upon the untimely and tragic death of their wealthy aunt the heirs wanted to memoria 613243

Use of discounting and tax effect

It is estimated that the settlement of an environmental provision will give rise to a gross cash outflow of £500,000 in three years time. The gross interest rate on a government bond maturing in three years time is 6%. The tax rate is 30%.

The net present value of the provision is £419,810 (£500,000 × 1 ÷ (1.06)³). Hence, a provision of £419,810 should be booked in the balance sheet. A corresponding deferred tax asset of £125,943 (30% of £419,810) would be set up if it met the criteria for recognition in IAS 12.