The Accounting Standards Board (ASB) currently faces a dilemma. IAS 12 (revised), Income Taxes published by the International Accounting Standards Committee (IASC), recommends measures which significantly differ from current UK practice set out in SSAP 15 Accounting for Deferred Tax. IAS 12 requires an enterprise to provide for deferred tax in full for all deferred tax liabilities with only limited exceptions whereas SSAP 15 utilises the partial provision approach. The dilemma facing the ASB is whether to adopt the principles of IAS 12 (revised) and face criticism from many UK companies who agree with the partial provision approach. The discussion paper ‘Accounting for Tax’ appears to indicate that the ASB wish to eliminate the partial provision method.
The different approaches are particularly significant when acquiring subsidiaries because of the fair value adjustments and also when dealing with revaluations of fixed assets as the IAS requires companies to provide for deferred tax on these amounts.
Required
(a) Explain the main reasons why SSAP 15 has been criticised.
(b) Discuss the arguments in favour of and against providing for deferred tax on:
(i) fair value adjustments on the acquisition of a subsidiary
(ii) revaluations of fixed assets.
(c) XL plc has the following net assets at 30 November 1997.
|
Fixed assets |
£000 |
Tax value (£000) |
|
Buildings |
33500 |
7500 |
|
Plant and equipment |
52000 |
13000 |
|
Investments |
66000 |
66000 |
|
151500 |
86500 |
|
|
Current assets |
15000 |
15000 |
|
Creditors: Amounts falling due within one year |
||
|
Creditors |
(13500) |
(13500) |
|
Liability for health care benefits |
(300) |
|
|
(13800) |
||
|
Net current assets |
1200 |
|
|
Provision for deferred tax |
(9010) |
(9010) |
|
143690 |
78990 |
XL plc has acquired 100% of the shares of BZ Ltd on 30 November 1997. The following statement of net assets relates to BZ Ltd on 30 November 1997.
|
£000 |
£000 |
£000 |
|
|
Fair value |
Carrying value |
Tax value |
|
|
Buildings |
500 |
300 |
100 |
|
Plant and equipment |
40 |
30 |
15 |
|
Stock |
124 |
114 |
114 |
|
Debtors |
110 |
110 |
110 |
|
Retirement benefit liability |
(60) |
(60) |
– |
|
Creditors |
(105) |
(105) |
(105) |
|
609 |
389 |
234 |
There is currently no deferred tax provision in the accounts of BZ Ltd. In order to achieve a measure of consistency XL plc decided that it would revalue its land and buildings to £50 million and the plant and equipment to £60 million. The company did not feel it necessary to revalue the investments. The liabilities for retirement benefits and healthcare costs areanticipated to remain at their current amounts for the foreseeable future.
The land and buildings of XL plc had originally cost £45 million and the plant and equipment £70 million. The company has no intention of selling any of its fixed assets other than the land and buildings which it may sell and lease back. XL plc currently utilises the full provision method to account for deferred taxation. The projected depreciation charges and tax allowances of XL plc and BZ Ltd are as follows for the years ending 30 November:
|
£000 |
£000 |
£000 |
|
|
Depreciation |
1998 |
1999 |
2000 |
|
(Buildings, plant and equipment) |
|||
|
XL plc |
7010 |
8400 |
7560 |
|
BZ Ltd |
30 |
32 |
34 |
|
Tax allowances |
|||
|
XL plc |
8000 |
4500 |
3000 |
|
BZ Ltd |
40 |
36 |
30 |
The corporation tax rate had changed from 35% to 30% in the current year. Ignore any indexation allowance or rollover relief and assume that XL plc and BZ Ltd are in the same tax jurisdiction.
Required
Calculate the deferred tax expense for XL plc which would appear in the group financial statements at 30 November 1997 using:
(i) the full provision method incorporating the effects of the revaluation of assets in XL plc and the acquisition of BZ Ltd.
(ii) the partial provision method.