Deferred Tax Asset on Intra-group Unrealized Profit

Discussion in 'Technical Queries' started by rabbitonthemoon, Jul 14, 2017.

  1. rabbitonthemoon

    rabbitonthemoon

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    Hi all,

    I am looking for a way to comprehend the idea of recognizing deferred tax on intra-group unrealized profit:
    Let's say subsidiary A purchased inventory at $500 and sold to subsidiary B at $800.
    At the end of the period, the inventory remains unsold.
    At consolidation level, the entries would be Dr. unrealized profit $300 and Cr. inventory $300.
    Temporary difference ($300) arises as the tax base of the unsold inventory is $800 (subsi B's inventory cost), but the book value of that inventory is $500 (value after elimination of unrealized profit).

    Assuming subsi A's tax rate is 10% and subsi B's tax rate is 30%. Which tax rate should we use to calculate the tax effect of the temporary difference? and why?

    Thanks in advance!
     
    rabbitonthemoon, Jul 14, 2017
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  2. rabbitonthemoon

    rabbitonthemoon

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    I read from an accounting guide that the buying entity's tax rate (30%) is applicable (but why?)

    if I put it in another way: after the inventory was sold to entity b, entity a recognized a current tax liability on its profit ($300 @ 10% tax rate = $30 tax liability). At the end of the period, the group recognizes a deferred tax credit to "offset" entity A's current tax liability because at group's perspective the tax liability does not exist (yet, as the group still owns the inventory).

    The group recognizes at 30% tax rate deferred tax credit ($300 @ 30% tax rate = $90 tax credit). If the group has only this transaction in the period, the consolidation result would be 0 profit and -$60 tax credit.

    This is what confuses me. What is the "correct" way to comprehend this "deferred tax on unrealized profit" idea?



     
    Last edited: Jul 14, 2017
    rabbitonthemoon, Jul 14, 2017
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