Accounting for tax losses*

Few construction companies have as much experience of land reclamation and conservation as the Stevin Company which made its name on the Zuider Zee project. The company had been consistently profitable until x7 when, as a result of a fall in revenues and a large restructuring charge, it reported a before-tax loss of 200 in its published accounts (amounts are in millions).

Key details from the company’s records are set out below. The taxable temporary differences are attributable largely to differences in the book and tax treatments of depreciation and profits on longterm contracts. Most of the deductible difference in x7 is attributable to the restructuring charge.

There are no permanent differences.AppenedixLO1

x5 x6 x7 Accounting profit (loss) 600 700 (200)
End-year temporary differences:
Taxable 270 380 540 Deductible 20 50 300 The corporate income tax rate is 40%. The company is uncertain about future profits and therefore recognises a deferred tax asset only up to the amount of its deferred tax liability at the balance sheet date.
Required What is the income tax expense or benefit the Stevin Company will recognise in x6 and x7, assuming:

(a) it can carry tax losses forward but not back?

(b) it can carry tax losses back (one year only) as well as carry them forward?
In each case, determine the deferred tax balances Stevin will report in its end-x6 and end-x7 balance sheets.
Check figures:

(a) Deferred tax benefit, x7 80

(b) Deferred tax benefit, x7 36 * Assignment draws on material in section 2 of this chapter.

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Exhibit 17.17 Siam City Cement Company: tax-related disclosures in 2001 accounts In baht million Statement of income (condensed) Net sales Income before tax" Income tax Group net income Minority interest in income of subsidiary companies Net income attributable to parent company shareholders Notes 2001 2000 15,927.8 14,255.8 3,320.3 1,597.2 26 -998.2 -562.0 2,322.1 1,035.2 -72.7 -83.1 2,349.4 952.1 * Of which SCCC's share of Income of associated companies is 236.9 (2000: 41.9 loss). Balance sheet, end year (condensed) Current assets Property, plant and equipment, net Investments in associated companies Other assets 6,705.7 12,817.0 4,608.1 13,617.3 711.9 544.2 4,129.3 4,946.6 [of which: Deferred tax assets 26 832.7 1,830.9] Total assets 24,363.9 23,716.2 Current liabilities 1,884.1 2,076.9 [of which: Income tax payable 71.1] Long-term debt 6,219.0 6,892.4 Provident fund and employee resignation benefit plan Group equity 358.2 333.4 15,902.6 14,413.5 Total liabilities and shareholders' equity 24,363.9 23,716.2 Note 26 Income tax (in baht million) The provision for income tax is as follows: Current tax Deferred tax The components of the deferred tax asset are as follows: 2001 2000 82.4 998.2 479.6 998.21 562.0 December 31, Changes December 31, 2000 during year 2001 Tax loss carry forwards 1,432.7 Allowance for doubtful accounts 71.1 (861.0) 1.1 571.7 72.2 Allowance for obsolete stocks 13.0 13.0 Equity in loss of associated companies 249.9 (142.3) 107.6 Provident fund and employee resignation benefit plan 64.2 4.0 68.2 Deferred income tax asset (net) 1,830.9 (998.2) 832.7 Note: "Employee resignation benefit plan' and 'provident fund' represent estimated abilities for employees' pension and termination benefits, respectively.