Deferred tax

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Green.A
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Joined: 16 Jun 2022, 11:34

Deferred tax

Post by Green.A »

Heya
Couple of quick things if it’s ok
- on a group basis, one entity has unused losses and another has forecast profits. Both are in the same country and can share losses without restriction. Using the single entity concept of a group can an DT asset be recognised on consolidation in this scenario? I’m not sure if the standards are explicit
- on offsetting DTa/DTL. This requires the same tax authority to apply and the same entity. In the case of a DTL arising on a business combination, which entity is that DTL associated with - the acquirer? In which case it couldn’t be offset by a DTA (from losses) in the acquiree in group accounts? Again I can’t really tell from the standard.
Thanks everyone for reading
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Marek Muc
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Re: Deferred tax

Post by Marek Muc »

ad 1. yes, you can recognise DTA - there are no exceptions in IAS 12 with regards to consolidated view. But carefully assess what to recognise in separate financial statements of these entities as this can be tricky.

ad 2. IMO it's a DTL of the acquirer but it's not covered in IAS 12. This is because acquiree cannot 'settle/realise' this DTL in any way.
Kalan
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Re: Deferred tax

Post by Kalan »

Good evening, colleagues,

I would add to
@1 - that merely having the forecast profits may not be sufficient.
IAS 2 requires strong evindence of taxable profit probability, i.e.:

IAS.35
The criteria for recognising deferred tax assets arising from the carryforward
of unused tax losses and tax credits are the same as the criteria for recognising
deferred tax assets arising from deductible temporary differences.
[Refer: paragraphs 27–31] However, the existence of unused tax losses is strong
evidence that future taxable profit may not be available. Therefore, when an
entity has a history of recent losses, the entity recognises a deferred tax asset
arising from unused tax losses or tax credits only to the extent that the entity
has sufficient taxable temporary differences or there is convincing other
evidence that sufficient taxable profit will be available against which the
unused tax losses or unused tax credits can be utilised by the entity. In such
circumstances, paragraph 82 requires disclosure of the amount of the deferred
tax asset and the nature of the evidence supporting its recognition.


@2 on one hand, DTA and DTO may be derecognised simultaneously in respect of transactions having the same roots (i.e. recognition of taxable income in subsidiary from an asset revalued in the parent's books) thus it may make sense to show them net. On the other hand, the FV of assets and liablities in IFRS are not pushed down to the subsidiary books, so we have DTA in the subsidiary and DTL in the parent. And, as ISA 12 states, an entity shall offset current tax assets and current tax liabilities if, and only if, the entity: (a) has a legally enforceable right to set off the recognised amounts and (b) intends either to settle on a net basis, or to realise the asset and
settle the liability simultaneously
. So probably these criteria can be met only if the group is a consilidated taxpayer
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Marek Muc
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Re: Deferred tax

Post by Marek Muc »

@2 on one hand, DTA and DTO may be derecognised simultaneously in respect of transactions having the same roots (i.e. recognition of taxable income in subsidiary from an asset revalued in the parent's books)
I don't get this. How does taxable income of a subsidiary affect DTO relating to its assets revalued in consolidated financial statements as a result of business combination accounting?
Leo
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Re: Deferred tax

Post by Leo »

Hi guys,

Reading your posts, you seem to say that the DTL arising from Business combination is booked by the parent, is that so ?
If a parent company in France buy a company in the US, and identified some "customer relationships" as intangible assets at fair value. This I have always booked at the Sub in the US, then calculated the DTL, and book the Goodwill, in the Sub, not in the parent ... (all of these only exist in my consolidation level)

Regarding to the first question, in France for example, there is something called "integration fiscale" (Group tax), meaning that if company A of the group realised a loss of 1 000 and company B realises a profit of 1 000, the group will be taxed on a taxable profit of 0. But individually, accountant of each company will recognise their tax profit/charges if they were independent entities. And it's the consolidation manager that in the end, make accounting adjustments. In my example, accountant of company A will recognise a DTA on unused taxable losses vs tax profit and company B recognises a tax liabilities and a tax charges. Step 2, the group tax manager calculate the taxable profit or loss of the tax group (integraton fiscale) and work with the consolidation manager to make adjustements. Any DTA on unused tax losses will be appreciated at the group level.
Last edited by Leo on 16 Jun 2022, 23:04, edited 1 time in total.
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Marek Muc
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Re: Deferred tax

Post by Marek Muc »

Yes, this is what I'm saying but I'm not truly convinced either way.

The example with customer relationship is a very good one. Assume that the tax rate is 20% in France and 40% in US, you would use 40% right?
Leo
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Re: Deferred tax

Post by Leo »

yes !
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Marek Muc
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Re: Deferred tax

Post by Marek Muc »

I need think about it more. Happy to hear other members' views!
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Marek Muc
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Re: Deferred tax

Post by Marek Muc »

Ps. It's covered in 'Example 3 – Business combinations' in part B of IAS 12. Acquiree's tax rate should be used so we can infer that deferred tax arising as a result of business combination accounting should be attributed to the acquiree.
JRSB
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Re: Deferred tax

Post by JRSB »

I thought I read somewhere in the standard or BCs etc that the rate depends on how the acquired asset is expected to be realised, ie if customer relationships in the US are exploited over time then use the US rate, but if the acquirer will more likely realise through further sale then French rate.
JRSB
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Re: Deferred tax

Post by JRSB »

And re offset, that a condition to offset is that both sides (asset and liab) relate to the same tax authority. But since often no tax obligation is levied on a group level, only individual entities, there is 'no' tax authority for DTL arising on acquired customer list, let's say.
Leo
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Re: Deferred tax

Post by Leo »

well, I think you can say that to all DTL arising from business combination. I remember seeing somewhere that the offset doesn't inlcude DTL arising from business combination. But can't find it now.
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Marek Muc
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Re: Deferred tax

Post by Marek Muc »

JRSB wrote: 17 Jun 2022, 01:10 I thought I read somewhere in the standard or BCs etc that the rate depends on how the acquired asset is expected to be realised, ie if customer relationships in the US are exploited over time then use the US rate, but if the acquirer will more likely realise through further sale then French rate.
I believe you are referring to paras 47-51 of IAS 12. It's a good point that we cannot automatically assume that the rate of the acquiree should always be used.
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