RECOGNITION OF DEFERRED TAX ASSETS Shady Sheds Ltd manufactures prefabricated sheds, ranging from industrial sheds and garden sheds down to small items such as dog kennels. In recent years, Shady Sheds Ltd has recorded accounting losses. The company has retrenched several of its staff after struggling to find new markets for its products. In the prior year, the company recognised expenses and liabilities for long service leave and potential redundancy payouts. Redundancy costs and long service leave are not deductible for income tax until paid. The company recognised deferred tax assets as a result of these liabilities. With the long service leave and redundancy entitlements being paid out to the retrenched employees in the current year, the company has now been able to claim large tax deductions for the cash payments made. The effect of these deductions is that the company has recorded a significant tax loss in the current year. Required 1. Outline the requirements of AASB 112/IAS 12 in relation to the recognition of deferred tax assets from long service leave and retrenchment liabilities. How do these requirements differ (if at all) from the recognition requirements for deferred tax assets from tax losses? 2. Discuss whether the deferred tax asset from the employee benefits liabilities in the prior year should have been recognised. Should the tax loss in the current year be recognised as a deferred tax asset? CASE STUDY