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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

Rate change, revaluation, investment property, dividends and loss of a tax status: measuring and allocating tax

7 documents11 tasks≈ 90 min
0 / 19 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  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn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

Corbelaine Industries SA (a fictitious entity) manufactures foundry parts and holds a revalued plot of land, a revalued office building, a warehouse let to third parties and a research centre located in a free zone. You are preparing the separate IFRS financial statements for the year ended 31 December 20X4, authorised on 24 February 20X5. The ordinary deferred tax movements of the year have been recorded by the tax department; the closing adjustments remain to be made. The tax rules, rates and amounts are case data.

Your assignment

Determine the rates to be used at 31 December 20X4, measure the effect of the rate change and split it between profit or loss and other comprehensive income, calculate the deferred tax on the revalued land and on the warehouse according to their manner of recovery, deal with the declared dividend and the loss of the free-zone status, record the entries, measure their impact and 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.

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

Events

Chronology of the file

  1. November 1 20X4Date the free-zone status was lost · Dated fact of the file

    Document 6

  2. November 28 20X4Date the finance act was promulgated · Dated fact of the file

    Document 1

  3. December 9 20X4Date the capital gains plan was announced · Dated fact of the file

    Document 1

  4. December 12 20X4Date of the distribution decision · Dated fact of the file

    Document 5

  5. December 31 20X4Reporting date · Dated fact of the file

    Document 1

Documents

File documents

7 documents: open each one to read it.

Document 1Memo

Tax department memo on rates

Tax department memo. Standard corporate income tax rate: 30% for 20X4. The finance act promulgated on 28 November 20X4 sets the standard rate at 25% for financial years beginning on or after 1 January 20X5. Gains on the sale of land and buildings are taxed at 15% on the difference between the price and the original tax cost; tax depreciation previously deducted is clawed back at the standard rate on sale. On 9 December 20X4, the government announced a plan to lower the capital gains rate to 12%; the bill had been neither tabled nor voted at 31 December 20X4 and, in this country, only the parliamentary vote enacts a rate. Reporting date: 31 December 20X4.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Standard tax rate for 20X430%
Standard rate enacted from 20X525%
Date the finance act was promulgatedNovember 28 20X4
Tax rate on real estate capital gains15%
Date the capital gains plan was announcedDecember 9 20X4
Capital gains rate contemplated by the plan12%
Reporting dateDecember 31 20X4
Taxable temporary difference on tooling€1,200,000.00
Taxable temporary difference on the revalued office building€600,000.00
Deferred tax liability recorded at 30%€540,000.00
Carrying amount of the land before revaluation€2,400,000.00
Fair value of the land€3,200,000.00
Tax base of the land€2,400,000.00
Fair value of the warehouse€3,700,000.00
Original tax cost of the warehouse€3,000,000.00
Tax written down value of the warehouse€2,400,000.00
Deferred tax liability recorded on the warehouse€325,000.00
Gross dividend declared€2,000,000.00
Date of the distribution decisionDecember 12 20X4
Withholding tax rate10%
Date the free-zone status was lostNovember 1 20X4
Free-zone tax rate10%
Taxable temporary difference of the research centre€400,000.00
Deferred tax liability recorded on the centre€40,000.00
Energy budget 20X5€4,150,000.00
Expected energy price increase8%

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 sort7

  • Tax department memo on rates

  • Schedule of temporary differences at the standard rate

  • Valuation report on the land

  • Memo on the Saint-Abeline warehouse

  • Minutes of the general meeting

  • Legal memo on the free zone

  • Extract from the purchasing budget

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

        Which rates should be used at 31 December 20X4 for deferred tax? Is the capital gains plan taken into account?

      2. Task 2Calculation

        Calculate the effect of the rate change on the differences measured at the standard rate.

        Calculator

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

        Part 1 · Calculation

        Calculate the effect of the rate change on the differences measured at the standard rate.

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

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Decrease in the liability due to the rate change

      3. Task 3Calculation

        Split this effect between profit or loss and other comprehensive income.

        Calculator

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

        Part 1 · Calculation

        Split this effect between profit or loss and other comprehensive income.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Part of the rate effect in other comprehensive income

      4. Task 4Calculation

        Calculate the deferred tax on the revalued land and the revaluation surplus net of tax.

        Calculator

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

        Part 1 · Calculation

        Calculate the deferred tax on the revalued land and the revaluation surplus net of tax.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Revaluation surplus net of tax

      5. Task 5Professional judgement

        On which manner of recovery is the deferred tax on the warehouse measured?

      6. Task 6Calculation

        Calculate the deferred tax on the warehouse and the adjustment to the recorded liability.

        Calculator

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

        Part 1 · Calculation

        Calculate the deferred tax on the warehouse and the adjustment to the recorded liability.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €

        Checks

        • 0 / 6 steps entered
        • Amounts readable

        Result: Decrease in the warehouse liability

      7. Task 7Calculation

        Calculate the withholding tax and the net dividend payable to shareholders.

        Calculator

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

        Part 1 · Calculation

        Calculate the withholding tax and the net dividend payable to shareholders.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Net dividend payable to shareholders

      8. Task 8Professional judgement

        Analyse the loss of the free-zone status: amount and allocation of the effect.

        Calculator

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

        Part 1 · Calculation

        Analyse the loss of the free-zone status: amount and allocation of the effect.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Effect of the loss of the status

      9. Task 9Journal entries

        Record the entries at 31 December 20X4.

        Calculator

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

        Part 1 · Journal entry · Journal entries

        Entry 1 of 5

        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

        3. Line 3

        TotalsDebit0Credit0

        Calculator

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

        Part 2 · Journal entry · Journal entries

        Entry 2 of 5

        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 3 · Journal entry · Journal entries

        Entry 3 of 5

        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 4 · Journal entry · Journal entries

        Entry 4 of 5

        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

        3. Line 3

        TotalsDebit0Credit0

        Calculator

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

        Part 5 · Journal entry · Journal entries

        Entry 5 of 5

        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

      10. Task 10Effects on the financial statements

        What is the impact of these entries on the financial statements and the closing deferred tax liability?

        Calculator

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

        Part 1 · Calculation

        What is the impact of these entries on the financial statements and the closing deferred tax liability?

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

        Part 2 · 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 3 · 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

      11. Task 11Conclusion

        Write the conclusion and answer the chief financial officer.

      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 / 19).

      Document this file

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

      Normative references

      • IAS 12 §46
      • IAS 12 §47
      • IAS 12 §48
      • IAS 12 §51
      • IAS 12 §51A
      • IAS 12 §51B
      • IAS 12 §51C
      • IAS 12 §20
      • IAS 12 §57
      • IAS 12 §58
      • IAS 12 §60
      • IAS 12 §61A
      • IAS 12 §62
      • IAS 12 §63
      • IAS 12 §57A
      • IAS 12 §65A