Deferred Tax--->Tax Base of Associate

[Muhammad Amir]

Dear Mr KamranACA I want some explanation,

As per accounting rule we add share in post acquisition profits of associate and less any dividends received from it to calculate the investment in associate.

IAS 12 says that An entity shall recognize a deferred tax liability for all taxable temporary differences associated with investment in associates, subsidiaries, branches and joint ventures except to the extent that both of the following conditions are satisfied
==>The parent investor or venturer is able to control the timing of reversal of temporary difference.
==>It is probable that temporary difference will not reverse in foreseeable future.

So, If these two exceptions are not applicable then we have to realize the temporary difference.

As per taxation rules when we adjust accounting profit in to taxable profits we deduct the share in associate(due to which current tax liability reduced) and add back the dividend received from associate(which give raise to current tax liability) and normally it proves to be tax efficient as current tax liability saved.

My question is that, for deferred tax 'Carrying Amount' we pick the balance sheet value of Investment in Associate(which is Cost of Investment plus share in post acquisition profits of Associate) how we calculate the tax base for it???

I am solving a question but there was an statement given that <b>"In Tax records investment in associate appears at cost which is Rs 105,000"</b><i>and this is the tax base for an associate which is already given but i want to know how to calculate this.</i>

I hope you will help me regarding this.

Regards,

Muhammad Amir

[kamranACA]

Dear Amir,


Accounting base of investment in associate is the carrying value as per balance sheet, which of course includes post acquisition profits/reserves and excludes dividends etc.

Tax base of investment is the actual cost incurred in acquiring / purchasing the investment at the outset of transaction.

Now I don't know whether or not appropriate data is available in your question and if it is available how it has to be deduced in the given circumstances. As far as companies are concerned, they always have the data of actual costs and subsequent measurement movements, therefore, they don't find it a matter of difficulty.

If you see the disclosures of investment in associate, you will note that a reconciliation is required by paragraph 38 of IAS 28 whereby separate disclosure of investor's share in profit or loss and actual carrying values is required. If such disclosure is appropriately drafted, the actual cost (original carrying value before recognizing investors share of profit or loss) could be found. However, so many company's don't give much detailed disclosure / reconciliation under this paragraph.

Even if investments are stated under IAS 39. The tax base has to remain its original cost. You may also have noted that some companies provide deferred taxation on fair value gains recognized against "unquoted" investments held for trading etc. Gains on listed securities has been exempted from tax therefore such gains are not subject to tax or deferred tax. So, in case of unlisted / unquoted investments such unrealized gains are not credited to investments for calculating tax base of investments. Rather, tax base has to remain the original cost.

Now you will have to discuss the specific issue with your question that how you approach or question requires you to approach to the cost of the investment in associate.

If you have data you can deduct all accumulated post acquisition profits/reserves from the investment and add back all the accumulated dividends over the period of holding such investment to reach the cost.

However, this methodology may require to make certain adjustments for investments sold during any period.

Simply speaking either you will have the data regarding cost of investments in your question or some other detailed reconciliation / disclosure or other information would be available and you will have to decide in specific circumstances that how cost could be arrived at.

There is no fix formula for this purpose.


Regards,



Kamran.

[Muhammad Amir]

Thank you so much dear KamranACA for your help.

Regards,

Muhammad Amir