I have a company who is in it's second year of trading. It has reported losses for both of it's first two years. It claimed 100% AIA on it's assets in the first year. Should I still include a deferred tax charge in the accounts even though they have losses?
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I think you are asking the wrong question.
The first question should be:
What is this company's deferred tax liability or asset at the end of the year?
The second question should be:
Do we provide for some or all of that liability?
The answer to the question you ask just follows as a matter of arithmetic from the answers to the above.
The unused tax losses will be one of the components of the calculation you need to do to answer the first question.
More than just arithmetic
The timing difference is the NBV less the TWDV of the assets which qualify for capital allowances. From that, you deduct the tax losses carried forward. If the balance is positive, it is just arithmetic - calculate the required deferred tax provision (liability).
If the balance after deducting the tax losses is negative, you have to make a judgement. Will the company make sufficient profits in the foreseeable future (perhaps, just one year) to be able to obtain relief for the losses? If your conclusion is Yes, it is then just arithmetic - calculate the required deferred tax asset. If your conclusion is No, you must not recognise an asset, so you will include nothing.
The other half of the deferred tax provision or asset in the balance sheet is the deferred tax charge or credit in the P&L.
I said it was just arithmetic after making the judgement required by the second question I said needed to be addressed.
So once that point has been reached I maintain strongly that it is all arithmetic, despite what you say in your heading. Have you perhaps not read my answer properly?
@John
Have you perhaps not read my answer properly?
Perhaps, you should read your own answer properly. It is headed "I said it was just arithmetic" and you go on to emphasise that judgement is required.
OFHS John
Have you perhaps not read my answer properly?
Perhaps, you should read your own answer properly. It is headed "I said it was just arithmetic" and you go on to emphasise that judgement is required.
I said it was arithmetic after the judgement as to how much, if any, of the asset or liability to provide had been exercised.
My use of the word "arithmetic" comes after not before my second question, which is the judgement call.
You seem to be reading my answer backwards.
I was not referring to your first response, but to your one at 16:43 headed "I said it was just arithmetic" which was clearly a misleading description of your opinion. No-one disagrees with your first response at 15:52. I would suggest that you might like to enter the heading separately in future and not just allow it to be auto-filled from the first line of the body of your responses.
Arithmetic
No-one disagrees with your first response at 15:52.
You did, or appeared to, by starting your response "more than just arithmetic".
Other way round surely
To make the judgement you need to have some idea of the quantum. So, unless it is clearly immaterial, you have to do the calculations before deciding whether to provide for it. I said it was just arithmetic after making the judgement required by the second question I said needed to be addressed
Backwards again?
To make the judgement you need to have some idea of the quantum. So, unless it is clearly immaterial, you have to do the calculations before deciding whether to provide for it. I said it was just arithmetic after making the judgement required by the second question I said needed to be addressed
Oh dear. Someone else reading my answer backwards.
My first question was to compute the liability or asset;
My second question was to decide how much if any of it to provide for.
Is that the correct and logical order or not?
Not enough information again
There are two elements here. The effect of accelerated capital allowances and the effect of the losses.
As the OP provides no numbers but does say there are "losses" - which I take to mean there's a negative P+L balance - the likelihood is that the "loss" effect will outweigh the "capital allowances" effect and you'll have a potential deferred tax asset.
Entirely up to the directors to decide whether to include that asset. Personally, I can't recall an instance where I have done.
The loss c/fwd on the P&L is irrelevant. The loss that you need to include on your calculation is the unused tax loss carried forward at the end of the year, which you get from the corporation tax computation. If your calculation produces a debit balance (i.e. a deferred tax asset) you need to make the judgement referred to in the second paragraph of Euan's first post above.
The other part of the calculation by the way is not just the "WDV of the assets". It is the difference between the accounting book value of the assets on which capital allowances have been claimed and the tax written down values of those assets.
Your numbers look right - I hope you have done a proof of tax to check.
Your last point is a matter of judgement for the directors. There is no right or wrong answer.
No a proof of tax is a reconciliation of the pre tax accounting profit or loss with the tax charge or credit (both current and deferred). It's an essential check of the arithmetical accuracy of your deferred tax calculation and that you have not missed or double counted anything.