Probable taxable profit and tax planning

Learning objectives

• Identify the sources of taxable profit that allow a deferred tax asset to be recognised (same taxation authority, same taxable entity, same period).L2
• Calculate future taxable profit excluding tax deductions resulting from the reversal of deductible differences, and the amount of the asset that can be recognised.L3
• Assess a tax planning opportunity and the recovery of assets for more than their carrying amount.L3, L4
• Analyse the effect of a tax law restriction on the utilisation of deductions by type of income (para. 27A).L3

Normative references

• IAS 12 §27The reversal of deductible temporary differences results in deductions in determining taxable profits of future periods; the entity obtains economic benefits, in the form of reductions in tax payments, only if it earns sufficient taxable profits against which the deductions can be offset. A deferred tax asset is therefore recognised only when it is probable that such profits will be available.
• IAS 12 §27AIn assessing whether taxable profit will be available, the entity considers whether tax law restricts the sources of taxable profits against which the deduction may be made: if there is no restriction, the deductible difference is assessed in combination with all of its other deductible differences; if tax law restricts the utilisation of losses to a specific type of income, it is assessed only in combination with other deductible differences of the appropriate type.
• IAS 12 §28Taxable profit is probable when there are sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity which are expected to reverse in the same period as the expected reversal of the deductible difference, or in periods into which a tax loss arising from it can be carried back or forward.
• IAS 12 §29When there are insufficient taxable differences, the deferred tax asset is recognised (a) to the extent that it is probable that the entity will have sufficient taxable profit relating to the same taxation authority and the same taxable entity in the reversal period (or the periods into which losses can be carried back or forward) — that profit being assessed without the deductions arising from the reversal of deductible temporary differences and without the taxable amounts arising from deductible temporary differences expected in future periods, because the deferred tax asset arising from them will itself require future taxable profit — or (b) to the extent that tax planning opportunities will create taxable profit in the appropriate periods.
• IAS 12 §29AThe estimate of probable future taxable profit may include the recovery of some assets for more than their carrying amount if there is sufficient evidence that this is probable. For an asset measured at fair value, the entity considers whether it is probable that it will recover the asset for more than its carrying amount; this may be the case, for example, for a fixed-rate debt instrument that it expects to hold in order to collect the contractual cash flows.
• IAS 12 §30Tax planning opportunities are actions the entity would take to create or increase taxable income in a given period before a tax loss or tax credit carryforward expires. Examples, depending on the jurisdiction: electing to have interest income taxed when received or when receivable; deferring the claim for certain deductions; selling (possibly with a leaseback) assets whose increase in value has not been reflected in the tax base; selling an asset that generates non-taxable income in order to buy an investment that generates taxable income. When such actions move taxable profit from a later period to an earlier one, using a loss or credit carryforward still depends on future taxable profit from sources other than future originating temporary differences.
• IAS 12When an entity has a history of recent losses, it applies the guidance in paras. 35 and 36.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

26 questions

• Elmorra, which has recent tax losses, leases a logistics site: right-of-use asset and lease liability of 380,000 each. Lease payments are deductible only when paid (tax data); according to the schedule prepared (case assumption), the taxable difference on the right-of-use asset will reverse in the same periods, and for the same tax authority and entity, as the deductible difference on the liability. Tax rate: 25%. What is recognised at the commencement date?L4
• To support a deferred tax asset, an entity may count the taxable temporary differences of a sister company that is a separate taxable entity.L2
• When assessing whether future taxable profit is sufficient, the entity considers it excluding the deductions that will result from the reversal of the deductible temporary differences themselves.L2
• An action that merely causes existing deductible temporary differences to reverse is a tax planning opportunity.L2
• The estimate of future taxable profit may include the recovery of some assets for more than their carrying amount, if sufficient evidence makes it probable.L2
• Which taxable temporary differences make probable the taxable profit needed for a deferred tax asset?L2
• Without sufficient taxable differences, on what other bases may a deferred tax asset be recognised?L2
• To what extent is a deferred tax asset recognised for deductible temporary differences?L2
• Arnavelle is assessing its deferred tax asset. Which sources of taxable profit may it take into account?L2
• In which of these situations is the recovery of an asset for more than its carrying amount least likely to be included in future taxable profit?L3
• In Belgrane's jurisdiction (case data), capital losses on securities can be offset only against capital gains of the same kind. Which statements are correct when assessing the deferred tax asset relating to an unrealised capital loss on securities?L3
• Which statements about tax planning opportunities are correct?L3
• At 31 December 20X5, Cortessa has deductible temporary differences of {deductible_diff}. Its taxable differences, with the same authority and entity, that will reverse in the same periods amount to {taxable_diff}. No other source of taxable profit is probable (case assumption). Tax rate: {tax_rate}%. Compute the deferred tax asset recognised and the uncovered deductible difference.L3
• The subsidiary Delmarre has deductible differences of {deductible_diff}. Its own taxable differences, which will reverse in the same periods, amount to {own_taxable_diff}; a sister company, a separate taxable entity with no group tax regime (tax data), has taxable differences of {sister_taxable_diff}. No other source is probable. Tax rate: {tax_rate}%. Compute Delmarre's deferred tax asset and the uncovered difference.L3
• Elvarine has deductible differences of {deductible_diff}, which will reverse between 20X6 and 20X8; it has no taxable differences. Its tax budgets (case assumptions) forecast for these three years cumulative taxable profit of {forecast_after}, computed after deducting these reversals. Tax rate: {tax_rate}%. Compute the taxable profit to be compared with the differences and the deferred tax asset.L3
• Faronde has deductible differences of {deductible_diff}. Taxable differences of {taxable_diff} (same authority, same entity) will reverse in the same periods. Its probable future taxable profit, excluding reversal deductions and taxable reversals, is estimated at {forecast_excl} (case assumption). Tax rate: {tax_rate}%. Compute the available profit and the deferred tax asset.L3
• Grisolde holds a financial investment whose future disposal will generate a capital loss for tax; the related deductible difference is {capital_diff}. Its tax law (case data) offsets such losses only against capital gains; probable future capital gains are estimated at {expected_gains}, while its operating profits are more than sufficient. Tax rate: {tax_rate}%. Compute the deferred tax asset on this difference and the uncovered part.L3
• Harmont has 400,000 of deductible differences; its tax budget forecasts taxable profit of 250,000 after deducting these reversals (case assumption). It caps the deferred tax asset at 250,000 × 25% = 62,500. Where is the error?L3
• Ilvaren, taxed in France, supports a deferred tax asset of 75,000 with the taxable differences of 300,000 of its subsidiary taxed in Italy, which will reverse in the same periods. Ilvaren has no other source of taxable profit. Where is the error?L3
• Jarvelle supports a deferred tax asset with a 'tax planning opportunity': in 20X6, it will pay the termination benefits provided for, which will make the related provision deductible. No other action is planned. Where is the error?L3
• Kerlanvel has a deductible difference of 240,000 on listed securities, the loss on which, under its tax law (case data), can be offset only against gains on disposals of securities. No gain is expected within the carry-forward period; its future operating profits are very high. Tax rate: 25%. What is recognised for this difference?L3
• In Lormian's jurisdiction (case data), financial losses can be offset only against financial income. Lormian has a deductible difference of a financial nature of 200,000 and probably expects 80,000 of taxable financial income within the carry-forward period. Tax rate: 25%. Which deferred tax asset is recognised on this difference?L3
• Morlaine has 500,000 of deductible differences. Its future taxable profit, excluding reversal deductions, is estimated at 300,000. It holds a building measured at cost (carrying amount equal to tax base, 1,000,000), used in a profitable business; three consistent appraisals put its disposal value at 1,400,000, and management documents probable recovery at that amount. What may it take into account for the deferred tax asset (rate: 25%)?L3
• Nervalle has 800,000 of deductible differences and probable future taxable profit of 200,000 (excluding reversal deductions). Management presents two actions: (1) transferring to Nervalle, by a decision already approved by the board, the profitable maintenance business of a sister company, which would generate 350,000 of taxable profit in Nervalle during the reversal period; (2) settling in 20X6 accrued expenses already provided for, of 250,000. Tax rate: 25%. Which deferred tax asset is best supported?L4
• Quillardine has 600,000 of deductible differences at 31 December 20X5 (rate: 25%). Evidence gathered: 300,000 of taxable differences of the same entity reversing in the same periods; a tax budget forecasting 200,000 of taxable profit after deducting the reversals; a hoped-for gain on a plant impaired last year; and the reversal of a provision presented by management as 'tax planning'. Write the note supporting the amount of deferred tax asset to be recognised.L4
• Pradeline group comprises two separately taxed companies (rate: 25% in both countries, no group regime). A has 400,000 of deductible differences, 160,000 of own taxable differences reversing in the same periods and no probable future profit. B has 200,000 of taxable differences, but also a deductible difference of 150,000 on securities whose loss can be offset only against capital gains (data); 60,000 of gains are probable. The CFO proposes recognising the full amount at group level. Write a position paper.L4