ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes
The finance director of Brava plc asks the reporting accountant to describe a $3m deferred tax asset on unused tax losses as recoverable without any disclosure, although Brava has a history of losses and no convincing other evidence of future taxable profit. Which response is most consistent with IAS 12 and professional ethics?
The accountant should refuse to recognise the asset unless convincing other evidence of future taxable profit exists, and disclose the evidence if an asset is recognised. IAS 12 requires probable future profits, and ethics demand integrity rather than yielding to management pressure.
- AComply, because deferred tax assets are always recognised for unused losses
- BRecognise the asset and disclose nothing, because the director is responsible for estimates
- CDecline to recognise the asset unless convincing other evidence exists, and disclose the amount and nature of the evidence supporting any asset recognisedCorrect
- DRecognise half the asset to compromise
Explanation
IAS 12 allows recognition of a deferred tax asset for unused losses only to the extent that it is probable future taxable profit will be available; a history of recent losses requires convincing other evidence, and the amount and nature of the evidence must be disclosed. Ethically, the accountant must act with integrity and not be associated with misleading information. A 50% compromise has no basis in the standard.
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…