Deductible temporary differences and deferred tax assets

Learning objectives

• Identify deductible temporary differences (a liability whose carrying amount exceeds its tax base, an asset whose tax base exceeds its carrying amount).L1, L2
• Calculate the gross deferred tax asset on deductible differences.L2
• Recognise a deferred tax asset and its movement.L2
• Explain why a debt instrument measured at fair value with an unrealised loss gives rise to a deductible difference even if the entity expects to hold it to maturity.L3

Normative references

• IAS 12 §24A deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless it arises from the initial recognition of an asset or liability in a transaction that is not a business combination, that at the time of the transaction affects neither accounting profit nor taxable profit and that does not give rise to equal taxable and deductible temporary differences (2021 amendment).
• IAS 12Recognising a liability implies that its carrying amount will be settled in future periods through an outflow of resources; when some or all of those resources may be deductible in determining taxable profit of a period later than the period in which the liability is recognised, a temporary difference exists between the carrying amount of the liability and its tax base, and a deferred tax asset results, provided that it is probable that sufficient future taxable profits will be available.
• IAS 12 §26Examples of deductible temporary differences: (a) retirement benefit costs deducted in determining accounting profit as service is provided but deductible for tax purposes only when contributions or benefits are paid; (b) research costs expensed but deductible for tax purposes in a later period; (c) in a business combination, a liability assumed whose costs will be deducted only later, or an asset acquired whose fair value is below its tax base (effect on goodwill, para. 66); (d) assets carried at fair value or revalued with no equivalent tax adjustment when their tax base exceeds their carrying amount (an example on a debt instrument measured at fair value follows the paragraph).

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

32 questions

• A provision that is deductible for tax only when paid gives rise to a deductible temporary difference, which results in a deferred tax asset to the extent that future taxable profit is probable.L1
• Every deductible temporary difference gives rise to a deferred tax asset, with no condition other than the existence of the difference.L2
• Retirement benefit costs recognised as an expense as service is provided, but deductible for tax only when contributions or benefits are paid, give rise to a deductible temporary difference.L1
• Which of these situations at Ravenelle gives rise to a deductible temporary difference? (Tax treatments: case data.)L1
• Gondrecourt has recognised a warranty provision of 80,000, deductible for tax only when repairs are made (case data). What temporary difference results?L2
• Under what main condition is a deferred tax asset recognised for a deductible temporary difference?L2
• Of the following items of Oustalet (tax treatments: case data), which give rise to a deductible temporary difference?L2
• Which statements about deferred tax assets arising from deductible differences are correct?L2
• Vesmarin holds a bond measured at fair value, 60,000 below its cost, which remains its tax base (case data). It intends to hold the bond to maturity. Which statements are correct?L3
• Castelmure has recognised a warranty provision of {provision}, deductible for tax when repairs are made. Its documented forecasts make sufficient taxable profit probable (case data). The expected rate is {tax_rate}%. Compute the deductible difference and the deferred tax asset.L2
• The printer Lauzerte has a pension liability of {pension_liability}, built up as service is provided; tax law deducts the costs only when benefits are paid (case data). Sufficient taxable profit is probable. With an expected rate of {tax_rate}%, what are the deductible difference and the deferred tax asset?L2
• At the reporting date, Montbrisac has a litigation provision of {provision}, deductible when paid, and revenue received in advance of {revenue_in_advance}, taxed when received (case data). Sufficient taxable profit is probable; the expected rate is {tax_rate}%. Compute the total deductible differences and the deferred tax asset.L2
• The mutual insurer Saint-Vrain holds a bond portfolio measured at fair value, {fair_value} at the reporting date; its tax base remains cost, {tax_base} (case data). It intends to hold the securities to maturity, and its forecasts make sufficient taxable profit probable. With an expected rate of {tax_rate}%, compute the deductible difference and the deferred tax asset.L3
• At the end of its first year, Pradelune identifies a deductible temporary difference of {deductible_difference}, arising from provisions recognised in profit or loss and deductible when paid. Sufficient taxable profit is probable; the expected rate is {tax_rate}%. No deferred tax existed at the start of the year. Record the entry.L2
• At the distributor Fenestrelle, provisions for returns, deductible when customers are refunded, are increasing. The deferred tax asset was {opening_dta} at the start of the year; the deductible difference reaches {closing_deductible_difference} at the reporting date, at the expected rate of {tax_rate}%, sufficient taxable profit remaining probable. Record the change in profit or loss.L2
• This year Rocheblave paid a large part of a termination benefit provided for last year; the payment was deducted from its taxable profit. The deferred tax asset was {opening_dta} at the start of the year; the remaining deductible difference is only {closing_deductible_difference} at the reporting date, at the expected rate of {tax_rate}%. Record the change.L2
• Ferlandine has recognised a restructuring provision of 150,000, deductible when paid next year (case data). Its future taxable profits are considered probable and sufficient. Its deferred tax schedule does not include this provision, on the grounds that 'the liability is certain'. What is the error?L2
• The regional bank Vauzelle holds bonds at fair value, 2,300,000 at the reporting date, with a tax base of 2,500,000 (cost). Sufficient taxable profit is probable (case data). The tax manager rules out any temporary difference: 'we will hold these securities to maturity, the loss will disappear'. What is the error?L3
• Escoulan holds bonds at fair value, 80,000 below their tax base. Based on management's documented analysis (case data), no taxable profit is probable in the periods in which the loss could be deducted, nor from any other source. Which analysis should be adopted?L3
• The sports club Valfrimont collected 48,000 of subscriptions for next year, recognised as a liability; tax law (case data) taxed them on receipt. Sufficient taxable profit is probable. The accountant thinks there is 'nothing to do, as the tax has already been paid'. Which analysis should be adopted?L2
• To what extent is a deferred tax asset recognised for deductible temporary differences?L2
• 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
• Hastrane, whose temporary differences all arise from items in profit or loss, has taxable differences of {opening_taxable} at the start of the year and {closing_taxable} at the reporting date, and deductible differences of {opening_deductible} and {closing_deductible}. The rate, unchanged, is {rate}%; the deferred tax assets are recoverable. Compute the deferred tax expense for the year.L3
• Kastrel recognises as an expense a warranty provision of {provision}, deductible for tax purposes when paid (tax data of the case). The rate is {rate}% and Kastrel will have sufficient taxable profits. Record the deferred tax entry.L2
• Sorbanel writes down a production line measured at cost by 160,000; the loss is recognised in profit or loss. Under the legislation in the case, the loss will only be deductible on disposal, which creates a deductible temporary difference. The rate is 25% and sufficient taxable profits are expected. What deferred tax effect does Sorbanel recognise?L3
• Rauvelle holds bonds whose fair value changes are recognised in OCI (accounting treatment given by the case). An unrealised loss of 120,000 is recognised in OCI; for tax purposes, it will only be deductible on disposal. The rate is 25% and the deferred tax asset is recoverable. Which treatment applies?L3
• On acquiring Morliandre, the Taldrix group recognises: inventories at their fair value of {inventory_fair_value} (tax base {inventory_tax_base}); patents at {patents_fair_value} (nil tax base); a litigation liability assumed of {litigation_liability}, tax deductible when paid (nil tax base). The group's future taxable profits allow the deductible difference to be used. Tax rate: {tax_rate}%. Compute the deferred tax liability and asset arising from the combination.L3
• Jaskova is 100% acquired by the Pellorix group for {consideration}. Before deferred tax, identifiable net assets at fair value are {net_assets_before_tax}. The combination gives rise to taxable differences of {taxable_differences} and deductible differences of {deductible_differences}, whose use is judged probable. Tax rate: {tax_rate}%. Using the teaching assumption goodwill = consideration − identifiable net assets, compute goodwill.L3
• The Orsavel group had not recognised a deferred tax asset on its warranty provisions of {warranty_provisions}, deductible when paid, for lack of probable taxable profit in its tax entity. The tax absorption of a profitable acquiree within the same taxable entity makes such profit probable at the acquisition date. Tax rate: {tax_rate}%. Record the entry at Orsavel.L4
• Yspala granted {options} options to its managers, subject to {service_period} years of service. The tax law in the case grants, on exercise, a deduction equal to the intrinsic value of the options, spread over the service period for the services received. At the reporting date, {years_elapsed} years of service have been rendered and the intrinsic value is {intrinsic_value} per option; all beneficiaries are expected to stay. Tax rate: {tax_rate}%. Future taxable profit is probable. Compute the deferred tax asset at the reporting date.L3
• One year after granting {options} options exercisable after {service_period} years of service, Zarnovel prepares its year-end: {years_elapsed} year of service has been rendered, the share price shows an intrinsic value of {intrinsic_value} per option, and the tax law in the case will deduct the intrinsic value on exercise, allocated to services in proportion to the period elapsed. Tax rate: {tax_rate}%; sufficient future profits. What deferred tax asset does Zarnovel recognise?L3