IAS 12 Allocation of current and deferred tax

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Ryan
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Joined: 02 Apr 2020, 14:37

IAS 12 Allocation of current and deferred tax

Post by Ryan »

Company ABC acquires shares in listed company X Ltd for CU 100 000 at the beginning of year 1. Company ABC recognises the investment in the X Ltd shares at fair value through other comprehensive income (OCI). The sale of the X Ltd shares will attract capital gains tax at the effective tax rate 22.4%

The fair value of X Ltd shares at the end of year 1 is CU 140 000
The fair value of X Ltd shares at the end of year 2 is CU 190 000
Company ABC sells the X Ltd shares at the end of year 2 for CU 190 000

My questions are as follows:
1) Where should the current tax expense of CU 20 160 [(CU 190 000 - CU 100 000) x 22.4%]
be recognised in year 2? Should this be in OCI or in profit or loss of Company ABC
2) Where should the deferred tax liability reversal of CU 20 160 [(CU 190 000 - CU 100 000) x 22.4%]
be recognised in year 2? Should this be in OCI or in profit or loss of Company ABC

I would submit that both current tax expense and deferred tax liability reversal in year 2 should be
recognised in OCI. This is in accordance with IAS 12 which states that for transactions and other
events recognised outside profit or loss (either in other comprehensive income or
directly in equity), any related tax effects are also recognised outside profit or loss
(either in other comprehensive income or directly in equity, respectively).
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Marek Muc
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Re: IAS 12 Allocation of current and deferred tax

Post by Marek Muc »

Income tax expense follows the item that it arises on. The changes in FV for equity instruments are recognised in OCI without recycling, so the income tax expense also goes to OCI and stays there (both current and deferred tax)

When you sell the asset, remeasure it to FV through OCI, and then there will be no gain/loss on disposal, so everything, incl. income tax, stays in OCI
Ryan
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Joined: 02 Apr 2020, 14:37

Re: IAS 12 Allocation of current and deferred tax

Post by Ryan »

Thanks for your response. I agree with you
JRSB
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Re: IAS 12 Allocation of current and deferred tax

Post by JRSB »

Can I ask about the particular circumstances that led you to identify the holding as FVOCI?
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Marek Muc
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Re: IAS 12 Allocation of current and deferred tax

Post by Marek Muc »

you mean as opposed to fair value through profit or loss?
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