16 DT Group

(a) Calculation of deferred tax liability

Carrying Tax Temporary
amount base differences
$m $m $m
Goodwill (note 1) 14 – –
Subsidiary (note 1) 76 60 16
Inventories (note 2) 24 30 (6)
Property, plant and equipment (note 3) 2,600 1,920 680
Other temporary differences 90
Liability for health care benefits (100) 0 (100)
Unrelieved tax losses (note 4) (100)
Property sold – tax due 30.11.20X4 (165/30%) 550
Temporary differences 1,130
Deferred tax liability 1,320 at 30% 396
(680 + 90 + 550)
Deferred tax liability 16 at 25% 4
Deferred tax asset (200) at 30% (60)
Deferred tax asset (6) at 25% (1.5)
1,130 338.5

Deferred tax liability b/d (given) 280

Deferred tax attributable to subsidiary to goodwill (76 – 60) 25% 4
Deferred tax expense for the year charged to P/L (balance) 54.5
Deferred tax liability c/d (from above) 338.5

Notes
1 As no deduction is available for the cost of goodwill in the subsidiary's tax jurisdiction, then
the tax base of goodwill is zero. Paragraph 15(a) of IAS 12, states that DT Group should not
recognise a deferred tax liability of the temporary difference associated in B's jurisdiction
with the goodwill. Goodwill will be increased by the amount of the deferred tax liability of
the subsidiary ie $4 million.
2 Unrealised group profit eliminated on consolidation are provided for at the receiving
company's rate of tax (ie at 25%).
3 The tax that would arise if the properties were disposed of at their revalued amounts which
was provided at the beginning of the year will be included in the temporary difference
arising on the property, plant and equipment at 30 November 20X1.
4 DT Group has unrelieved tax losses of $300m. This will be available for offset against
current year's profits ($110m) and against profits for the year ending 30 November 20X2
($100m). Because of the uncertainty about the availability of taxable profits in 20X3, no
deferred tax asset can be recognised for any losses which may be offset against this
amount. Therefore, a deferred tax asset may be recognised for the losses to be offset
against taxable profits in 20X2. That is $100m 30% ie $30m.

Exam answer bank 533

 (b) Report
To: The Directors, DT Group
From: Accountant
Date: XX.XX.XX
Effect of application of IAS 12 on financial statements
The application of IAS 12will have the following effect on the financial statements of the DT group:
The deferred tax liability of DT Group will rise in total by $335.5 million ($338.5m – $3m), thus
reducing net assets, distributable profits, and post-tax earnings.
The profit for the year will be reduced by $54.5 million which would probably be substantially more
under IAS 12 than the old method of accounting for deferred tax.
A prior period adjustment will occur of $280m – $3m as IAS are being applied for the first time
(IFRS 1) ie $277m.
The borrowing position of the company may be affected and the directors may decide to cut
dividend payments.
However, the amount of any unprovided deferred tax may have been disclosed under the previous
GAAP standard used.
IAS 12 brings this liability into the statement of financial position but if the bulk of the liability had
already been disclosed the impact on the share price should be minimal.
I hope that this report is helpful to you.
Signed, Accountant

17 Courtney
(a) Courtney must recognise the purchase of goods at the exchange rate in place at the date of the
transaction.
Therefore:
300,000 Wons/20 = $15,000
DR Purchases $15,000
CR Trade payables $15,000
At the year end, the supplier has not been paid, so the liability is still outstanding. It must be
translated at the closing rate at the year end and any exchange gains or losses recognised in the
statement of profit or loss.
The liability at 31 December 20X7 is:
3000,000 Wons/16 = $18,750
It has increased and Courtney must recognise an exchange loss of $3,750 (18,750 – 15,000).
DR Statement of profit or loss $3,750
CR Trade payables $3,750
(b) Functional currency is the currency of the primary economic environment in which the entity
operates. Determining an entity's functional currency involves looking at the currency that
influences sales prices and costs. Additionally, if an entity raises finance in its home currency, that
is likely to be its functional currency.
In Courtney's case, it operates in US$, which is the functional currency.
The presentation currency is the currency in which the financial statements are presented.
Courtney may well prepare financial statements in their functional currency (US$), but the parent
company reports in Euros, so Courtney's results will have to be translated into Euros so that they
can be consolidated. The group presentation currency is the Euro.

534 Exam answer bank