Davida Limited started operations in 2013. Although it has grown steadily, the company reported accumulated operating losses of $450,000 in its first four years in business. In the most recent year (2017), Davida appears to have turned the corner and reported modest taxable income of $30,000. In addition to a deferred tax asset related to its net operating loss, Davida has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerated depreciation. Given its past operating results, Davida management has determined that it is not probable that it will realize any of the deferred tax assets. However, given its improved performance, management wonders whether there are any accounting consequences for its deferred tax assets. They would like you to conduct some research on the accounting for recognition of its deferred tax asset.

Instructions

Refer to the IFRS standard, IAS 12 Income Taxes. Provide a reference to the specific paragraphs of IAS 12, where appropriate, in answering the following.

(a) Briefly explain to Davida management the importance of future taxable income as it relates to the recognition of deferred tax assets.
(b) What should management consider in assessing the potential realization of a deferred tax asset?
(c) What are tax-planning strategies? Provide examples. From the information provided, does it appear that Davida could use a tax-planning strategy in evaluating its deferred tax asset?
(d) Identify and explain any possible areas where there might be ethical issues in recognizing the deferred asset and in applying Davida's tax-planning strategies. Suggest what should be done.