Question Tag: Deferred Tax

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AT – Nov 2024 – L3 – Q2b – Tax Implications of 100% Acquisition in Mining Operations

Explain the tax implications of a 100% acquisition and compute the gains from the acquisition.

Question

Tongo LTD (Tongo) is a mining company operating in the Upper East Region of Ghana. The following relates to the operations of Tongo for the 2023 year of assessment:

Description	GH¢
Revenue (Gross)	200,000,000
Cost of Operations	80,000,000
Margin/Profit	120,000,000

Additional Information:

Tempane Mines LTD acquired 100% interest in Tongo for a consideration of GH¢310,000,000 at the end of 2023.
The cost of assets acquired at their respective acquisition dates are as follows:

Year	Cost of Assets (GH¢)
2020	100,000,000
2021	75,000,000
2023	50,000,000

Required:

i) Explain the tax implication of the 100% acquisition.

ii) Compute the gains from the above acquisition and determine how the gains should be treated.

Answer

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Tags: Acquisition, Capital Allowance, Corporate Restructuring, Deferred Tax, Mining Tax, Tax implications
Level: Level 3

Topic: Minerals and mining
Series: Nov 2024

CR – May 2016 – L3 – Q3 – Income Taxes (IAS 12)

Discuss and account for deferred taxation arising from temporary differences using IAS 12 for Limelight Plc.

Question

Limelight, a public limited company, is a major player in commodity brokerage and supplies. The following transactions relate to the year ended December 31, 2014.

Profit before taxation for the year was ₦487.5m. Taxable profit for the same period was ₦131.25m.

The balances of non-current assets of the company, at December 31, 2014:

N’000	Amount
Accounting carrying amount	937,500
Tax written down value	637,500

The balances above do not include a freehold building purchased in February 2014 for ₦750m. This building was revalued to ₦985m on December 31, 2014.

Accrued rental income on investment property at December 31, 2014, amounted to ₦9.75m. This income was credited to the statement of profit or loss as at year-end but was not received until three months after. Rental income is taxed by the Federal Inland Revenue Service on an actual basis when it is received.

No other temporary differences exist at December 31, 2014. Income tax and Withholding taxes on rental income are paid at 30% and 10% respectively, six months after the year.

Required:

a) Discuss the conceptual basis for the recognition of deferred taxation by Limelight Plc using the temporary difference approach in accordance with IAS 12, arising from the above transactions.

b (i) Outline how the above transactions should be accounted for using journal entries where appropriate.

b (ii) Calculate the provision for deferred tax after any necessary adjustments to the financial statements at December 31, 2014, and use journal entries.

Answer

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Tags: Deferred Tax, IAS 12, Journal Entries, Taxation, Temporary Differences
Level: Level 3

Topic: Income Taxes (IAS 12)

CR – May 2017 – L3 – Q3a – Impairment of Assets (IAS 36)

Discuss why FRCN should focus on impairment of non-financial and deferred tax assets during economic recession.

Question

The economic environment in the country has been very harsh, and it is now common knowledge that the economy is in a recession. This downturn impacts the income-generating capacity of companies, particularly in industries experiencing a significant decline in fortunes. Consequently, financial reporting regulators must closely examine evidence of impairment of assets in financial statements submitted by such companies.

Required:
Discuss briefly the reasons why the Financial Reporting Council of Nigeria (FRCN) should focus on the impairment of non-financial assets and deferred tax assets of listed companies in Nigeria during this period of slow economic growth. Also, outline the key areas entities should focus on when accounting for these items.

Answer

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Tags: Deferred Tax, Economic Recession, IAS 12, IAS 36, Impairment
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – Nov 2014 – L3 – SC – Q4b – Income Taxes (IAS 12)

Evaluate the impact of deferred tax on fair value adjustments for property, plant, and equipment in an acquisition.

Question

On 1 June 2013, Bam Plc acquired Mango Limited for N3,150 million.
The fair value of the identifiable net assets of Mango Limited at this date was N825 million, and N2,550 million and retained earnings and other components of equity were N105 million, respectively. Mango Limited’s share capital was N1,500 million.

The excess of the fair value of the net assets is due to an increase in the value of property, plant, and equipment.

Required:
Evaluate the impact of full deferred tax on the excess of the fair value of the net assets attributable to the increase in the value of property, plant, and equipment of Bam Plc.

Answer

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Tags: Acquisition, Business combination, Deferred Tax, Fair value adjustment, IAS 12, Identifiable Net Assets, Plant & Equipment, Property
Level: Level 3

Topic: Income Taxes (IAS 12)
Series: NOV 2014

CR – Nov 2014 – L3 – SB – Q4a – Income Taxes (IAS 12)

Compute the impact of deferred tax on retained earnings and advise Lagos Plc on IAS 12 compliance.

Question

The following is the statement of financial position of Lagos Plc as at 31 December, 2013, with its immediate two comparative years.

The management of Lagos Plc is not sure of the impact of IAS 12 (Income Taxes) on its retained earnings as at 31 December, 2013, as well as what the new deferred tax balance will be on migrating to IFRS.

The following information was also available as at the year-end:

Details	Value (N’000)
Tax written down value of PPE	40,300
Tax written down value of goodwill	4,300
Tax base of trade receivables	29,800
Tax base of trade payables	13,000

Assume that current tax has been correctly computed in line with the applicable tax laws at 30%.

Required:
Using relevant computations, advise the management of Lagos Plc on the impact of deferred tax calculated on retained earnings in accordance with IAS 12.

Answer

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Tags: Deferred Tax, Financial Reporting, Goodwill, IAS 12, Income Taxes, Plant & Equipment, Property, Retained Earnings, Tax Base
Level: Level 3

Topic: Income Taxes (IAS 12)
Series: NOV 2014

CR – Nov 2014 – L3 – SB – Q2b – Income Taxes (IAS 12)

Discuss reasons for variances in effective tax rates and differences between tax charges and tax payments.

Question

Mr. Ojoowuro, the director of a grocery store, has noticed that the tax charge for his company is N15million on profits before tax of N105million. This is an effective rate of 14.3%. Another company, Irin Plc, has an income tax charge of N30million on profit before tax of N90million. This is an effective rate of tax of 33.3%, yet both companies state that the rate of income tax applicable to them is 25%. Mr. Ojoowuro has also noticed that in the statements of cash flows, each company has paid the same amount of tax of N24million.

Required:
Advise Mr. Ojoowuro on the possible reasons why the income tax charge in the financial statements as a percentage of the profit before tax may not be the same as the applicable income tax rate and why the tax paid in the statement of cash flows may not be the same as the tax charge in the statement of profit or loss and other comprehensive income. (7 Marks)

Answer

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Tags: Cash Flow Variances, Deferred Tax, Effective Tax Rate, Financial Statements, Income Tax, Tax adjustments, Tax provisions
Level: Level 3

Topic: Income Taxes (IAS 12)
Series: NOV 2013

CR – May 2021 – L3 – Q6 – Associates and Joint Ventures (IAS 28)

Discuss equity accounting for investment, accounting for deferred tax, and calculate the recoverable amount of equipment.

Question

Awa Publish has just recently acquired 18% of the shareholding in Tunbe, making it the second largest single shareholder. The majority shareholder has 58% voting shares, while the remainder of the shares is held by ten other shareholders, none holding more than 5% voting shares. The board of directors of Tunbe is made up of 12 members, with Awa Publish having 3 members and the majority shareholder having 7 members.

Awa Publish was able to negotiate its representation on the board due to its strategic importance in Tunbe’s operations and expansion plans. The directors of Awa Publish accounted for its investment in Tunbe as an equity investment. The directors feel that Tunbe should not be accounted for as an associate because Awa Publish does not have 20% of the voting interest and thus does not exercise significant influence over Tunbe.

Tunbe has been making losses for the past three years and has only returned a taxable profit once in the last five years. The projection is that Tunbe will return to making taxable profits in another five years. As part of the acquisition of shares in Tunbe, deferred tax assets for deductible temporary differences arose. The directors of Awa Publish are unsure how to account for this deferred tax asset.

Awa Publish has an item of equipment that cost N56 million. This item of plant and equipment currently has a carrying amount in the financial statements of N39.2 million. Awa Publish expects the operation of the equipment to generate undiscounted cash flows of N7 million per year for the next five years.

Awa Publish could generate immediate cash flow of N40 million if it sold the equipment today. However, if it did go ahead with the sale, it will have to pay a sales commission of 8.5%. The directors of Awa Publish are performing an annual impairment review and understand that determining the recoverable amount is an important part of this exercise.

Required:

a. Discuss how the investment in Tunbe should be accounted for in the financial statements of Awa Publish. (7 Marks)

b. Advise the directors of Awa Publish how the deferred tax asset that has arisen should be accounted for. (7 Marks)

c. Assist the directors of Awa Publish to determine the recoverable amount of the equipment. You may assume a discount rate of 10% or five-year annuity rate of 3.791, if relevant. (6 Marks)

Answer

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Tags: Deferred Tax, Equity Accounting, IAS 12, IAS 36, Recoverable Amount
Level: Level 3

Topic: Associates and Joint Ventures (IAS 28), Impairment of Assets (IAS 36), Income Taxes (IAS 12)

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

Question

Omoge Nigeria PLC has the following share options scheme for its directors as of May 31, 2021:

The price of the company’s shares as of:

May 31, 2021: ₦8 per share
May 31, 2020: ₦8.50 per share

Key details:

Directors must be working for Omoge Nigeria PLC on the vesting dates for the options to vest.
No directors have left the company since the share options were issued, and none are expected to leave before June 2023.
The options can be exercised on the first day of the month in which they vest.
In accordance with IFRS 2, an expense of ₦600,000 was charged to profit in the year ended May 31, 2020, and the cumulative expense for the two years ended May 31, 2021, is ₦2,200,000.
Tax allowances arise when the options are exercised and are based on the option’s intrinsic value at the exercise date.
Assume a tax rate of 30%.

Required:

Evaluate the deferred tax implications of the share options for the year ended May 31, 2020, and May 31, 2021. (10 Marks)

Answer

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Tags: Deferred Tax, IAS 12, IFRS 2, Share Options, Tax Allowances
Level: Level 3

Topic: Share-Based Payments (IFRS 2)

AAA – Nov 2020 – L3 – Q5 – Advanced Audit Planning and Strategy

Identification of financial statement risks in planning the final audit for Maideline Nigeria Limited’s winding-up.

Question

Maideline Nigeria Limited manufactures tyres for use by cars, trucks, and trailers. The company is owner-managed, meaning the shareholders are also the directors. On June 1, 2020, the directors decided to wind up the company due to the high cost of operations, the Naira’s depreciation against the US dollar, and the economic impact of COVID-19, which have severely impacted the company’s ability to continue business.

Management notified employees, suppliers, and customers that Maideline would cease all manufacturing activities by September 30. Consequently, all factory workers and most employees in accounts and administration were terminated effective September 30. Remaining employees will face redundancy by November 30. A minimal head office team, including the Company Secretary and some support staff, will remain operational for a few more years until the company winds down completely.

Maideline operated 20 branches and a head office. Of these, 12 branches are located in company-owned buildings, while the remaining 8 operate from leased buildings with lease terms of three to five years. Lease agreements prohibit sub-letting and sale. On adopting IFRS 16, the entity assumed lease renewals at term end, recording lease liabilities and right-of-use assets. A small head office building will remain in use until its lease expires in three years. Maideline accounts for its tangible non-current assets at cost, less depreciation, and has recognized deferred tax assets due to past tax losses and unutilized capital allowances.

All products sold carry a one-year warranty. Until May 31, 2020, the company offered two- and three-year extended warranties, but these were discontinued from March 1, 2020. Maideline distributes products nationally and internationally under three-year agreements and maintains annual supplier contracts. While no distributors or suppliers have pursued legal actions, some are withholding payments, awaiting penalty settlements they claim are due.

Required:
Using the information provided, identify and explain the financial statement risks to be taken into account in planning the final audit of Maideline in respect of the year ended December 31, 2020. (20 Marks)

Answer

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Tags: COVID-19 Impact, Deferred Tax, financial statement risks, IFRS 16, Inventory Valuation, Legal claims, Winding-up
Level: Level 3

Topic: Advanced Audit Planning and Strategy

CR – Nov 2020 – L3 – Q3 – Impairment of Assets (IAS 36)

Discuss the accounting treatment of Tupe Print's investment in Adowa plc, advise on deferred tax assets, and determine the recoverable amount of equipment.

Question

Tupe Print plc has just recently acquired 18% of the shareholding in Adowa plc, making it the second largest single shareholder. The majority shareholder has 58% voting shares, while the remainder of the shares are held by ten other shareholders, with none holding more than 5% voting shares. The board of directors of Adowa is made up of 12 members, with Tupe Print having 3 members and the majority shareholder having 7 members. Tupe Print was able to negotiate its representation on the board due to its strategic importance in Adowa‘s operations and expansion plans. The directors of Tupe Print have accounted for its investment in Adowa as an equity instrument investment. The directors feel Adowa should not be accounted for as an associate because Tupe Print does not have 20% of the voting interest and thus does not exercise significant influence over Adowa.

Adowa has been making losses for the past three years and has only returned a taxable profit once in the last five years. The projection is that Adowa will return to making taxable profits in another five years. As part of the acquisition of shares in Adowa, deferred tax assets for deductible temporary differences arose. The directors of Tupe Print are unsure of how to account for this deferred tax asset.

Tupe Print has an item of equipment which costs N56 million. This item of plant and equipment currently has a carrying value in the financial statements of N39.2 million. Tupe Print expects the operation of the equipment to generate undiscounted cash flows of N7 million per year for the next five years. Tupe Print could generate immediate cash flow of N40 million if the equipment is disposed of today. However, if the disposal is carried out, it will have to pay a sales commission of 8.5%. The directors of Tupe Print are performing an annual impairment review and understand that determining the recoverable amount is an important part of this exercise.

Required:

a. Discuss how the investment in Adowa plc should be accounted for in the financial statements of Tupe Print plc. (7 Marks)

b. Advise the directors of Tupe Print on how the deferred tax asset that has arisen should be accounted for. (7 Marks)

c. Assist the directors of Tupe Print in determining the recoverable amount of the equipment. You may assume a discount rate of 10% or a five-year annuity rate of 3.791 (if relevant). (6 Marks)

Answer

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Tags: Deferred Tax, Equity Instrument, Impairment Review, Investment Accounting, Recoverable Amount
Level: Level 3

Topic: Associates and Joint Ventures (IAS 28), Impairment of Assets (IAS 36)

FR – May 2024 – L2 – SA – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explains temporary differences, components of tax expense, and deferred tax calculations for Buga Nigeria Limited.

Question

a. Accounting for deferred tax is based on the identification of temporary differences.

Required:
Explain the term “Temporary difference” and discuss the TWO different types. (3 Marks)

b. State and briefly explain FIVE components of tax expense or income. (5 Marks)

c. Buga Nigeria Limited had an accounting profit before taxation of N196,800,000 for the year ended September 30, 2022. The following balances were extracted from the company’s books as at September 30, 2022.

Other information:

Interest income is taxed while interest expense is allowable on a cash basis. There were no opening balances on interest receivable and interest payable.
The trade receivables above are shown net of an allowance for doubtful balances of N16,750,000. This is the first year that such an allowance has been recognized. A deduction for debts is only allowed for tax purposes when the debtor is in the process of winding-up.
The balances in respect of office equipment are after charging accounting depreciation of N28,250,000 and tax allowable depreciation of N22,500,000 respectively.
The freehold property was purchased on October 1, 2021, for N263,000,000 and is being depreciated for accounting purposes on a 10% per annum basis. Buga Nigeria Limited is in a position to claim N94,600,000 as accelerated depreciation on cost as a taxable expense in this year’s tax computation.

Required:

i. Prepare a tax computation and calculate the current tax expense. (4 Marks)

ii. Calculate the deferred tax liability as at September 30, 2022. (6 Marks)

iii. Show the movement on the deferred tax account for the year ended September 30, 2022, given that the opening balance was N8,100,000. (2 Marks)

Answer

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Tags: Deferred Tax, IAS 12, Tax computation, Tax Expense, Temporary Differences
Level: Level 2

Topic: Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)
Series: MAY 2023

FR – May 2024 – L2 – SA – Q2 – Conceptual Framework for Financial Reporting

Discusses the information needs of financial statement users, CAMA director report requirements, and deferred tax calculations.

Question

a. The Conceptual Framework for Financial Reporting sets out the concepts that underlie the preparation and presentation of financial statements and considers the various users of these financial statements.

Required:
Identify and discuss the information needs of the different users of financial statements. (10 Marks)

b. The Companies and Allied Matters Act (CAMA) 2020 is the primary source of company law that establishes the requirements for financial reporting by all companies in Nigeria.

Required:
Briefly explain FIVE issues that must be contained in a directors’ report in accordance with CAMA 2020. (5 Marks)

c. Babanriga Nigeria Limited acquired a factory machine for N10 million on January 1, 2019. The machine had an estimated life and residual value of 10 years and N2 million, respectively, and is depreciated on a straight-line basis. In lieu of depreciation, the tax authority allows a tax expense of 40% of the cost of this type of machine to be claimed against income tax in the year of purchase, with 25% per annum of its tax base subsequently on a reducing balance basis. The prevailing company income tax rate is 30%.

Required:
Calculate the deferred tax charge or credit which will be recorded in Babanriga Nigeria Limited’s Statement of Profit or Loss and Other Comprehensive Income for the year ended December 31, 2021, and the deferred tax balance in the Statement of Financial Position at that date. (5 Marks)

Answer

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Tags: CAMA, Conceptual Framework, Deferred Tax, Financial Reporting, Statement of Financial Position, Tax computation, User Needs
Level: Level 2

Topic: Conceptual Framework for Financial Reporting
Series: MAY 2023

FR – Nov 2019 – L2 – Q2b – Accounting for Income Taxes (IAS 12)

Calculate current and deferred tax for Dan Ruwa Nigeria Limited and prepare the statement of profit or loss.

Question

b. Dan Ruwa Nigeria Limited is a company that specializes in the production of bottled and sachet water. The company was incorporated on January 1, 2018.

The summarised financial statements of the company for the year ended December 31, 2018, are as follows:

Extract of Statement of Profit or Loss for the year ended December 31, 2018:

Description	N’000
Revenue	270,000
Administrative and other allowable expenses	(138,000)
Accounting depreciation	(11,000)
Net profit before taxation	121,000

Extract of Statement of Financial Position as at December 31, 2018:

Description	N’000
Property, plant & equipment	48,000
Motor vehicle	12,000
Less: Depreciation	(11,000)
Carrying amount	49,000

Description	N’000
Ordinary share capital	17,000
Retained earnings	12,000
Other liabilities	20,000
Total	49,000

The Federal Inland Revenue Service (FIRS) granted the company a capital allowance on its non-current assets, which amounted to N15,000,000, and the company income tax rate is 30%.

Required:

i. Calculate the current income tax expense and the deferred tax liability balance that should be disclosed in the statement of financial position of the company as at December 31, 2018.
(10 Marks)

ii. Prepare the statement of profit or loss of Dan Ruwa Nigeria Limited showing the tax expense for the year ended December 31, 2018.
(5 Marks)

Answer

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Tags: Capital allowances, Current Tax, Deferred Tax, IAS 12, Income Tax Calculation
Level: Level 2

Topic: Accounting for Income Taxes (IAS 12)
Series: NOV 2019

FR – Nov 2019 – L2 – Q2a – Accounting for Income Taxes (IAS 12)

Explain the concepts of current tax and deferred tax in accordance with IAS 12.

Question

a. In accordance with IAS 12 on Income Tax, the income tax expense in the statement of profit or loss is composed of two tax components:

i. Current tax
ii. Deferred tax

Required:

Explain these two tax components.
(5 Marks)

Answer

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Tags: Current Tax, Deferred Tax, IAS 12, Income Tax
Level: Level 2

Topic: Accounting for Income Taxes (IAS 12)
Series: NOV 2019

CR – May 2021 – L3 – Q1 – Consolidation with Subsidiaries and Associate

Prepare consolidated statement of financial position including two subsidiaries and an associate. Adjust for goodwill, non-controlling interest, and contingent consideration.

Question

Required:
Prepare a consolidated statement of financial position as of 31 May 2020 for the Blavo Group.

Answer

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Tags: Associates, Business Combinations, Consolidation, Deferred Tax, Financial Statements, Goodwill, Non-Controlling Interests, Subsidiaries
Level: Level 3

CR – May 2021 – L3 – Q2a(i) – Impairment of Assets and CGU Valuation

Evaluate the acceptability of accounting practices used for CGU impairment test, focusing on discount rates and foreign exchange issues under IAS 36.

Question

Gyamfi Ltd (Gyamfi) is an international company with a presence in Ghana, providing spare parts for the automotive industry. It operates in various jurisdictions, each with different currencies. In 2020, Gyamfi faced financial difficulties partly due to the COVID-19 pandemic, resulting in a decline in revenue, a reorganization, and restructuring of the business. As a result, Gyamfi reported a loss for the year.
Gyamfi conducted an impairment test for goodwill, but no impairment was recognized. The company applied a single discount rate to all cash flows for all cash-generating units (CGUs), regardless of the currency in which the cash flows were generated. The discount rate used was the weighted average cost of capital (WACC), and Gyamfi used the 10-year government bond rate of its jurisdiction as the risk-free rate in the calculation.

Additionally, Gyamfi built its impairment model using forecasts denominated in the parent company’s functional currency, arguing that any other approach would be unrealistic and impracticable. Gyamfi claimed that the CGUs had different risk profiles in the short term, but there was no basis for claiming that their risk profiles were different over a longer business cycle.

Impairment of Non-Current Assets:
Gyamfi also tested its non-current assets for impairment. A building located overseas was deemed impaired due to flooding in the area. The building was acquired on 1 April 2020 for 25 million dinars when the exchange rate was 2 dinars to the Ghana Cedi. The building is carried at cost. As of 31 March 2021, the building’s recoverable amount was determined to be 17.5 million dinars. The exchange rate on 31 March 2021 was 2.5 dinars to the Ghana Cedi. Buildings are depreciated over 25 years.

The tax base and carrying amounts of the non-current assets before the impairment write-down were identical. The impairment of the non-current assets is not deductible for tax purposes. No deferred tax adjustment has been made for the impairment. Gyamfi expects to make profits for the foreseeable future and assumes the tax rate is 25%. No other deferred tax effects need to be considered besides the ones relating to the impairment of the non-current assets.

Requirements (as per question):
i) Evaluate the acceptability of the accounting practices under IAS 36: Impairment of Assets (6 marks).

Answer

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Tags: Deferred Tax, flooding, foreign currency exchange, Impairment of Assets, Non-current Assets, Risk-free rate, WACC
Level: Level 3

Topic: IAS 36: Impairment of assets
Series: MAY 2021

CR – May 2021 – L3 – Q2a(ii) – Impairment of Overseas Building and Deferred Tax

Recommend the accounting treatment for impairment and deferred tax for an overseas building under IAS 36 and IAS 12.

Question

ii) Recommend the accounting treatment of the above transaction to the directors of Gyamfi for the year ended 31 March 2021, including financial statements extracts in accordance with relevant International Financial Reporting Standards.

Answer

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Tags: Deferred Tax, Depreciation, Impairment, Non-current Assets, overseas asset
Level: Level 3

Topic: IAS 12: Income taxes, IAS 36: Impairment of assets
Series: MAY 2021

FR – May 2018 – L2 – Q6b – Accounting for Income Taxes (IAS 12)

Calculate the deferred tax charge/credit for Lawmarg Nigeria Limited and the deferred tax balance in the statement of financial position.

Question

Lawmarg Nigeria Limited purchased an item of plant for N2,000,000 on October 1, 2014. It had an estimated life of eight years and an estimated residual value of N400,000. The plant is depreciated on a straight-line basis. The tax authorities do not allow depreciation as a deductible expense. Instead, an initial capital allowance of 40% of the cost of this type of asset can be claimed against income tax, and 20% per annum (on a reducing balance basis) of its tax base thereafter. The rate of income tax is 30%.

Required: In respect of the above item of plant, calculate the deferred tax charge/credit in Lawmarg Nigeria Limited’s statement of profit or loss for the year ended December 31, 2017, and the deferred tax balance in the statement of financial position at that date.

Answer

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Tags: Deferred Tax, Depreciation, IAS 12, Income Taxes, Tax Base, Temporary Differences
Level: Level 2

Topic: Accounting for Income Taxes (IAS 12)
Series: MAY 2018

FR – May 2018 – L2 – Q6a – Accounting for Income Taxes (IAS 12)

Explain the need for providing deferred tax and the principles for accounting for deferred tax under IAS 12.

Question

IAS 12 – Income Tax details the requirements relating to the accounting treatment of deferred tax and current income tax.

Required: Explain the need to provide for deferred tax and briefly outline the principles of accounting for deferred tax contained in IAS 12.

Answer

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Tags: Accounting Standards, Deferred Tax, IAS 12, Income Taxes, Temporary Differences
Level: Level 2

Topic: Accounting for Income Taxes (IAS 12)
Series: MAY 2018

FR – Nov 2018 – L2 – SB – Q3 – Accounting for Income Taxes (IAS 12)

Calculate the current tax expense, deferred tax liability, and tax expense components for Yemnike Nigeria Ltd.

Question

Yemnike Nigeria Limited has an accounting profit before taxation of N225 million for the year ended December 31, 2017.

The following are extracts of the financial position of Yemnike Nigeria Limited as at December 31, 2017:

Non-Current Assets:

Item	N’000
Building	157,500
Plant and machinery	250,000
Assets held under finance lease	200,000

Receivables:

Item	N’000
Trade receivables	182,500
Interest receivable	2,500

Payables:

Item	N’000
Fines	25,000
Finance lease obligation	216,000
Interest payable	8,250

The following information is relevant:

The building was acquired by the company at a cost of N175 million at the start of the year, and it is depreciated at 10% per annum on a straight-line basis. The company’s tax consultants have stated that the company can claim N105 million capital allowance this year on the building.
The balance of plant and machinery is after providing for depreciation of N30 million, and the capital allowance claimable on it is N25 million.
The asset held under finance lease was acquired during the year. Rental expense for the lease is tax deductible. The annual lease rental is N72 million and was paid on December 31, 2017. The depreciation policy for leased assets is 20% per annum on a straight-line basis. The annual finance charge is N36.667 million.
The receivables figure is shown net of an allowance for doubtful balances of N17.5 million. A deduction for debt is only allowed for tax purposes when the debtor enters liquidation.
Interest income is taxed, and interest expense is allowable both on a cash basis. There were no opening balances for interest receivable and payable.
Provisions for fines and penalties are not allowable deductions for tax purposes.

Required:
(a) Calculate the current tax expense for the period.
(b) Calculate the deferred tax liability as at December 31, 2017.
(c) Prepare notes showing the component of the tax expense for the year.

Answer

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Tags: Current Tax, Deferred Tax, Tax Expense
Level: Level 1

Topic: Accounting for Income Taxes (IAS 12)
Series: NOV 2018

Question Tag: Deferred Tax

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AT – Nov 2024 – L3 – Q2b – Tax Implications of 100% Acquisition in Mining Operations

Explain the tax implications of a 100% acquisition and compute the gains from the acquisition.

CR – May 2016 – L3 – Q3 – Income Taxes (IAS 12)

Discuss and account for deferred taxation arising from temporary differences using IAS 12 for Limelight Plc.

CR – May 2017 – L3 – Q3a – Impairment of Assets (IAS 36)

Discuss why FRCN should focus on impairment of non-financial and deferred tax assets during economic recession.

CR – Nov 2014 – L3 – SC – Q4b – Income Taxes (IAS 12)

Evaluate the impact of deferred tax on fair value adjustments for property, plant, and equipment in an acquisition.

CR – Nov 2014 – L3 – SB – Q4a – Income Taxes (IAS 12)

Compute the impact of deferred tax on retained earnings and advise Lagos Plc on IAS 12 compliance.

CR – Nov 2014 – L3 – SB – Q2b – Income Taxes (IAS 12)

Discuss reasons for variances in effective tax rates and differences between tax charges and tax payments.

CR – May 2021 – L3 – Q6 – Associates and Joint Ventures (IAS 28)

Discuss equity accounting for investment, accounting for deferred tax, and calculate the recoverable amount of equipment.

Required:

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

AAA – Nov 2020 – L3 – Q5 – Advanced Audit Planning and Strategy

Identification of financial statement risks in planning the final audit for Maideline Nigeria Limited’s winding-up.

CR – Nov 2020 – L3 – Q3 – Impairment of Assets (IAS 36)

Discuss the accounting treatment of Tupe Print's investment in Adowa plc, advise on deferred tax assets, and determine the recoverable amount of equipment.

FR – May 2024 – L2 – SA – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explains temporary differences, components of tax expense, and deferred tax calculations for Buga Nigeria Limited.

FR – May 2024 – L2 – SA – Q2 – Conceptual Framework for Financial Reporting

Discusses the information needs of financial statement users, CAMA director report requirements, and deferred tax calculations.

FR – Nov 2019 – L2 – Q2b – Accounting for Income Taxes (IAS 12)

Calculate current and deferred tax for Dan Ruwa Nigeria Limited and prepare the statement of profit or loss.

FR – Nov 2019 – L2 – Q2a – Accounting for Income Taxes (IAS 12)

Explain the concepts of current tax and deferred tax in accordance with IAS 12.

CR – May 2021 – L3 – Q1 – Consolidation with Subsidiaries and Associate

Prepare consolidated statement of financial position including two subsidiaries and an associate. Adjust for goodwill, non-controlling interest, and contingent consideration.

CR – May 2021 – L3 – Q2a(i) – Impairment of Assets and CGU Valuation

Evaluate the acceptability of accounting practices used for CGU impairment test, focusing on discount rates and foreign exchange issues under IAS 36.

CR – May 2021 – L3 – Q2a(ii) – Impairment of Overseas Building and Deferred Tax

Recommend the accounting treatment for impairment and deferred tax for an overseas building under IAS 36 and IAS 12.

FR – May 2018 – L2 – Q6b – Accounting for Income Taxes (IAS 12)

Calculate the deferred tax charge/credit for Lawmarg Nigeria Limited and the deferred tax balance in the statement of financial position.

FR – May 2018 – L2 – Q6a – Accounting for Income Taxes (IAS 12)

Explain the need for providing deferred tax and the principles for accounting for deferred tax under IAS 12.

FR – Nov 2018 – L2 – SB – Q3 – Accounting for Income Taxes (IAS 12)

Calculate the current tax expense, deferred tax liability, and tax expense components for Yemnike Nigeria Ltd.

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