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7- Part 2 - Coggle Diagram
7- Part 2
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ED 2019/5 Deferred tax related to assets and liabilities arising from a single transaction (Proposed amendment to IAS 12)
Purpose
To clarify that the initial recognition exemption in IAS 12 does not apply to assets and liabilities that arise from a single transaction
Background
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Therefore, this gives an issue whether or not an entity should recognise deferred tax related expense
At present, it is not clear in IAS 12 whether or not the initial recognition exemption applies, so divergence in practice has arisen
Proposed amendment
It is clarified that the recognition exemption does not apply to assets and liabilities that arise from a single transaction
For a lease, the entity should first assess whether there are any temporary diff. arise from the assets and liabilities, if TD arise, then the entity should recognise the associated deferred tax
The amendment applies to all similar transactions that result in the recognition of an asset and liabilities
For example, initial recognition of a decommissioning liability in which a NCA and an associated decommissioning provision would be recognised
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Tax reconciliation
It shows how tax charge in the SOPL can be reconciled back to user's expectation that income tax is simply PBIT x TAX RATE
It is complicated, particularly when the company's tax affairs is complex
Even though it is complicated, it cannot be excluded from disclosure merely because it is complicated and users cannot understand them
If a company thinks that the tax reconciliation is complicated, then it suggests that their tax affairs are complex therefore, it is likely to be material, therefore, the disclosure is required since IAS 1 requires an entity to make materiality judgements and disclose information if the effect of disclosure is material
If users find it hard to understand, the company must consider whether there is just one shareholder who feels that way. However, this is particularly the case for several shareholders, then the company needs to provide an explanatory note to the tax reconciliation in order for them to better understand it. This is because IAS 1 requires entities to provide additional information to enable users to understand the impact of transactions on performance and position
Other than that, the CF expects users of the financial statements to have a reasonable knowledge of business and economic activities
The reason that the tax reconciliation is too complex to be prepared is not a valid reason to exclude it. Instead, the competence of the accountant should be questioned.
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Investment in subs, branches, associates and interests in joint arrangement
The CA of those (parent's of NA + Goodwill) can be diff from the tax base (often cost of the investment)
How can it happen?
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The subs profits are recognised in the CFS, but if the profits are non-taxable until they are remitted to the parent as div. income, then TD arise
Temporary difference
Temporary diff. in CFS can be diff. from that in the separate FS of parent if the parent carries investment in its separate FS at cost or revalued amount
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