Reference no: EM132969893
MM plc has made a profit before tax of £64.4 million for the year ended 31 March 2021. The tax rate in the tax jurisdiction where MM plc operates is 20%.
The following tax rules are relevant for the jurisdiction where MM plc operates:
All income credited and expenses charged in the income statement are allowable for tax purposes except for the following:
- A tax deduction for an inventory impairment is allowed but only for 40% of the amount written off to the statement of profit or loss. The remaining 60% is a permanent timing difference.
- Interest costs are allowable for tax purposes when the interest is paid and not when it is accrued.
- Depreciation for accounting purposes is disallowed and replaced by tax depreciation.
The tax rules follow the accounting rules for all other items of income and expenditure.
The following notes are relevant for the profit for the year ended 31 March 2021 for MM plc.
Notes:
1. Inventory impairment Profit for the year ended 31 March 2021 includes £8 million for an inventory impairment.
2. Property, plant and equipment At 31 March 2021, the carrying amount of property, plant and equipment was £36 million, compared with its tax base of £5 million. Depreciation charged for the year to 31 March 2021 is £24 million and tax depreciation is £33 million.
3. Interest costs of £4 million are included in the profit for the year. Of this amount £3 million had been paid during the year and £1 million represents an accrued interest cost.
Deferred tax liability brought forward:
- At 31 March 2020, the deferred tax liability was £4.4 million in the statement of financial position and no adjustments have yet been made to this figure in the draft financial statements at 31 March 2021.
- The deferred tax liability at 31 March 2020 related to a temporary timing difference between the carrying amount of property, plant and equipment and its tax base. The carrying amount of property, plant and equipment on 31 March 2020 was £60 million, compared with its tax base of £38 million.
Problem 1: Explain the reason for deferred tax adjustments in financial reporting. Include an explanation of the tax base concept and the initial recognition exemption.