Skip to content

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

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 in the next two years. It has a history of losses, and forecasts no taxable profits other than from these reversals, apart from one uncertain contract not yet signed. How much deferred tax asset should be recognised for the losses?

Rho should recognise $30,000. With a history of losses, the asset is supported only by existing taxable temporary differences of $150,000 that will reverse, taxed at 20%. The unsigned contract is not convincing evidence of future profits, so the remaining losses are left unrecognised.

  1. A$120,000
  2. B$30,000Correct
  3. C$0
  4. D$150,000

Explanation

With a history of recent losses, a deferred tax asset is recognised only to the extent of taxable temporary differences reversing, or convincing other evidence. Reversing differences of 150,000 x 20% = 30,000. The unsigned contract is not convincing evidence. Recognising the full 600,000 x 20% = 120,000 ignores the recoverability test.

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.

Practise Income taxesFree diagnostic mock

More Income taxes questions