Cases
Practical case
The Ardelys group (fictitious entities) produces laboratory equipment. The parent, Ardelys SA, is taxed at 25%; its subsidiaries are based in Varnessa (a fictitious low-tax country) and in Escalvia (a fictitious country). You are preparing the consolidated IFRS tax closing for the year ended 31 December 20X6, financial statements authorised on 2 March 20X7. The ordinary current tax of each entity and the deferred tax have been recorded; the uncertain tax treatments, the Pillar Two top-up tax and the tax note remain to be dealt with. The tax amounts, the probabilities and the Pillar Two calculations are case data.
Your assignment
Identify the uncertain tax treatments and their unit of account, assess the probability of their acceptance, measure them using the method that better predicts their resolution, deal with the closure of the prior-year audit and the Pillar Two tax, calculate the tax expense and its components, prepare the reconciliation with the expected tax and the deferred tax movement schedule, record the entries, measure their impact and prepare the points of the note; answer the chief financial officer's proposals.
Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.
Autonomous professional situation
As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.
Document 4
Document 1
Document 5
8 documents: open each one to read it.
Document 1Memo
Closing memo of the group tax department. Reporting date: 31 December 20X6. Consolidated profit before tax: 20,000,000. Tax rate of the parent: 25%, used by the group as the applicable rate for the reconciliation, as most of the profit is earned in its country. Current tax of the year already recorded (before uncertain treatments and Pillar Two): 4,300,000. Deferred tax expense recognised in profit or loss: 270,000.
The figures of the documents, gathered for your work.
| Item | Value | Found in |
|---|---|---|
| Reporting date | December 31 20X6 | |
| Consolidated profit before tax | €20,000,000.00 | |
| Tax rate of the parent (applicable rate) | 25% | |
| Current tax already recorded | €4,300,000.00 | |
| Deferred tax expense in profit or loss | €270,000.00 | |
| Possible additional tax, scenario 1 | €0.00 | |
| Probability of scenario 1 | 20% | |
| Possible additional tax, scenario 2 | €300,000.00 | |
| Probability of scenario 2 | 50% | |
| Possible additional tax, scenario 3 | €600,000.00 | |
| Probability of scenario 3 | 20% | |
| Possible additional tax, scenario 4 | €1,000,000.00 | |
| Probability of scenario 4 | 10% | |
| Deducted indemnity paid to the former distributor | €800,000.00 | |
| Probability that the deduction is accepted | 35% | |
| Research tax credit obtained | €160,000.00 | |
| Probability that the tax credit is accepted | 80% | |
| Liability recognised in 20X5 on the audited position | €150,000.00 | |
| Date the audit closed | November 18 20X6 | |
| Pillar Two top-up tax of the Varnessan subsidiary | €180,000.00 | |
| Effective date of the Escalvian rules | January 1 20X7 | |
| Estimated Escalvian exposure, lower bound | €60,000.00 | |
| Estimated Escalvian exposure, upper bound | €90,000.00 | |
| Proposed Pillar Two deferred tax liability | €75,000.00 | |
| Non-deductible expenses | €1,200,000.00 | |
| Exempt income | €800,000.00 | |
| Effect of foreign rate differentials (decrease) | €750,000.00 | |
| Effect of losses of the year not recognised | €220,000.00 | |
| Unrecognised Escalvian tax losses | €880,000.00 | |
| Opening net deferred tax liability | €1,400,000.00 | |
| Movement in other comprehensive income | €90,000.00 | |
| Movement in equity (decrease) | €40,000.00 | |
| Deferred tax liabilities in the statement of financial position | €2,350,000.00 | |
| Deferred tax assets in the statement of financial position | €630,000.00 | |
| Reduction in carbon emissions | 12% | |
| Environmental action budget | €350,000.00 |
Not every document matters: identify those that affect the accounting treatment.
Part 1 · Classification · Analysis
Sort each document: does it affect the accounting treatment?
Drag each item into its category, or tap the category under the item.
Closing memo of the tax department
Advisers' summary on transfer pricing
Memo from the tax director
Notice of audit closure
Pillar Two memo
Reconciliation data
Schedule of deferred tax balances
Extract from the non-financial report
Organise your work freely: deal with each point, then argue your conclusion.
Task 1Analysis
Which uncertain tax treatments exist, and should they be assessed separately or together?
Task 2Professional judgement
Is it probable that the authority will accept each treatment?
Task 3Calculation
Calculate the expected value of the positions not probably accepted.
Part 1 · Calculation
Calculate the expected value of the positions not probably accepted.
Result: Expected value, distributor indemnity
Task 4Calculation
Calculate the most likely amount of these positions.
Part 1 · Calculation
Calculate the most likely amount of these positions.
Result: Most likely amount, distributor indemnity
Task 5Professional judgement
Which method should be used for each position, and how should the end of the 20X4 audit be treated?
Part 1 · Calculation
Which method should be used for each position, and how should the end of the 20X4 audit be treated?
Task 6Analysis
How should the Varnessan Pillar Two tax and the Escalvian rules be treated?
Task 7Calculation
Calculate the current tax of the year and the total tax expense.
Part 1 · Calculation
Calculate the current tax of the year and the total tax expense.
Result: Tax expense of the year
Task 8Calculation
Calculate the expected tax and the effects of permanent differences.
Part 1 · Calculation
Calculate the expected tax and the effects of permanent differences.
Result: Effect of exempt income
Task 9Calculation
Prepare the reconciliation between expected tax and tax expense.
Part 1 · Calculation
Prepare the reconciliation between expected tax and tax expense.
Result: Control difference of the reconciliation
Task 10Calculation
Prepare the movement schedule of the net deferred tax.
Part 1 · Calculation
Prepare the movement schedule of the net deferred tax.
Result: Control difference of the movement schedule
Task 11Journal entries
Record the closing entries.
Part 1 · Journal entry · Journal entries
Entry 1 of 4
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Part 2 · Journal entry · Journal entries
Entry 2 of 4
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Part 3 · Journal entry · Journal entries
Entry 3 of 4
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Part 4 · Journal entry · Journal entries
Entry 4 of 4
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Task 12Effects on the financial statements
What is the impact of these entries on the financial statements?
Part 1 · Classification · Analysis
State the direction of the effect on each financial statement aggregate.
Financial position (balance sheet)
Profit or loss
Other comprehensive income
Equity
Part 2 · Calculation · Analysis
Quantify the effect on the aggregates concerned.
Result: Amount of the effect — Equity
Task 13Conclusion
Write the conclusion and the points of the tax note, and answer the chief financial officer.
Your working draft for this file: points noted, leads, intermediate calculations.
Saved on this device only; never graded.
Complete every item of the file to submit it (0 / 19).
Document this file
These working papers use the data and results of this case.
Normative references