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IAS 12Case studies (Step 3 of 5)

Case study

Step 3 of 5

IAS 12 Income Taxes — wording before IFRS 18Applicable today

Applies to annual periods beginning before January 1, 2027.

Practical caseIAS 12L3 · Advanced

Loss-making subsidiary: tax losses, convincing evidence, tax planning and reassessment

5 documents11 tasks≈ 90 min
0 / 14 items completed
Standards
IAS 12 — Income Taxes
Assistance levelNo help · reduced assistance
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: shown

Case brief

Situation

The Sorbiane group (fictitious) holds two subsidiaries taxed separately, each by the taxation authority of its country, with no tax consolidation. Ferrandine SA, which manufactures castings, incurred tax losses in 20X4 and 20X5. Sorbiane Nord SA, a distributor, has returned to profit over the last two years. For the consolidated financial statements at 31 December 20X5, you are preparing the recoverability review of the deferred tax assets and the related disclosures.

Your assignment

Analyse Ferrandine's situation and the sources of taxable profit put forward; calculate the available future profit, the losses usable before they expire, the deferred tax asset that can be recognised and its write-down; reassess Sorbiane Nord's unrecognised losses; record the entries, measure their impact and prepare the disclosures.

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.

Advanced level: no help, the work is grouped by kind.

Documents

File documents

5 documents: open each one to read it.

Document 1Table

Ferrandine's tax position

Ferrandine's tax position at 31 December 20X5 (enacted rate: 20%). Unused tax losses: 3,000,000, of which 1,000,000 expire on 31 December 20X6 and 2,000,000 expire on 31 December 20X7; the law uses the oldest losses first. Deductible temporary differences (restructuring provisions deductible when paid, expected in 20X6): 300,000. Taxable temporary differences (accelerated tax depreciation): 800,000, of which 600,000 will reverse in 20X6 and 20X7 (300,000 a year) and 200,000 in 20X8; the related deferred tax liability, 160,000, is recognised. Deferred tax asset in the general ledger, unchanged since 31 December 20X4, when it was recognised against deferred tax income: 450,000.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Losses expiring on 31 December 20X6€1,000,000.00
Losses expiring on 31 December 20X7€2,000,000.00
Unused tax losses, total€3,000,000.00
Deductible temporary differences (reversing in 20X6)€300,000.00
Taxable temporary differences, total€800,000.00
Taxable differences reversing in 20X6 and 20X7€600,000.00
Taxable differences reversing in 20X8€200,000.00
Deferred tax asset in the general ledger€450,000.00
Recognised deferred tax liability€160,000.00
Ferrandine's enacted tax rate20%
Contract signature dateNovember 15 20X5
Annual taxable profit from the contract€250,000.00
Expected taxable gain on the sale of the land€400,000.00
Budgeted taxable profits for 20X8 and 20X9€1,500,000.00
Sorbiane Nord's unused tax losses€400,000.00
Sorbiane Nord's enacted tax rate25%
Sorbiane Nord's forecast taxable profit for 20X6€950,000.00
Refundable value added tax credit€85,000.00

Sorting the information

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.

To sort5

  • Ferrandine's tax position

  • Supply contract

  • Minutes of Ferrandine's board

  • Memo on Sorbiane Nord

  • Value added tax statement

Relevant to the treatment0

    No effect0

      Questions

      Work programme

      11 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.

      1. Task 1Analysis

        Analyse Ferrandine's situation: which threshold of evidence applies and which sources are eligible?

      2. Task 2Professional judgement

        Assess each source of taxable profit put forward (contract, land, budget, provisions, Sorbiane Nord).

      3. Task 3Calculation

        Calculate the future taxable profit available for the losses, excluding reversal deductions.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the future taxable profit available for the losses, excluding reversal deductions.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Future profit available for the losses, excluding reversal deductions

      4. Task 4Calculation

        Calculate the losses usable before they expire and the unrecognised losses.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the losses usable before they expire and the unrecognised losses.

        1. €
        2. €
        3. €
        4. €
        5. €

        Checks

        • 0 / 5 steps entered
        • Amounts readable

        Result: Unrecognised losses expiring at the end of 20X7

      5. Task 5Calculation

        Calculate Ferrandine's gross deferred tax asset and the asset that can be recognised.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate Ferrandine's gross deferred tax asset and the asset that can be recognised.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Ferrandine's deferred tax asset that can be recognised

      6. Task 6Calculation

        Calculate the write-down of Ferrandine's deferred tax asset.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the write-down of Ferrandine's deferred tax asset.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Reassess Sorbiane Nord's unrecognised losses.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Reassess Sorbiane Nord's unrecognised losses.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Sorbiane Nord's recognised deferred tax asset

      8. Task 8Journal entries

        Record the entries at 31 December 20X5.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      9. Task 9Effects on the financial statements

        What is the impact of the entries on the consolidated financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      10. Task 10Analysis

        What should be disclosed in the notes on these deferred tax assets?

      11. Task 11Conclusion

        Write the conclusion.

      Workspace

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 14).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 12 §28
      • IAS 12 §29
      • IAS 12 §30
      • IAS 12 §34
      • IAS 12 §35
      • IAS 12 §36
      • IAS 12
      • IAS 12 §56
      • IAS 12
      • IAS 12 §81
      • IAS 12