Question Tag: IAS 12

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  • 20 Marks

CR – Nov 2020 – L3 – Q5 – Leases (IFRS 16)

Discuss lease classification, loan liability derecognition under IFRS 9, and tax offsetting rules under IAS 12.

Muzana Limited owns tractors used for farming purposes and sometimes enters into lease arrangements with other agricultural companies. A particular tractor when leased out by Muzana is for 8 years. The useful economic life of each tractor is estimated at 10 years while the fair value of each tractor is estimated at N26 million. The present value of minimum lease payments in the lease arrangement is N28 million. Lease payments are made to Muzana by the lessee on a monthly basis and has a purchase option at the end of the lease term to acquire the machine for N2.2 million. A similar fairly used machine in the market will cost the buyer N2.5 million. Following the transition to IFRS 16, the management of Muzana have classified this lease as an operating lease in its year-end financial statements.

In order to expand its operations, Muzana accessed the Agricultural Loan Credit Programme set up by the government of Nigeria. In the year 2016, Muzana was granted a 5-year interest free loan of N100 million. At year end September 30, 2019, Muzana had been able to set aside N100 million in a special trust to be used for no other purpose than to pay off the loan in full on its due date in 2020. The management of Muzana are currently preparing their year-end 2019 financial statements and have derecognised the loan liability due to the fact that funds have been set aside in full to satisfy the loan payment in 2020.

Muzana Limited have just concluded a meeting with its tax consultant. The amounts due to the state tax authorities in the current year is N2.3 million. Muzana also has a tax credit of N1.8 million due from the Federal government in the current year. The tax consultant has advised Muzana that these amounts can be offset in their year-end financial statements to show only a tax liability of N500,000.

Required: a. Explain how the lease arrangement should be classified in Muzana‘s 2018 year-end financial statements? (7 Marks) b. Advise the management of Muzana, based on IFRS 9 derecognition rules, if the loan liability can be recognised in their year-end September 30, 2019 financial statements. (7 Marks) c. Explain if the advise provided by the tax consultant is consistent with the offsetting rules under IAS 12 Income Taxes? (6 Marks)

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  • 15 Marks

CR – May 2018 – L3 – SC – Q5b – Consolidated Financial Statements (IFRS 10)

Compute deferred tax provision and charge for Tola Plc. as of December 31, 2017.

The following information relates to Tola Plc. as at December 31, 2017:

Description Carrying Amount (N) Tax Base (N)
Plant and equipment 250,000 218,750
Receivables:
Trade receivables 62,500 68,750
Interest receivable 1,250 0
Payables:
Fine 12,500 0
Interest payable 2,500 0

Further information:

  1. The trade receivables balance includes balances of N68,750 less a specific doubtful debt provision of N6,250.
  2. Deferred tax balance as of January 1, 2017, was N1,500.
  3. Interest is taxed on a cash basis.
  4. Doubtful debt allowances are not tax-deductible; receivables are only deductible upon a court order.
  5. Fines are non-deductible for tax purposes.
  6. The tax rate for 2017 is 30%, with an anticipated rise to 36% in 2018.

Required:

Compute the deferred tax provision required as of December 31, 2017, and the charge to profit or loss for the period in accordance with IAS 12 – Income Taxes.
(11 Marks)

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  • 12 Marks

FR – Nov 2023 – L2 – Q5b – Accounting for Income Taxes (IAS 12)

Calculate Shakara Limited's income tax liability, deferred tax balance, and movement of deferred tax.

Shakara Limited was incorporated on January 1, 2022. During the year ended December 31, 2022, the company made a profit before taxation of N18,150,000.

The following capital expenditure were made during the year:

Expenditure N’000
Plant and machinery 7,200
Motor vehicles 1,800

The depreciation charged for the year amounted to N1,650,000, and capital allowance granted by the Federal Inland Revenue Services (FIRS) for the same period amounted to N2,250,000.

Company income tax rate is 30%, and deferred tax liability brought forward was N1,200,000.

Required:
i. Calculate the company income tax liability for the year ended December 31, 2022. (3 Marks)

ii. Calculate the deferred tax balance that should be disclosed in the statement of financial position of Shakara Limited as at December 31, 2022. (3 Marks)

iii. Prepare notes showing the movement of deferred tax charged to profit or loss for the year ended December 31, 2022. (3 Marks)

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  • 3 Marks

FR – Nov 2023 – L2 – Q5a – Accounting for Income Taxes (IAS 12)

Define deferred tax, permanent differences, and temporary differences per IAS 12.

Explain the following terms in accordance with IAS 12 – Income tax.
i. Deferred tax
ii. Permanent differences
iii. Temporary differences

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  • 15 Marks

FR – May 2024 – L2 – SA – Q7 – Accounting for Income Taxes

Explains the qualitative characteristics of financial statements and describes the methods of valuation for property, plant, and equipment.

a. The Conceptual Framework for Financial Reporting states the qualitative characteristics of financial information.

Required:
Identify and explain FIVE qualitative characteristics of general-purpose financial statements. (10 Marks)

b. IAS 16 prescribes the principles and the valuation methods in recognizing items of property, plant, and equipment in the financial statements of an entity.

Required:
Describe the TWO methods of valuation recognized in IAS 16 on property, plant, and equipment. (5 Marks)

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  • 20 Marks

FR – May 2024 – L2 – SA – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explains temporary differences, components of tax expense, and deferred tax calculations for Buga Nigeria Limited.

a. Accounting for deferred tax is based on the identification of temporary differences.

Required:
Explain the term “Temporary difference” and discuss the TWO different types. (3 Marks)

b. State and briefly explain FIVE components of tax expense or income. (5 Marks)

c. Buga Nigeria Limited had an accounting profit before taxation of N196,800,000 for the year ended September 30, 2022. The following balances were extracted from the company’s books as at September 30, 2022.

Other information:

  1. Interest income is taxed while interest expense is allowable on a cash basis. There were no opening balances on interest receivable and interest payable.
  2. The trade receivables above are shown net of an allowance for doubtful balances of N16,750,000. This is the first year that such an allowance has been recognized. A deduction for debts is only allowed for tax purposes when the debtor is in the process of winding-up.
  3. The balances in respect of office equipment are after charging accounting depreciation of N28,250,000 and tax allowable depreciation of N22,500,000 respectively.
  4. The freehold property was purchased on October 1, 2021, for N263,000,000 and is being depreciated for accounting purposes on a 10% per annum basis. Buga Nigeria Limited is in a position to claim N94,600,000 as accelerated depreciation on cost as a taxable expense in this year’s tax computation.

Required:

i. Prepare a tax computation and calculate the current tax expense. (4 Marks)

ii. Calculate the deferred tax liability as at September 30, 2022. (6 Marks)

iii. Show the movement on the deferred tax account for the year ended September 30, 2022, given that the opening balance was N8,100,000. (2 Marks)

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  • 15 Marks

FR – Nov 2019 – L2 – Q2b – Accounting for Income Taxes (IAS 12)

Calculate current and deferred tax for Dan Ruwa Nigeria Limited and prepare the statement of profit or loss.

b. Dan Ruwa Nigeria Limited is a company that specializes in the production of bottled and sachet water. The company was incorporated on January 1, 2018.

The summarised financial statements of the company for the year ended December 31, 2018, are as follows:

Extract of Statement of Profit or Loss for the year ended December 31, 2018:

Description N’000
Revenue 270,000
Administrative and other allowable expenses (138,000)
Accounting depreciation (11,000)
Net profit before taxation 121,000

Extract of Statement of Financial Position as at December 31, 2018:

Description N’000
Property, plant & equipment 48,000
Motor vehicle 12,000
Less: Depreciation (11,000)
Carrying amount 49,000
Description N’000
Ordinary share capital 17,000
Retained earnings 12,000
Other liabilities 20,000
Total 49,000

The Federal Inland Revenue Service (FIRS) granted the company a capital allowance on its non-current assets, which amounted to N15,000,000, and the company income tax rate is 30%.

Required:

i. Calculate the current income tax expense and the deferred tax liability balance that should be disclosed in the statement of financial position of the company as at December 31, 2018.
(10 Marks)

ii. Prepare the statement of profit or loss of Dan Ruwa Nigeria Limited showing the tax expense for the year ended December 31, 2018.
(5 Marks)

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  • 5 Marks

FR – Nov 2019 – L2 – Q2a – Accounting for Income Taxes (IAS 12)

Explain the concepts of current tax and deferred tax in accordance with IAS 12.

a. In accordance with IAS 12 on Income Tax, the income tax expense in the statement of profit or loss is composed of two tax components:

i. Current tax
ii. Deferred tax

Required:

Explain these two tax components.
(5 Marks)

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  • 8 Marks

FR – May 2018 – L2 – Q6b – Accounting for Income Taxes (IAS 12)

Calculate the deferred tax charge/credit for Lawmarg Nigeria Limited and the deferred tax balance in the statement of financial position.

Lawmarg Nigeria Limited purchased an item of plant for N2,000,000 on October 1, 2014. It had an estimated life of eight years and an estimated residual value of N400,000. The plant is depreciated on a straight-line basis. The tax authorities do not allow depreciation as a deductible expense. Instead, an initial capital allowance of 40% of the cost of this type of asset can be claimed against income tax, and 20% per annum (on a reducing balance basis) of its tax base thereafter. The rate of income tax is 30%.

Required: In respect of the above item of plant, calculate the deferred tax charge/credit in Lawmarg Nigeria Limited’s statement of profit or loss for the year ended December 31, 2017, and the deferred tax balance in the statement of financial position at that date.

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  • 7 Marks

FR – May 2018 – L2 – Q6a – Accounting for Income Taxes (IAS 12)

Explain the need for providing deferred tax and the principles for accounting for deferred tax under IAS 12.

IAS 12 – Income Tax details the requirements relating to the accounting treatment of deferred tax and current income tax.

Required: Explain the need to provide for deferred tax and briefly outline the principles of accounting for deferred tax contained in IAS 12.

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  • 6 Marks

FR – May 2017 – L2 – Q2c – Financial Reporting Standards and Their Applications

Explain deferred tax, identify reasons for deferred tax increase, and explain overprovision in the income statement.

The draft financial statements for the year ended 31 March 2015 for Kobby Ltd include the following:

Required:
i) Explain how deferred tax arises.
(2 marks)

ii) Identify the most likely reason for the increase of GH¢200,000 in the deferred tax provision for the year to 31 March 2015.
(2 marks)

iii) Explain what the over provision of GH¢50,000 in the income statement represents.
(2 marks)

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  • 2 Marks

FR – Nov 2018 – L2 – Q2e- Financial Reporting Standards and Their Applications

This question tests the explanation of temporary differences in relation to deferred tax liabilities and assets under IAS 12.

In accordance with IAS 12: Income Taxes, deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.

Required:
Explain temporary differences.

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  • 4 Marks

FR – May 2019 – L2 – Q2c – Financial Reporting Standards and Their Applications

Explanation of how under- and over-provision of taxes is handled under IAS 12.

IAS 12: Income Taxes sets out guidance for dealing with under-provision and over-provision of income taxes by reporting entities.

During the year ended 31 March 2019, Dansoman Ltd finalised and paid its liability for corporate tax on profit for the year ended 31 March 2018 at an amount of GH¢21 million. It had previously made an estimated provision for corporation tax of GH¢25 million in the financial statements for the year ended 31 March 2018. The directors estimate the liability for the year ended 31 March 2019 at GH¢24.5 million.

Required:

Explain the treatment of the above transactions in the financial statements of Dansoman Ltd for the year ended 31 March 2019 in respect of taxation.

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  • 5 Marks

CR – May 2018 – L3 – Q2e – IAS 12: Income Taxes

Explain how to account for deferred tax arising from revaluation of land.

On 1 October 2016, Abudu Ltd decided to revalue its land for the first time. The land was originally purchased six years ago for GH¢65,000 and was revalued to its current market value of GH¢80,000 on 1 October 2016. The difference between Abudu Ltd’s net assets (including revaluation of land) and the lower tax base at 30 September 2017 was GH¢27,000. The opening deferred tax liability at 1 October 2016 was GH¢2,600, and Abudu Ltd’s tax rate is 25%.

Required:
Explain how to account for the above transaction in the financial statements of Abudu Ltd for the year to 30 September 2017. (5 marks)

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  • 10 Marks

CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes

Discuss the appropriate accounting treatments for Sanda Ltd’s preference shares and deferred tax asset.

Sanda Ltd, a consumer electronics company in Accra, faced a challenging year due to increased competition and COVID-19. Sanda Ltd has a year-end of 31 December 2021. The unaudited financial statements reported an operating loss, and debt covenant limits were close to being breached. The following occurred during the year:

i. On 1 January 2021, the Finance Director and CEO paid GH¢3 million each for preference shares that provide cumulative dividends of 7% per annum. These preference shares can either be converted into a fixed number of ordinary shares in three years or redeemed at par. The Finance Director suggested classifying the preference shares as equity.

ii. Sanda Ltd included a deferred tax asset in the statement of financial position based on losses incurred in the previous two years. The Finance Director asked the Accountant to include the deferred tax asset in full, expecting a return to profitability once funding issues are resolved.

Required:
With reference to International Financial Reporting Standards (IFRS), discuss the appropriate accounting treatments which Sanda Ltd should adopt for the issues identified in i) and ii) and their impact on gearing as at 31 December 2021.

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