Land Tax question?

Financial accounting exercise about deferred tax?

• [Authors’ note: This question has been included for students who wish to consider the partial provision method of accounting for deferred tax, which was required by SSAP 15 but is now outlawed by FRS 19.] The Accounting Standards Board (ASB) currently faces a dilemma. IAS 12 (revised), Income Taxes published by the International Accounting Standards Committee (IASC), recommends measures which significantly differ from current UK practice set out in SSAP 15 Accounting for Deferred Tax. IAS 12 requires an enterprise to provide for deferred tax in full for all deferred tax liabilities with only limited exceptions whereas SSAP 15 utilises the partial provision approach. The dilemma facing the ASB is whether to adopt the principles of IAS 12 (revised) and face criticism from many UK companies who agree with the partial provision approach. The discussion paper ‘Accounting for Tax’ appears to indicate that the ASB wish to eliminate the partial provision method. The different approaches are particularly significant when acquiring subsidiaries because of the fair value adjustments and also when dealing with revaluations of fixed assets as the IAS requires companies to provide for deferred tax on these amounts. Required (a) Explain the main reasons why SSAP 15 has been criticised. (8 marks) (b) Discuss the arguments in favour of and against providing for deferred tax on: (i) fair value adjustments on the acquisition of a subsidiary (ii) revaluations of fixed assets. (7 marks) (c) XL plc has the following net assets at 30 November 1997. Fixed assets £000 Tax value (£000) Buildings 33500 7500 Plant and equipment 52000 13000 Investments 66000 66000 ––––––– ––––––– 151500 86500 ––––––– ––––––– Current assets 1500 15000 Creditors: Amounts falling due within one year Creditors (13500) (13500) Liability for health care benefits (300) – ––––––– (13800) ––––––– Net current assets 1200 Provision for deferred tax (9010) (9010) –––––––– ––––––– 143690 78990 ====== ====== XL plc has acquired 100% of the shares of BZ Ltd on 30 November 1997. The following statement of net assets relates to BZ Ltd on 30 November 1997. £000 £000 £000 Fair value Carrying value Tax value Buildings 500 300 100 Plant and equipment 40 30 15 Stock 124 114 114 Debtors 110 110 110 Retirement benefit liability (60) (60) – Creditors (105) (105) (105) –––– –––– –––– 609 389 234 ==== === === There is currently no deferred tax provision in the accounts of BZ Ltd. In order to achieve a measure of consistency XL plc decided that it would revalue its land and buildings to £50 million and the plant and equipment to £60 million. The company did not feel it necessary to revalue the investments. The liabilities for retirement benefits and healthcare costs are anticipated to remain at their current amounts for the foreseeable future. The land and buildings of XL plc had originally cost £45 million and the plant and equipment £70 million. The company has no intention of selling any of its fixed assets other than the land and buildings which it may sell and lease back. XL plc currently utilises the full provision method to account for deferred taxation. The projected depreciation charges and tax allowances of XL plc and BZ Ltd are as follows for the years ending 30 November: £000 £000 £000 Depreciation 1998 1999 2000 (Buildings, plant and equipment) XL plc 7 010 8 400 7 560 BZ Ltd 30 32 34 Tax allowances XL plc 8 000 4 500 3 000 BZ Ltd 40 36 30 The corporation tax rate had changed from 35% to 30% in the current year. Ignore any indexation allowance or rollover relief and assume that XL plc and BZ Ltd are in the same tax jurisdiction. Required Calculate the deferred tax expense for XL plc which would appear in the group financial statements at 30 November 1997 using: (i) the full provision method incorporating the effects of the revaluation of assets in XL plc and the acquisition of BZ Ltd. (ii) the partial provision method. (10 marks) (Candidates should not answer in accordance with IAS 12 (Revised) Income Taxes.) ACCA, Financial Reporting Environment, December 1997 (25 marks)

• Answer:

  i am not sure