IAS 12 · Case studies (Step 3 of 5)
Case study
IAS 12 Income Taxes — wording before IFRS 18Applicable today
Applies to annual periods beginning before January 1, 2027.
The Valdrise group (fictitious entities) manufactures industrial valves and pumps. Valdrise SA, the parent, is based in Lustrania; its subsidiaries are Corvanne SA in Cadoria (loss-making), Arlesque SA in Merovia (acquired on 1 July 20X7) and Valdrise Vescaria in Vescaria (a low-tax country); the four countries are fictitious. You are the preparer of the consolidated tax closing file at 31 December 20X7; the head of consolidation is the reviewer. The financial statements will be authorised on 4 March 20X8. The current tax of Arlesque and Valdrise Vescaria and the deferred tax movements prior to the closing have been recorded; the closing adjustments remain to be made. The tax rules, rates and amounts calculated by the advisers are case data.
Your assignment
From the documents, determine current tax, the schedule of temporary differences and their exceptions, the recoverability of Corvanne's deferred tax assets, the effects of the rate change, the revaluation and the dividend, the deferred tax on the business combination, the investments and the share option plan, the offset presentation, the uncertain tax treatments and the Pillar Two tax; record the entries, measure their impact, determine tax expense, its reconciliation and the movement schedule, prepare the note and answer the chief financial officer's proposals. Document the workpapers, information requests, review and conclusion.
You prepare a complete file: documents, work, entries and conclusion, then compare your work with the solution and the review points of the file.
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 11
Document 9
Document 1
Document 7
Document 8
Document 1 · Document 5
Document 17
Document 15
Document 1
Document 13
17 documents: open each one to read it.
Document 1Memo
Scoping memo. Reporting date: 31 December 20X7; authorisation of the financial statements: 4 March 20X8. Lustrania: 25% tax for 20X7; law promulgated on 12 December 20X7 setting the rate at 22% from 1 January 20X8; all the temporary differences of Valdrise SA will reverse from 20X8. Cadoria: 20%. Merovia: 30%. Vescaria: 8%. These rates are enacted and unchanged, except in Lustrania.
The figures of the documents, gathered for your work.
| Item | Value | Found in |
|---|---|---|
| Reporting date | December 31 20X7 | |
| Authorisation date | March 4 20X8 | |
| Lustranian rate 20X7 | 25% | |
| Lustranian rate from 20X8 | 22% | |
| Date the law was promulgated | December 12 20X7 | |
| Cadorian rate | 20% | |
| Merovian rate | 30% | |
| Vescarian rate | 8% | |
| Valdrise SA profit before tax | €8,400,000.00 | |
| Non-deductible fines | €200,000.00 | |
| Net charge to the warranty provision | €600,000.00 | |
| Share option plan expense | €300,000.00 | |
| Excess tax depreciation | €1,000,000.00 | |
| Exempt dividends | €500,000.00 | |
| Instalments paid | €1,700,000.00 | |
| Corvanne's tax loss for 20X7 | €1,500,000.00 | |
| Tax paid for 20X6 | €200,000.00 | |
| Losses carried forward at the opening | €2,500,000.00 | |
| Opening deferred tax asset on losses | €500,000.00 | |
| Carry-forward period | 5 years | |
| Corvanne's taxable temporary differences | €800,000.00 | |
| Taxable profits budgeted by local management | €1,500,000.00 | |
| Carrying amount of the tooling | €9,000,000.00 | |
| Tax cost of the tooling | €10,000,000.00 | |
| Tax depreciation deducted | €4,000,000.00 | |
| Opening taxable difference on the tooling | €2,000,000.00 | |
| Opening deferred tax liability on the tooling | €500,000.00 | |
| Warranty provision | €1,400,000.00 | |
| Opening deductible difference on warranties | €800,000.00 | |
| Opening deferred tax asset on warranties | €200,000.00 | |
| Commencement date | December 31 20X7 | |
| Right-of-use asset | €2,400,000.00 | |
| Lease liability | €2,400,000.00 | |
| Carrying amount of the land before revaluation | €3,000,000.00 | |
| Fair value of the land | €4,000,000.00 | |
| Tax base of the land | €3,000,000.00 | |
| Capital gains rate on land | 15% | |
| Dividend declared | €3,000,000.00 | |
| Date of the decision | December 14 20X7 | |
| Withholding tax rate | 10% | |
| Date the contract was signed | December 18 20X7 | |
| Taxable profit expected from the contract | €1,200,000.00 | |
| Acquisition date | July 1 20X7 | |
| Consideration transferred | €12,000,000.00 | |
| Arlesque's book net assets | €7,000,000.00 | |
| Fair value adjustment to the land | €800,000.00 | |
| Fair value adjustment to the brand | €1,200,000.00 | |
| Identifiable net assets at fair value before deferred tax | €9,000,000.00 | |
| Consolidated carrying amount of the investment in Arlesque | €12,900,000.00 | |
| Tax base of the Arlesque shares | €12,000,000.00 | |
| Consolidated carrying amount of the investment in Valdrise Vescaria | €2,600,000.00 | |
| Tax base of the Valdrise Vescaria shares | €2,000,000.00 | |
| Distribution decided by Valdrise Vescaria | €400,000.00 | |
| Tax rate on dividends received from low-taxed subsidiaries | 5% | |
| Options granted | 200,000 units | |
| Grant date | January 1 20X7 | |
| Vesting period | 3 years | |
| Intrinsic value per option at the reporting date | €6.00 | |
| Transfer pricing, outcome 1 | €0.00 | |
| Probability of outcome 1 | 30% | |
| Transfer pricing, outcome 2 | €200,000.00 | |
| Probability of outcome 2 | 40% | |
| Transfer pricing, outcome 3 | €500,000.00 | |
| Probability of outcome 3 | 30% | |
| Tax at stake on Arlesque's deduction | €300,000.00 | |
| Probability that Arlesque's deduction is accepted | 40% | |
| Top-up tax of Valdrise Vescaria | €140,000.00 | |
| Effective date of the Lustranian rules | January 1 20X9 | |
| Estimated exposure, lower bound | €50,000.00 | |
| Estimated exposure, upper bound | €80,000.00 | |
| Consolidated profit before tax | €9,200,000.00 | |
| Arlesque's profit (six months) | €1,500,000.00 | |
| Arlesque's current tax | €450,000.00 | |
| Valdrise Vescaria's profit | €800,000.00 | |
| Valdrise Vescaria's local tax | €64,000.00 | |
| Opening net deferred tax asset | €40,000.00 | |
| Date of the memo | February 10 20X8 | |
| Training hours | 18,500 units | |
| Safety budget | €420,000.00 | |
| Annual premium | €265,000.00 | |
| Renewal date | January 1 20X8 |
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.
Scoping memo
Valdrise SA tax return workings
Corvanne tax memo
Schedule of fixed assets and provisions
Warehouse lease
Valuation report on the land
Minutes of the general meeting
Corvanne supply contract
Arlesque acquisition file
Minutes of the board on investments
Share option plan
Advisers' memo on uncertain treatments
Pillar Two memo
Consolidation schedule
Memo from the chief financial officer
Extract from the social report
Insurance invoice
Organise your work freely: deal with each point, then argue your conclusion.
Task 1Analysis
Which entities, authorities and rates does the file cover?
Task 2Calculation
Calculate the current tax of Valdrise SA, its balance and Corvanne's carryback asset.
Part 1 · Calculation
Calculate the current tax of Valdrise SA, its balance and Corvanne's carryback asset.
Result: Corvanne's carryback asset
Task 3Calculation
Determine the tax bases, temporary differences and deferred tax of Valdrise SA.
Part 1 · Calculation
Determine the tax bases, temporary differences and deferred tax of Valdrise SA.
Result: Deferred tax asset and liability on the lease
Task 4Professional judgement
Assess the exceptions: lease and Arlesque's goodwill.
Part 1 · Calculation
Assess the exceptions: lease and Arlesque's goodwill.
Task 5Professional judgement
Assess the recoverability of Corvanne's losses.
Part 1 · Calculation
Assess the recoverability of Corvanne's losses.
Task 6Calculation
Calculate Corvanne's deferred tax asset, its write-down and the unrecognised losses.
Part 1 · Calculation
Calculate Corvanne's deferred tax asset, its write-down and the unrecognised losses.
Result: Corvanne's unrecognised losses
Task 7Calculation
Calculate the effects of the rate change and the deferred tax on the revalued land.
Part 1 · Calculation
Calculate the effects of the rate change and the deferred tax on the revalued land.
Result: Revaluation surplus net of tax
Task 8Calculation
Deal with the dividend declared by Valdrise SA.
Part 1 · Calculation
Deal with the dividend declared by Valdrise SA.
Result: Net dividend payable
Task 9Calculation
Calculate the deferred tax on the business combination and analyse the investments.
Part 1 · Calculation
Calculate the deferred tax on the business combination and analyse the investments.
Result: Tax on the decided distribution
Task 10Calculation
Calculate the deferred tax asset of the share option plan and its allocation.
Part 1 · Calculation
Calculate the deferred tax asset of the share option plan and its allocation.
Result: Part in equity
Task 11Calculation
Determine the offset presentation of deferred taxes.
Part 1 · Calculation
Determine the offset presentation of deferred taxes.
Result: Amount offset
Task 12Calculation
Measure the uncertain tax treatments.
Part 1 · Calculation
Measure the uncertain tax treatments.
Result: Most likely amount, Arlesque deduction
Task 13Professional judgement
Conclude on the uncertain treatments and on Pillar Two.
Part 1 · Calculation
Conclude on the uncertain treatments and on Pillar Two.
Task 14Journal entries
Record the closing entries.
Part 1 · Journal entry · Journal entries
Entry 1 of 15
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 15
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 15
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 15
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 5 · Journal entry · Journal entries
Entry 5 of 15
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 6 · Journal entry · Journal entries
Entry 6 of 15
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 7 · Journal entry · Journal entries
Entry 7 of 15
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 8 · Journal entry · Journal entries
Entry 8 of 15
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Line 3
Part 9 · Journal entry · Journal entries
Entry 9 of 15
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 10 · Journal entry · Journal entries
Entry 10 of 15
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 11 · Journal entry · Journal entries
Entry 11 of 15
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Line 3
Part 12 · Journal entry · Journal entries
Entry 12 of 15
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 13 · Journal entry · Journal entries
Entry 13 of 15
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 14 · Journal entry · Journal entries
Entry 14 of 15
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 15 · Journal entry · Journal entries
Entry 15 of 15
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Line 3
Line 4
Task 15Effects 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.
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 16Calculation
Determine tax expense, its reconciliation and the deferred tax movement schedule.
Part 1 · Calculation
Determine tax expense, its reconciliation and the deferred tax movement schedule.
Result: Control difference of the movement schedule
Task 17Conclusion
Write the conclusion of the file and answer the chief financial officer.
Points raised during the review of this file: read them as the preparer would.
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 / 36).
Document this file
These working papers use the data and results of this case.
Normative references