PROBLEM 43

When is DEFERRED TAX LIABILITY(DTL) recognized?

1. Accounting Income is HIGHER than its TAX BASE.2. Carrying Amount of Asset is HIGHER than its TAX BASE.3. Carrying Amount of Liability is LOWER than its TAX BASE.

When is DEFERRED TAX LIABILITY(DTL) recognized?Pas 12, paragraph 15, provides that a deferred tax liability shall be recognized for ALL taxable temporary differences. However, a deferred tax liability is not recognized when the taxable temporary difference arises from:Goodwill resulting from a business combination and which is nondeductible for tax purposes. Initial Recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting income nor taxable income. Undistributed profit of subsidiary, associate or joint venture when : a. Parent/Venturer has control in timing of the reversal of temporary difference. b. It is probable that the temporary difference will not reverse in the foreseeable future.

When is DEFERRED TAX ASSET(DTA) recognized?

1. Accounting Income is HIGHER than its TAX BASE.2. Carrying Amount of Asset is HIGHER than its TAX BASE.3. Carrying Amount of Liability is LOWER than its TAX BASE.

When is DEFERRED TAX ASSET(DTA) recognized?PAS 12, paragraph 24, provides that a deferred tax asset shall be recognized for ALL deductible temporary differences and operating loss carryforward when it is probable that taxable income will be available against which the deferred tax asset can be used.

Operating Loss Carryforward is an excess of tax deductions over gross income in a year that may be carried forward to reduce taxable income in a future year.

CASE ATemporary difference1)Accounts Payable is affected

2) Carrying Amount of Liability($125,000 x 41.60)P 5,200,000 Tax base of Liabilty($125,000 x 40) 5,000,000 Temporary differenceP 200,000

3)Temporary differenceP 200,000Tax rate40%Deferred tax assetP 80,000

CASE BTemporary difference1)Inventory is affected

2)Carrying amount of InventoriesP 2,500,000 Tax base of Inventories 2,700,000 Temporary differenceP (200,000)

3)Temporary differenceP (200,000)Tax rate30%Deferred tax assetP (60,000)

CASE CTemporary difference1)Investment is affected

2)Carrying amount of InvestmentP 1,500,000 Tax base of Investment 1,200,000 Temporary differenceP 300,000

3)Temporary differenceP 300,000 5% 100,000 5,000 10% 200,000 20,000 Deferred tax liabilityP 25,000

CASE DTemporary difference1)Trademark is affected

2)Carrying amount of TMP 350,000 Tax base of TM 500,000 Temporary differenceP (150,000)

3)Temporary differenceP (150,000)Tax rate25%Deferred tax assetP (37,500)

CASE ETemporary difference1)Building

2)Carrying amount of BP 2200000Tax base of Building (P2,000,000- P200,000) 1800000 Temporary differenceP 400,000

3)Temporary differenceP 400,000Tax rate20%Deferred tax LiabilityP 80,000

CASE FTemporary difference

1)Equipment is affected

2)Carrying amountP 800,000 Tax base - Temporary differenceP 800,000

no deferred tax

Initial recognition of an asset or liability that doesn't affect accounting income or taxable income

CASE GTemporary difference1)Investment in associate is affected

2)Carrying amount of InvP 5,000,000 Tax base of Investment 4,000,000 Temporary differenceP 1,000,000

3)Temporary differenceP 1,000,000 tax rate 10%Deferred tax liabilityP 100,000

3. Undistributed profit of subsidiary, associate or joint venture when : a. Parent/Venturer has control in timing of the reversal of temporary difference. b. It is probable that the temporary difference will not reverse in the foreseeable future.

CASE HTemporary difference 1)Goodwill is affected

2)Carrying amountP 600,000 Tax base - Temporary differenceP 600,000

3)no deferred tax

PAS 12, Appendix A, 13Reductions in the carrying amount of goodwill are not deductible in determining taxable profit and the cost of goodwill would not be deductible on disposal of the business.

Paragraph 15 (a) of the Standard prohibits the recognition of the resulting deferred tax liability.

PAS 12 prohibits a deferred tax liability for goodwill on initial recognition or when any reduction in the value of goodwill is not allowed for tax purposes.Because goodwill is residual amount after recognizing assets and liabilities at fair value, recognizing a deferred tax liability with respect to goodwill WOULD SIMPLY INCREASE THE VALUE OF GOODWILL. Therefore, recognition of deferred tax liability in this regard is prohibited.