Three Kamwala plc prepares financial statements to 31 March each year. The rate of income tax applicable

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Question:

Three Kamwala plc prepares financial statements to 31 March each year. The rate of income tax applicable to Kamwala plc is 35%. The following information relates to transactions, assets and liabilities of Kamwala plc during the year ended 31 March 2020: (1) Kamwala plc has an investment property which it carries under the fair value model of IAS40 Investment Property. The property originally cost K60 million. The property had an estimated fair value of K70 million on 31 March 2019 and K76 million on 31 March 2020. For tax purposes gains on the fair value of investment properties are not subject to income tax until the properties are disposed of. (2) Kamwala plc has a 40% shareholding in Kabwata plc. Kamwala plc purchased this shareholding for K90 million. The shareholding gives Kamwala plc significant influence over Kabwata plc, but not control and therefore Kamwala plc accounts for its interest in Kabwata plc using the equity method. The equity method carrying value of Kamwala plc’s investment in Kabwata plc was K140 million on 31 March 2019 and K150 million on 31 March 2020. For tax purposes profits recognised under the equity method are taxed if and when they are distributed as a dividend or the relevant investment is disposed of. (3) Kamwala plc measures its head office property using the revaluation model under IAS16 Property, Plant and Equipment. The property is revalued every year on 31 March. On 31 March 2019, the carrying value of the property (after revaluation) was K80 million and its tax base was K44 million. During the year ended 31 March 2020, Kamwala plc charged depreciation in its statement of profit or loss of K4 million and claimed a tax deduction for tax depreciation of K2.5 million. On 31 March 2020, the property was revalued to K90 million. For tax purposes revaluation of property, plant and equipment does not affect taxable income at the time of revaluation. (4) Kamwala plc had an unrelieved tax loss of K600 million on 1 April 2019, which was incurred by the company in the previous year. For tax purposes, this loss can only be carried forward for a maximum period of 5 years. The company is anticipating to generate the following taxable profits in the following financial years; 7

Year ending 31 March 2020 2021 2023

K’M K’M K’M

Taxable profits 220 200 260

The directors of Kamwala plc are however unsure about the availability of taxable profits in 2023 as the amount is based upon the projected acquisition of a profitable company and are further unable to estimate reliably the amounts of profits if any that will arise after 2023.

Required: Discuss, with suitable computations, how the above events will be accounted for under IAS12 Income Taxes in the financial statements of Kamwala plc and compute the deferred tax liability as at 31 March 2020 and the charge or credit to both profit or loss and other comprehensive income for the year.