prepare any necessary entries in e s financial statements as at dec 31 for the years 613319

Recognition of deferred tax asset in profit or loss on the basis of tax liability accounted for outside profit or loss

An entity that pays tax at 30% has brought forward unrecognised deferred tax assets (with an indefinite life) totalling £1 million, relating to trading losses accounted for in profit or loss in prior periods. On 1 January 2013 it invests £100,000 in government bonds, which it holds until they are redeemed for the same amount on maturity on 31 December 2016. For tax purposes, any gain made by the entity on disposal of the bonds can be offset against the brought forward tax losses. The tax base of the bonds remains £100,000 at all times.

The entity elects to account for the bonds as available-for-sale and therefore carries them at fair value. Over the period to maturity the fair value of the bonds at each balance sheet date (31 December) is as follows:

Under IAS 39 the movements in value would all be accounted for in other comprehensive income (‘OCI’) – see at Taken in isolation, the valuation gains in 2012 to 2014 would give rise to a deferred tax liability (at 30%) of £3,000 (2012), £4,500 (2013) and £6,000 (2014). However, these liabilities arise from taxable temporary differences that can be offset against the losses brought forward (see above), and accordingly the (equal and opposite) deferred tax liability and deferred tax asset are offset in the balance sheet . This raises the question as to whether there should be either:

(a) no tax charge or credit in either profit or loss or OCI in any of the periods affected; or

(b) in each period, a deferred tax charge in OCI (in respect of the taxable temporary difference arising from valuation gains on the bonds) and deferred tax income in profit or loss (representing the recognition of the previously unrecognised deferred tax asset).

In our view, the treatment in (b) should be followed. The fact that no deferred tax is presented in the balance sheet arises from the offset of a deferred tax asset and deferred tax liability – it does not imply that there is no deferred tax. Moreover, although the recognition of the deferred tax asset is possible only as the result of the recognition of a deferred tax liability arising from a transaction accounted for in OCI, the asset itself relates to a trading loss previously accounted for in profit or loss. Accordingly, the deferred tax credit arising from the recognition of the asset is properly accounted for in profit or loss.