Tax base of assets and liabilities

Learning objectives

• Calculate the tax base of an asset (the amount deductible in future; the carrying amount if the economic benefits are not taxable).L1, L2
• Calculate the tax base of a liability, including revenue received in advance.L2
• Identify an item that has no carrying amount but has a tax base (research costs deductible in a later period).L2
• Determine the relevant tax bases in consolidated financial statements (consolidated tax return or individual returns) and go back to the fundamental principle when the tax base is not immediately apparent.L3

Normative references

• IAS 12 §5Definitions: accounting profit (profit or loss for the period before deducting tax expense); taxable profit (tax loss), determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable; tax expense (tax income), the aggregate amount included in profit or loss for the period in respect of current tax and deferred tax; current tax, the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for the period; deferred tax liabilities, the amounts of income taxes payable in future periods in respect of taxable temporary differences; deferred tax assets, the amounts of income taxes recoverable in future periods in respect of deductible temporary differences, the carryforward of unused tax losses and the carryforward of unused tax credits; temporary differences, differences between the carrying amount of an asset or liability in the statement of financial position and its tax base.
• IAS 12 §7The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when it recovers the carrying amount of the asset; if those economic benefits will not be taxable, the tax base equals the carrying amount.
• IAS 12 §8The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods; for revenue received in advance, it is the carrying amount less any amount of the revenue that will not be taxable in future periods.
• IAS 12 §9Some items have a tax base but are not recognised as assets or liabilities: for example, research costs recognised as an expense under IAS 38 but deductible for tax purposes over several periods; the difference between their tax base (the amount the taxation authorities will permit as a deduction in future periods) and a carrying amount of nil is a deductible temporary difference that results in a deferred tax asset.
• IAS 12Where the tax base of an asset or liability is not immediately apparent, it is helpful to consider the fundamental principle on which the standard is based: with certain limited exceptions, a deferred tax liability (asset) is recognised whenever recovery or settlement of the carrying amount would make future tax payments larger (smaller) than they would be if such recovery or settlement had no tax consequences.
• IAS 12In consolidated financial statements, temporary differences are determined by comparing the carrying amounts in the consolidated financial statements with the tax bases, determined by reference to a consolidated tax return where one is filed, or otherwise to the tax returns of each entity in the group.

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

38 questions

• IAS 12 is limited to the tax payable for the year: the future tax consequences of recovering the assets and settling the liabilities in the statement of financial position are outside its objective.L1
• Where recovering the carrying amount of an asset will probably make future tax payments larger than if it had no tax consequences, IAS 12 requires a deferred tax liability to be recognised, with limited exceptions.L1
• What is the principal issue addressed by IAS 12?L1
• Settling a liability in the statement of financial position will probably make the entity's future tax payments smaller than if it had no tax consequences. What does the core principle of IAS 12 require?L1
• Brumelot has recognised as an expense a fine of 40,000, still unpaid at the reporting date; tax law (case data) will never allow it to be deducted. This fine gives rise to a temporary difference.L1
• The tax base of an asset is the amount that will be deductible for tax purposes against the taxable economic benefits the entity will obtain when it recovers the carrying amount of that asset.L1
• Where the economic benefits that an asset will generate will not be taxable, the tax base of that asset is nil.L1
• Research costs recognised as an expense under IAS 38, but which tax law allows to be deducted over the following years, have a tax base even though no asset is recognised.L2
• Revenue received in advance, taxed when received, has a tax base equal to its carrying amount.L2
• Pernelle holds a trade receivable of 90,000. The related revenue has already been included in its taxable profit, so the collection will not be taxed (case data). What is the tax base of the receivable?L1
• Castellane has recognised an accrual of 36,000 for professional fees, which tax law will deduct only when paid, next year (case data). What is the tax base of this liability?L2
• Ivrandel has borrowed 500,000 from a bank; under tax law (case data), repaying the principal will have no tax consequences. What is the tax base of the loan?L2
• For an unusual asset, Corlanne's tax team cannot directly identify its tax base. What approach does IAS 12 suggest?L3
• At the reporting date, which of the following items of Bérondel have a positive tax base even though no asset is recognised? (Tax treatments: case data.)L2
• Which statements about temporary differences in consolidated financial statements are correct?L3
• Fauvelle holds an asset whose tax base is not immediately apparent. Which lines of reasoning are consistent with IAS 12?L3
• Loubreuil acquired a machine for {tax_cost}, a cost recognised by the tax authorities. At the reporting date, tax law has already allowed it to deduct {tax_depreciation_to_date} (case data); the carrying amount of the machine is {carrying_amount}. Compute the tax base and the difference between carrying amount and tax base.L1
• Management software bought for {tax_cost} by the Valquirin cooperative is amortised faster for tax than for accounting: {tax_amortisation_to_date} has already been deducted for tax, while its carrying amount is still {carrying_amount} (case data). What are its tax base and the related temporary difference?L2
• The Ostrivane training centre collected {revenue_in_advance} in December for courses to be held next year; the revenue is recognised as a liability. Tax law (case data) taxes these amounts when received. Compute the tax base of the revenue received in advance and the gap with its carrying amount.L2
• The magazine publisher Tervaline received {revenue_in_advance} of subscriptions covering next year, recognised as a liability. In its country, tax law (case data) taxes these subscriptions only when the revenue is recognised in profit or loss. What are the tax base of this liability and the temporary difference?L2
• Hautmarel's accrued expenses amount to {accrued_expenses} at the reporting date. Under tax law (case data), {deductible_on_payment} will be deductible only on payment; the rest has already been deducted for the year. Compute the tax base of these accrued expenses.L2
• The Quintaverne laboratory expensed {research_costs} of research costs under IAS 38. Tax law (case data) spreads their deduction over three years; {deducted_this_year} was deducted this year. At the reporting date, what are the tax base of these costs and their carrying amount?L2
• Mérandol has recognised a litigation provision of 70,000, deductible for tax only when paid (case data). In its tax base schedule, the accountant shows a tax base of 70,000 for this provision, 'the amount that will be deducted'. Where is the error?L2
• Rivelane has recognised a dividend receivable of 120,000; tax law (case data) fully exempts this dividend. The accountant uses a nil tax base and derives a temporary difference of 120,000. What is the error?L2
• For its consolidated financial statements, the Aubrelin group computes the temporary differences on a warehouse of its foreign subsidiary, which is taxed separately (no consolidated return: case data). It uses as tax base the one the warehouse would have under the law of the parent's country. What is the error?L3
• The Calvereau group and its three domestic subsidiaries are under a tax consolidation regime: a single consolidated return is filed by the parent (case data). For a machine held by one of the subsidiaries, how is the tax base used in the consolidated financial statements determined?L3
• Sorbière has lent 400,000 to a distributor. At the reporting date, it has recognised 24,000 of accrued interest receivable. Under tax law (case data), interest is taxed when received and repayment of the principal has no tax consequences. Which analysis of the tax bases should be adopted?L3
• The equipment hirer Brissange has received 15,000 of security deposits from customers, recognised as liabilities and repayable at the end of the contracts. Under tax law (case data), these deposits are neither taxed when received nor deductible when repaid. Which conclusion should be adopted?L2
• In the Escandor group, the North subsidiary, which had acquired land for 500,000, sold it for 650,000 to the South subsidiary. Both subsidiaries are taxed separately, with no consolidated return; in South's return, the tax base of the land is 650,000 (case data). On consolidation, the intragroup gain is eliminated. Which temporary difference arises in the consolidated financial statements?L3
• 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
• Gondrecourt has recognised a warranty provision of 80,000, deductible for tax only when repairs are made (case data). What temporary difference results?L2
• Of the following items of Oustalet (tax treatments: case data), which give rise to a deductible temporary difference?L2
• 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
• 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
• 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 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
• 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