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Wepesi Ltd. has been making losses for the last four years. The management the company has developed an exit loss making activity will be discontinued....

      

Wepesi Ltd. has been making losses for the last four years. The management the company has developed an exit loss making activity will be discontinued. The management intends to implement the measures from. The management expects to reverse the losses over the next two years following the implementation of the exit plan.
The management proposes that a deferred tax asset is recognized in respect of the losses incurred using the exit plan to justify the recognition of the deferred tax asset.
The management is preparing the financial statements for the year ended 31st May 2010. The current date is 7th June 2010 and the plan has not yet been made public

i. With respect to the International Accounting Standard IAS 12, Income Taxes, argue the case for or against recognition of the deferred tax asset n the financial statements of Wepesi Ltd. For the year ended 31st May 2010.
ii. Explain the factors you would take into consideration in assessing the likelihood of the projected profits being realized by Wepesi Ltd.

  

Answers


Wilfred
i) The deferred tax asset should not be recognized
- IAS 12 requires timing differences to be recognized when there is reasonable expectation of realization
- Deferred tax arising from tax losses should be recognized as an asset only where there is assurance beyond any reasonable doubt that future taxable income would be sufficient to allow the benefit of the loss to be realized
- In the case of Wepesi ltd there is high degree that recent losses raises significant concerns whether the management plan is achievable or not

ii)The Factors To Consider Are
- The probability that management will implement the plan
- Management ability to implement the plan by the example obtaining concessions from labour unions
- The level of detailed analysis and sensitivity analysis prepared by management
- The extent to which the plan of Wepesi ltd could be verified objectively
Wilfykil answered the question on February 13, 2019 at 06:06


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