[Question] Deferred tax on Franchise costs

[dellatjie]

Good morning guys,

I just want to make sure that I am looking at the set of the facts in the correct manner:

My client purchased a few franchises. I capitalised these costs as an intangible asset, and per IFRS for SME, I am depreciating it at 5% per year.

SARS will not allow any deduction for this expense as far as I am aware.

Therefore there would be a difference between the tax basis and the accounting basis here.

Should I be calculating deferred tax on it?

[CLIVE-TRIANGLE]

dellatjie, perhaps you should revisit the 5%. Normally you would amortize it over the initial period of the lease. If the lease is undetermined then over 5 years is usual.

As regards the deferred tax aspect, I would suggest no, because it is a permanent difference.

[dellatjie]

Clive,

Can you please elaborate on your suggestion with regard to the 5%? Why would I amortize it over a shorter period?

[CLIVE-TRIANGLE]

Dellatijie, it is much the same as goodwill; an intangible asset.

For the purpose of IFRS 18.19, all intangible assets shall be considered to have a finite useful life
18.20 If an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall be presumed to be ten years. 5% equates to 20 years ...

Some people use the period of the lease as a yardstick. In a nutshell, IFRS requires ten years unless you have reliable way to measure the useful life.

You are not required to annually test for impairment, but if it becomes apparent that it is impaired then you should do it.