Investment
In accordance with IAS 12.39 an entity should recognise a deferred tax liability for all taxable
temporary differences associated with investments in subsidiaries, associates and interests in
joint ventures, except to the extent that both of the following conditions are satisfied:
The investor is able to control the timing of the reversal of the temporary difference; and
It is probable that the temporary difference will not reverse in the foreseeable future.
Consolidated financial statements
Subsidiary
A parent normally controls the dividend policy of its subsidiary and is able to control the
timing of the reversal of the temporary difference. Therefore, when a parent has determined
that the profit will not be distributed in the foreseeable future the parent does not recognise a
deferred tax liability.
However, as company ABC LTD intends to sell the subsidiary in the foreseeable future,
deferred tax should be recognised in respect of the related temporary differences at the tax rate
applicable on disposal of an investment.
Associate
Normally, an investor in an associate does not control the dividend policy of the associate and
in absence of an agreement limiting distribution of the associate’s profit in the foreseeable
future, an investor should recognise a deferred tax liability.
Joint venture
The investor should not provide for a deferred tax liability if it can control sharing of the profit
and if it is probable that the profits will not be distributed in the foreseeable future.
In this case, the key question is whether a 5 year period is a foreseeable future. Our
interpretation is that when venturers do not have an intention to change the terms of an
agreement and therefore there is no uncertainty in respect of the date of the profits distribution,
a period of 5 years is in the foreseeable future. Therefore condition b) is not met, and a related
deferred tax liability should be recognised in the consolidated financial statements of ABC Ltd.
Separate financial statements of the parent company
Recognition of deferred taxes in the separate financial statements of the parent company should
be consistent with their recognition in the consolidated financial statements. Therefore, if there
is a taxable temporary difference related to investments in subsidiaries, associates and joint
ventures, for example, when investments are measured at fair value in accordance with IAS 39
or when an impairment of an investment measured at cost is recognised, deferred tax is
recognised in the separate financial statements at the same time as in the consolidated financial
statements (as the criteria are the same).
However, when such investments are accounted for at cost and are not impaired, no deferred tax
is recognised as the accounting and tax bases normally (depending on the tax law) will be
equal.
