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

Tarn Co has a subsidiary, Wick Co, in which it holds 100%. At the reporting date the carrying amount of the net assets of Wick in the consolidated financial statements exceeds their tax base by $8m because of undistributed profits. Tarn controls the dividend policy of Wick and has decided that the profits will not be distributed in the foreseeable future. Under IAS 12, how should Tarn treat the temporary difference?

No deferred tax liability is recognised. IAS 12 exempts temporary differences on subsidiary investments when the parent controls the timing of reversal and it is probable the difference will not reverse in the foreseeable future, as the parent has decided not to distribute the profits.

1. ARecognise a deferred tax liability because the difference is taxable
2. BDo not recognise a deferred tax liability, because the parent controls the timing of reversal and it is probable the difference will not reverse in the foreseeable futureCorrect
3. CRecognise a deferred tax liability only if Wick is located in a different tax jurisdiction
4. DRecognise the liability directly in equity rather than in profit or loss