |n tho yoar, |ront|or announcod that tho oxpoctod prot|t wou|d not bo ach|ovod and
that, |nstoad, a substant|a| |oss wou|d bo |ncurrod. |ront|or had a h|story ot roport|ng s|gn|t|cant nogat|vo var|ancos trom |ts ant|c|patod
rosu|ts.

|ront|or's rocogn|zod dotorrod tax assots havo boon |ncroas|ng yoar on yoar.

|ront|or's dotorrod tax assots cons|st pr|mar||y ot unusod tax |ossos that can bo carr|od torward but aga|nst wh|ch thoro aro v|rtua||y no
taxab|o tomporary d|ttoroncos to ottsot.

Roquirod

0|scuss whothor |ront|or shou|d bo rocogn|z|ng dotorrod tax assots.

5oIution

1ho rocogn|t|on ot dotorrod tax assots on |ossos carr|od torward |s not |n accordanco w|th lA3 12. |ront|or |s not ab|o to prov|do
conv|nc|ng ov|donco to onsuro that |t wou|d bo ab|o to gonorato sutt|c|ont taxab|o prot|ts aga|nst wh|ch tho unusod tax |ossos cou|d bo
ottsot. |ront|or doos not havo sutt|c|ont taxab|o tomporary d|ttoroncos aga|nst wh|ch tho unusod tax |ossos can bo ottsot. |ront|or's
act|v|t|os havo gonoratod o|thor s|gn|t|cant |ossos or vory m|n|ma| prot|ts, thoy havo novor producod s|gn|t|cant protax prot|ts. 1ho
doc|s|on |s basod ma|n|y on tho to||ow|ng:
1. ||story ot |ront|or's protax prot|ts
2. lrov|ous|y pub||shod budgot oxpoctat|ons and roa||zod rosu|ts |n tho past
8. |ront|or's oxpoctat|ons tor tho noxt tow yoars
||stor|ca||y, substant|a| nogat|vo var|ancos aroso botwoon budgotod and roa||zod rosu|ts. A|so, |n 20X0, |ront|or had announcod that |t
wou|d not ach|ovo tho oxpoctod prot|t, but rathor wou|d rocord a substant|a| |oss. 1ho |ossos aro not ot a typo that cou|d c|oar|y bo
attr|butod to oxtorna| ovonts that m|ght not bo oxpoctod to rocur.
5|Ca
3lC 21, locomo 7oxos-Rocovoty o Rovo|ooo Nooooptoclob|o Assots, doa|s w|th tho s|tuat|on whoro a nondoproc|ab|o assot (|and) |s carr|od
at rova|uat|on. 1ho carry|ng amount ot such an assot |s cons|dorod not to bo rocovorod through usago. 1horotoro, 3lC 21 says that tho dotorrod tax
||ab|||ty or assot ar|s|ng trom rova|uat|on |s moasurod basod on tho tax consoquoncos ot tho sa|o ot tho assot rathor than through uso. 1h|s may
rosu|t |n tho uso ot tho tax rato, wh|ch ro|atos to cap|ta| prot|ts rathor than tho rato app||cab|o to oarn|ngs.
3lC 2b, locomo 7oxos-Cboogos lo tbo 7ox 5totos o oo Eotlty ot lts 5botobo|oots, statos that a chango |n tax status doos not g|vo r|so to
|ncroasos or docroasos |n tho protax amounts rocogn|zod d|roct|y |n oqu|ty. 1horotoro, 3lC 2b conc|udos that tho curront and dotorrod tax
consoquoncos ot tho chango |n tax status shou|d bo |nc|udod |n not prot|t or |oss tor tho por|od. lt a transact|on or ovont doos rosu|t |n a d|roct crod|t
or chargo to oqu|ty, tor oxamp|o on tho rova|uat|on ot llE undor lA3 10, tho tax consoquonco wou|d st||| bo rocogn|zod |n oqu|ty.
EX1RAC15 FRON PuBL|5EED F|NANC|AL 51A1ENEN15
J. 5A|N5BuRY PLC FinanciaI 5tatomonta to Narch 21, 2000

Dotorrod taxation

1ho movomonts |n dotorrod |ncomo tax assots and ||ab|||t|os dur|ng tho t|nanc|a| yoar, pr|or to tho ottsott|ng ot tho ba|ancos w|th|n tho samo
tax jur|sd|ct|on, aro shown bo|ow.
51ANDARD CEAR1ERED PLC~AnnuaI Roort, 2000

1axation

0otorrod tax |s prov|dod |n tu||, us|ng tho ||ab|||ty mothod, on tomporary d|ttoroncos ar|s|ng botwoon tho tax basos ot assots and ||ab|||t|os
and tho|r carry|ng amounts |n tho conso||datod t|nanc|a| statomonts. 0otorrod |ncomo tax |s dotorm|nod us|ng tax ratos (and |aws) that havo
boon onactod or substant|a||y onactod as at tho statomont ot t|nanc|a| pos|t|on dato, and that aro oxpoctod to app|y whon tho ro|atod
dotorrod |ncomo tax assot |s roa||zod or tho dotorrod |ncomo tax ||ab|||ty |s sott|od.

0otorrod tax assots aro rocogn|zod whoro |t |s probab|o that tuturo taxab|o prot|t w||| bo ava||ab|o aga|nst wh|ch tho tomporary d|ttoroncos
can bo ut|||zod.

lncomo tax payab|o on prot|ts |s basod on tho app||cab|o tax |aw |n oach jur|sd|ct|on and |s rocogn|zod as an oxponso |n tho por|od |n wh|ch
prot|ts ar|so. 1ho tax ottocts ot |ncomo tax |ossos ava||ab|o tor carrytorward aro rocogn|zod as an assot whon |t |s probab|o that tuturo
taxab|o prot|ts w||| bo ava||ab|o aga|nst wh|ch thoso |ossos can bo ut|||zod.

Curront and dotorrod tax ro|at|ng to |toms wh|ch aro chargod or crod|tod d|roct|y to oqu|ty, |s crod|tod or chargod d|roct|y to oqu|ty and |s
subsoquont|y rocogn|zod |n tho statomont ot comprohons|vo |ncomo togothor w|th tho curront or dotorrod ga|n or |oss.

5ootco. 5tooooto Cbottotoo PLC ooooo| topott 2000. O 5tooooto Cbottotoo PLC
NuL1|PLE-CEO|CE OuE51|ON5
1. A subs|d|ary has so|d goods cost|ng $1.2 m||||on to |ts paront tor $1.4 m||||on. A|| ot tho |nvontory |s ho|d by tho paront at yoar-ond. 1ho subs|d|ary
|s 80% ownod, and tho paront and subs|d|ary oporato |n d|ttoront tax jur|sd|ct|ons. 1ho paront pays taxat|on at 80%, and tho subs|d|ary pays
taxat|on at 80%. Ca|cu|ato any dotorrod tax assot that ar|sos on tho sa|o ot tho |nvontory trom tho subs|d|ary ont|ty to tho paront.
a. $ 00,000
b. $ 200,000
c. $ 48,000
d. $ 80,000
2. An ont|ty |ssuod a convort|b|o bond on 1anuary 1, 20X4 that maturos |n t|vo yoars. 1ho bond can bo convortod |nto ord|nary sharos at any t|mo.
1ho ont|ty has ca|cu|atod that tho ||ab|||ty and oqu|ty compononts ot tho bond aro $8 m||||on tor tho ||ab|||ty componont and $1 m||||on tor tho oqu|ty
componont, g|v|ng a tota| amount ot tho bond ot $4 m||||on. 1ho |ntorost rato on tho bond |s 0%, and |oca| tax |og|s|at|on a||ows a tax doduct|on tor
tho |ntorost pa|d |n cash. Ca|cu|ato tho dotorrod tax ||ab|||ty ar|s|ng on tho bond at tho yoar ond|ng 0ocombor 81, 20X4. 1ho |oca| tax rato |s 80%.
a. $1.2 m||||on.
b. $000,000
c. $800,000
d. $4 m||||on.
8. An ont|ty |s undortak|ng a roorgan|zat|on. Undor tho p|an, part ot tho ont|ty's bus|noss w||| bo domorgod and w||| bo transtorrod to a soparato
ont|ty, Ent|ty Z. 1h|s a|so w||| |nvo|vo a transtor ot part ot tho pons|on ob||gat|on to Ent|ty Z. 3ocauso ot th|s, Ent|ty Z w||| havo a doduct|b|o tomporary
d|ttoronco at |ts yoar-ond ot 0ocombor 81, 20X4. lt |s ant|c|patod that Ent|ty Z w||| bo |oss-mak|ng tor tho t|rst tour yoars ot |ts ox|stonco, but
thoroattor |t w||| bocomo a prot|tab|o ont|ty. 1ho tuturo torocastod prot|t |s basod on ost|matos ot sa|os to |ntorgroup compan|os. 3hou|d Ent|ty Z
rocogn|zo tho doduct|b|o tomporary d|ttoronco as a dotorrod tax assot?
a. 1ho ont|ty shou|d rocogn|zo a dotorrod tax assot.
b. Vanagomont shou|d not rocogn|zo a dotorrod tax assot, as tuturo prot|tab|||ty |s not corta|n.
c. 1ho ont|ty shou|d rocogn|zo a dotorrod tax assot |t tho authont|c|ty ot tho budgotod prot|ts can bo vor|t|od.
d. 1ho ont|ty shou|d rocogn|zo a dotorrod tax assot |t tho |ntorgroup prot|t |n tho budgotod prot|t |s o||m|natod.
4. An ont|ty has rova|uod |ts proporty and has rocogn|zod tho |ncroaso |n tho rova|uat|on rosorvo |n |ts t|nanc|a| statomonts. 1ho carry|ng va|uo ot tho
proporty was $8 m||||on, and tho rova|uod amount was $10 m||||on. 1ax baso ot tho proporty was $0 m||||on. ln tho country, tho tax rato app||cab|o to
prot|ts |s 8b% and tho tax rato app||cab|o to prot|ts mado on tho sa|o ot proporty |s 80%. Whoro w||| tho tax ||ab|||ty bo rocogn|zod and at what
amount?
a. ln tho statomont ot comprohons|vo |ncomo at $000,000.
b. ln oqu|ty at $1.2 m||||on.
c. ln tho statomont ot rocogn|zod |ncomo and oxponso at $1.4 m||||on.
d. ln rota|nod oarn|ngs at $700,000.
5. 1ho curront ||ab|||t|os ot an ont|ty |nc|udo t|nos and pona|t|os tor onv|ronmonta| damago. 1ho t|nos and pona|t|os aro statod at $10 m||||on. 1ho
t|nos and pona|t|os aro not doduct|b|o tor tax purposos. What |s tho tax baso ot tho t|nos and pona|t|os?
a. $10 m||||on.
b. $8 m||||on.
c. $18 m||||on.
d. Zoro.
0. An ont|ty acqu|rod p|ant and oqu|pmont tor $2 m||||on on 1anuary 1, 20X0. 1ho assot |s doproc|atod at 2b% a yoar on tho stra|ght-||no bas|s, and
|oca| tax |og|s|at|on porm|ts tho managomont to doproc|ato tho assot at 80% a yoar tor tax purposos. Ca|cu|ato any dotorrod tax ||ab|||ty wh|ch m|ght
ar|so on tho p|ant and oqu|pmont at 0ocombor 81, 20X0, assum|ng a tax rato ot 80%.
a. $ b00,000
b. $ 000,000
c. $ 80,000
d. $ 2b,000
7. An ont|ty has spont $10 m||||on |n dovo|op|ng a now product. 1hoso costs moot tho dot|n|t|on ot an |ntang|b|o assot undor lA3 88 and havo boon
rocogn|zod |n tho statomont ot t|nanc|a| pos|t|on. loca| tax |og|s|at|on a||ows thoso costs to bo doductod tor tax purposos whon thoy aro |ncurrod
and, thorotoro, thoy havo boon rocogn|zod as an oxponso tor tax purposos. At tho yoar-ond tho |ntang|b|o assot |s doomod to bo |mpa|rod by $8
m||||on. What |s tho tax baso ot tho |ntang|b|o assot at tho account|ng yoar-ond?
a. $10 m||||on.
b. $8 m||||on.
c. $7 m||||on.
d. Zoro
8. Wh|ch ot tho to||ow|ng oxamp|os wou|d not g|vo r|so to a tomporary d|ttoronco?
a. lovonuo trom |nsta||mont sa|os rocogn|zod undor tho |nsta||mont mothod tor taxat|on.
b. locogn|t|on ot goodw||| |n a bus|noss comb|nat|on.
c. 0oproc|at|on usod tor account|ng purposos wh||st an acco|oratod mothod |s usod tor tax purposos.
d. Warranty costs rocogn|zod tor account|ng purposos but not rocogn|zod tor tax purposos unt|| pa|d.
0. Ent|ty X |s |nvo|vod |n a bus|noss acqu|s|t|on on 1anuary 1, 20X0. At tho dato ot acqu|s|t|on tho dotorrod tax assots woro $800,000. On 1anuary
1, 20X0, tho d|roctors cons|dorod that roa||zat|on ot tho dotorrod tax assots woro not probab|o. What ottoct wou|d th|s doc|s|on havo on tho
a||ocat|on ot tho purchaso pr|co?
a. 1ho unrocogn|zod dotorrod tax wou|d bo a||ocatod to goodw|||, wh|ch wou|d |ncroaso by $800,000.
b. 1ho va|uo ot goodw||| wou|d docroaso by $800,000.
c. 1horo wou|d bo no ottoct on goodw|||.
d. logat|vo goodw||| ot $800,000 wou|d ar|so.
10. An ont|ty has ca|cu|atod |ts dotorrod tax prov|s|on as $7 m||||on. lt too|s that |t d|scount|ng |s takon |nto account, tho prov|s|on wou|d on|y nood to
bo $b m||||on. 1ho prov|s|on doos not tako |nto account a d|v|dond roco|vab|o, wh|ch has boon rocogn|zod |n |ts own t|nanc|a| statomonts tor $1.b
m||||on trom an 80%-ownod subs|d|ary. 1ho d|v|dond |s not taxab|o |n tho country |n wh|ch tho ont|ty oporatos. 1ho tax rato |s 80%. What |s tho
dotorrod tax prov|s|on |n tho t|nanc|a| statomonts ot tho ont|ty?
a. $b m||||on.
b. $7 m||||on.
c. $b.4b m||||on.
d. $7.4b m||||on.
11. An ont|ty has tho to||ow|ng assots and ||ab|||t|os rocordod |n |ts statomont ot t|nanc|a| pos|t|on at 0ocombor 81, 20X0: proporty, p|ant, and
oqu|pmont has a carry|ng va|uo ot $1b m||||on, |nvontory has a carry|ng va|uo ot $7 m||||on, trado roco|vab|os has a carry|ng va|uo ot $0.b m||||on,
trado payab|os has a carry|ng va|uo ot $4 m||||on, and cash has a carry|ng va|uo ot $2.b m||||on. 1ho va|uo tor tax purposos ot proporty, p|ant, and
oqu|pmont |s $12 m||||on. 1ho ont|ty has mado a prov|s|on tor |nvontory obso|osconco ot $1.b m||||on, wh|ch |s not a||owab|o tor tax purposos unt||
tho |nvontory |s so|d. A gonora| |mpa|rmont chargo aga|nst trado roco|vab|os ot $1 m||||on has boon mado. 1h|s chargo w||| not bo a||owod |n tho
curront yoar tor tax purposos but w||| bo |n tho tuturo. 1ho tax basos ot curront ||ab|||t|os and cash aro tho samo as tho|r carry|ng amounts. lncomo
tax pa|d |s at 80%. Ca|cu|ato tho dotorrod tax prov|s|on at 0ocombor 81, 20X0.
a. $1.8 m||||on.
b. $1.0b m||||on.
c. $1.0b m||||on.
d. $1b0,000
12. An ont|ty has acqu|rod a subs|d|ary on 1u|y 1, 20X0. Goodw||| ot $24 m||||on has ar|son on tho purchaso ot th|s subs|d|ary. 1h|s subs|d|ary has
doduct|b|o tomporary d|ttoroncos ot $10 m||||on and |t |s probab|o that tuturo taxab|o prot|ts aro go|ng to bo ava||ab|o tor tho ottsot ot th|s doduct|b|o
tomporary d|ttoronco. 1ho tax rato dur|ng 20X0 |s 80%. 1ho doduct|b|o tomporary d|ttoronco has not boon takon |nto account |n ca|cu|at|ng
goodw|||. What |s tho t|guro tor goodw||| that shou|d bo rocogn|zod |n tho conso||datod statomont ot t|nanc|a| pos|t|on ot tho ho|d|ng company?
a. $21 m||||on.
b. $14 m||||on.
c. $10 m||||on.
d. $24 m||||on.
Chator 0
1. a
2. c
8. b
4. b
b. a
0. c
7. d
8. b
0. a
10. b
11. d
12. a
($4m - $8m) 80%