Deferred tax help

cornflower

Please can someone help me with this question.

Company operates in a country that gives a tax allowance equal to the intrinsic value of share options on the exercise date. Company grants share options at grant date of $1.6 m and intrinsic value is 2m. Company pays tax at 30%. What are the deferred tax implications?

Thanks in advance.

cornflower

Forgot to add that this is a college question.

Steve Collings

Hi

Because in many countries the tax allowance is likely to be based on the intrinsic value of the share options (accounted for under IFRS 2/FRS 20 by the way) it is likely that a deferred tax asset will arise that represents the difference between the tax base of the employee's services received todate and the carrying amount (which is usually zero).

In your question a deferred tax asset would be recognised of $2m x 30% x 1 / 2 = $300,000. The income statement will be credited with $1.6m x 30% x 1/2 = $240,000 and equity will be credited with $0.4m x 30% x 1/2 = $600,000. Because the intrinsic value of $2m exceeds the expense that will be charged to the income statement of $1.6m, part of the deferred tax asset is recorded in equity. However, bear in mind that if the future expense exceeds the intrinsic value, the amount recorded in equity will be taken to the income statement.

Don't also forget that IFRS/IAS often overlap so consider the IAS 12 requirements that a deferred tax asset can only be recognised if there will be suitable taxable profits from which the asset can be utilised.

Regards
Steve