The consolidated financial statements of FMCG Ltd and RG Ltd were presented to the Board. The Board is alarmed that the economic entitys balance sheet (consolidated balance sheet) shows a deferred tax balance, when the accounts for FMCG Ltd had no deferred tax asset or deferred tax liability.

FMCG management is also planning to acquire another entity ABC Investments Ltd in the near future. Management pointed out to the Board that on acquisition, the financial results of this new subsidiary (ABC Investments Ltd) will also be consolidated in the economic entity financial statements.

One of the Board members noted that the new business to be acquired by FMCG Ltd is an investment company. Its financial statements should not be consolidated because it is involved in investments industry, whereas all of the other companies in the economic entity are involved in retail industry.

Required:

As the financial accountant you are requested to prepare a response to the following questions:

(a) Why does the economic entity have a deferred tax balance? (2.5 marks)

(b) Should the financial statements of proposed acquired business, ABC Investments Ltd, be consolidated into the economic entity and why? (2.5 marks)