GATEWAY Limited (GATEWAY), a company that prepares its financial statements to 31 December each year, has been trading at a loss for the last 3-4 years. However, the directors expect the company to return to profitability in the near future. GATEWAY pays core portion tax at 25%, and the following information has been extracted from GATEWAY’s books and records in respect of the year ended 31 December 20X5:

1. Depreciation charged in the statement of comprehensive income amounted to

€3,250,000, while capital allowances of €4,750,000 were included in the tax computation;

2. The estimated tax loss for the year ended 31 December 20X5 is €250,000 and, because prior year losses have been fully utilized, the tax loss for the year ended 31 December 20X5 will have to be carried forward to future years;

3. The net book value of non-current assets qualifying for capital allowances at 31 December 20X4 was €13,000,000 against a tax written down value of €12,000,000. This gave rise to a deferred tax provision at 31 December 20X4 of €250, 000. No other timing differences existed at 31 December 20X4; and 4. Although €500,000 was charged to the statement of comprehensive income in the year ended 31 December 20X5 in respect of royalties, the amount actually paid was

€550,000.

Requirement

(a) Calculate the deferred tax charge to be included in the statement of comprehensive income of GATEWAY for the year ended 31 December 20X5, and the deferred tax provision required as at that date, in accordance with IAS 12 Income Taxes.

(b) Included in GATEWAY’s non-current assets at 31 December 20X5 is property recorded at €1,400,000. The property cost €2,000,000 when purchased, and depreciation totaling €600,000 has been charged up to 31 December 20X5. GATEWAY has claimed total tax allowances of €800,000 on the property up to 31 December 20X5, and is considering recording the property at its valuation of €1,800,000 in the financial statements for the year ended 31 December 20X5. GATEWAY does not intend to sell the property.

Requirement Explain whether:

(a) GATEWAY is permitted to record the property at valuation in the financial statements for the year ended 31 December 20X5;

(b) Recording the property at its valuation of €1,800,000 will create an unavoidable incremental tax liability; and

(c) GATEWAY is permitted to discount any deferred tax asset or liability that may arise.