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Deferred Tax Assets

In: Business and Management

Submitted By goucelia
Words 1026
Pages 5
PART A
Part (a):
Paragraph 5 of the AASB 112 provides definition for the deferred tax asset as the amount 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. A deductible temporary difference occurs as a result of a difference between the carrying amount of an asset or liability in the statement of the financial position and its tax base (Locke, C., 2004), in which the amount is deductible in determining taxable profit (tax loss) of future periods when the carrying amount is recovered or settled.

In Surewin Ltd’s case, in terms of the accounting treatment using the accrual basis, the company recognises a product warranty expense in profit and loss for the year end from its provisions for product warranty. Whereas under the tax treatment which is cash based, the company is allowed to claim tax deductions only after it has paid out the warranty costs. There is a timing difference between when the warranty expense is recorded in the accounting books of the company (immediately) and when the liability is claimed and paid for in cash (in the future). Therefore, the difference in the carrying amount of the liabilities for product warranty in the balance sheet of the company and its tax base results in a future deductible amount. This amount is known as a deductible temporary difference, in which results in a deferred tax asset at a 30% tax rate.

Part (b):
Paragraph 24 outlines the recognition criteria for deferred tax asset as it shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available in the future against which the temporary difference can be offset.

In Surewin Ltd’s case, I agree with the auditors that the deferred tax assets arising from the provision for

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