Whale Caravans Ltd (WCL) is a reporting entity, that is required to prepare General Purpose Financial Statements (GPFS), manufactures high quality caravans and prefabricated sheds built to suit the needs of Australian consumers. With 50 years of manufacturing reputation, WCL maintains quality, innovation and champions in customisation. WCL is a profitable company and had been continuously paying company tax over two decades.

Unfortunately, in the current year due to bush fire, Company’s main factory in Sydney’s west was destroyed. The company has recorded a $5.2 million accounting loss in the current period as a result of bush fire. The Board of Directors of Whale Caravans Ltd are debating whether it can raise a deferred tax asset in relation to this loss in the financial statements for the current period.

Loftus et al (2020) and Leo et al (2018) postulate that in Australia, tax losses can be carried forward and charged against future taxable profits.

AASB 112 states that;

“When a tax loss is used to recover current tax of a previous period, an entity recognises the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the entity and the benefit can be reliably measured” (AASB112,  pp 9).

Required

Prepare a report to the chairman of WCL discussing whether the tax loss in the current year be recognised as a deferred tax asset in accordance with AASB 112 accounting for company income taxes.

You are also required to review one of the ASX listed companies’ annual report’s financial statements and notes, and provide examples as to how they recognise deferred tax assets in their financial statements.

In your report:

1. What is tax loss and how is it accounted for?
2. Discuss how and when a deferred tax asset (DTA) or deferred tax liability (DTL) must be recognised. Discuss any differences between the criteria for DTA and DTL.
3. Evaluate the factors that should be considered in determining whether deferred tax assets relating to tax losses are to be recognised.
4. Analyse and report how the selected/allocated ASX listed company recognised and disclosed DTA, DTL and Tax losses if any.
5. Advise the Chairman of WCL how income tax losses can provide future tax benefits.