QUESTION 3 PROVISIONS AND CONTINGENCIES

3.2. Arial Narrow Ltd signed a service agreement to run and maintain a new juvenile correctional facility for the government which remains the property of the government. The facility itself remains the legal property of the government. The service agreement states that Arial Narrow is obligated to maintain the facility in the condition as before. Significant visible damages occurred during the financial years ended 31 December 2020 and 31 December 2021.

The following table provides the closing balance of the provision for rectifying damages/ repairs at the end of each financial year as well as the amount of cash paid for repairs by the company during the respective financial year:

The tax rate applicable on companies is 30%. The Receiver of Revenue (SARS in this case) will allow as a deduction all the repair costs which was paid in cash. The current tax payable to SARS for the prior financial year was paid each year in April.

REQUIRED: Disclose the information as required in terms of IAS 12 Income Taxes par 81(g) for Arial Narrow Ltd for the financial years ended 2020 and 2021. When calculating the temporary differences associated with the deferred tax liability (asset), use the balance sheet approach and calculate the temporary differences associated with the deferred tax expense (income), use the income statement approach. Ignore deferred tax consequences due to any assessed losses. Round all amounts to the nearest Rand.

(15 marks)

Year-end 31 December 2020 31 December 2021 Carrying amount of provision at year-end R3 800 000 R10 000 000 Cash paid during year R16 000 000 R14 000 000 Year-end 31 December 2020 31 December 2021 Carrying amount of provision at year-end R3 800 000 R10 000 000 Cash paid during year R16 000 000 R14 000 000