ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes
Orion Group's parent has a subsidiary that has retained earnings of $4m. The parent controls the dividend policy and has confirmed no dividend will be paid in the foreseeable future. Dividends from the subsidiary would suffer withholding tax of 10%. Under IAS 12, what is the correct treatment of the temporary difference on the undistributed earnings?
No deferred tax liability should be recognised. IAS 12 exempts temporary differences on investments in subsidiaries when the parent controls the timing of reversal and it is probable they will not reverse in the foreseeable future, as with the retained earnings here.
- ARecognise a deferred tax liability of $400,000 in the group financial statements
- BRecognise no deferred tax liability, because the parent can control the timing and it is probable the difference will not reverse in the foreseeable futureCorrect
- CRecognise the $400,000 as a provision under IAS 37
- DRecognise a deferred tax asset of $400,000
Explanation
IAS 12 requires deferred tax on temporary differences from investments in subsidiaries unless the parent can control the timing of reversal and it is probable the difference will not reverse in the foreseeable future. Both conditions are met, so no liability arises. The $400,000 option ignores the exception. A provision under IAS 37 would be inappropriate with no obligation.
Did you get it right without looking?
One question tells you little. A timed set on Income taxes shows your real accuracy, how long you take and where you lose marks.
More Income taxes questions
- Tau Co revalues land from a carrying amount of $800,000 (original cost $800,000, tax base $800,000) to $1,100,000. If the land is sold, a ta…
- At 31 December 20X5, Rento Co's financial statements showed a current tax liability estimate of $420,000 for the year. In 20X6 the tax autho…
- Rho Co has unused tax losses of $600,000 and a tax rate of 20%. It has existing taxable temporary differences of $150,000 that will reverse …
- Hotel Co's finance director proposes omitting a current tax provision for an aggressive transfer-pricing position that the tax authority is …
- Kappa acquires a subsidiary and, in the post-acquisition period, a deferred tax asset not recognised at acquisition becomes probable of reco…
- Omega has a subsidiary, Zeta, which has retained earnings of $2m since acquisition. Omega controls the timing of dividends from Zeta and has…