Inception of loan with non-deductible issue costs A borrowing entity paying tax at 30% records a loan at £9.5 million, being the proceeds received of £10 million (which equal the amount due at maturity), less transaction costs of £500,000, which not deductible for tax purposes either in the period when the loan is first recognised or subsequently. For financial reporting purposes, IAS 39 requires the […]

Purchase of PP& subject to tax-free government grant An entity acquires an item of PP& for €1 million subject to a tax free government grant of €350,000. The asset is also fully-tax deductible (at €1 million). IAS 20 permits the grant to be accounted for either as deferred income or by deduction from the cost of the asset. Whichever treatment is followed, a deductible temporary […]

Impairment of non-deductible goodwill Goodwill of £10 million (not tax-deductible) arose on a business combination in 2006. In accordance with IAS 12 no deferred tax liability was recognised on the taxable temporary difference of £10 million that arose on initial recognition of the goodwill. During the year ended 31 December 2013, following an impairment test, the carrying amount of the goodwill is reduced to £6 […]

Depreciation of non-deductible PP& During the year ended 31 March 2014 an entity acquires an item of PP& for €1 million which it intends to use for 20 years, with no anticipated residual value. No tax deductions are available for the asset. In accordance with IAS 12 no deferred tax liability was recognised on the taxable temporary difference of €1 million that arises on initial […]

Tax deduction for land An entity that pays tax at 35% acquires land with a fair value of €5 million. Tax deductions of €100,000 per year may be claimed for the land for the next 30 years (i.e. the tax base of the land is €3 million). In accordance with IAS 12, no deferred tax liability is recognised on the taxable temporary difference of €2 […]

Asset non-deductible at date of acquisition later becomes deductible During the year ended 31 March 2014 an entity acquired an item of PP& for €1 million which it intends to use for 20 years, with no anticipated residual value. No tax deductions were available for the asset. In accordance with IAS 12 no deferred tax liability was recognised on the taxable temporary difference of €1 […]

Compound financial instrument An entity issues a zero-coupon convertible loan of €1,000,000 on 1 January 2014 repayable at par on 1 January 2017. In accordance with IAS 32, the entity classifies the instrument”s liability component as a liability and the equity component as equity. The entity assigns an initial carrying amount of €750,000 to the liability component of the convertible loan and €250,000 to the […]

Acquired subsidiary accounted for as asset purchase An entity (P) acquires a subsidiary (S), whose only asset is a property, for $10 million. The transaction is accounted for as the acquisition of a property rather than as a business combination. The tax base of the property is $4 million and its carrying value in the financial statements of S (under IFRS) is $6 million. The […]

Temporary differences associated with subsidiaries, branches, associates and joint arrangements On 1 January 2013 entity H acquired 100% of the shares of entity S, whose functional currency is different from that of H, for €600m. The tax rate in H’s tax jurisdiction is 30% and the tax rate in S”s tax jurisdiction is 40%. The fair value of the identifiable assets and liabilities (excluding deferred […]

Changes in decommissioning costs – related asset measured at cost An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant started operating on 1 January 2000. The plant has a useful life of 40 years. Its initial cost was $120,000; this included an amount for decommissioning costs of $10,000, which represented $70,400 in estimated cash flows payable in 40 […]