ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes

Finance director of Lumen Co proposes recognising a deferred tax asset for tax losses by using an optimistic profit forecast that the board has not approved and that conflicts with the budgets used for impairment testing. Recognising the asset would let Lumen meet a bank covenant. Which response is most consistent with IAS 12 and professional ethics?

Lumen should not recognise the asset unless the forecast is consistent with approved budgets and other assumptions, and supported by convincing evidence of probable taxable profits. Using an unsupported, optimistic forecast to meet a covenant breaches IAS 12 and the ethical duties of integrity and objectivity, so the proposal should be challenged.

1. ARecognise the asset, because forecasts are a matter of management judgement
2. BRecognise the asset but disclose the covenant
3. CDecline to recognise it unless the forecasts are consistent with approved budgets and supported by convincing evidence, and challenge the proposalCorrect
4. DRecognise half of the asset to compromise between the views