The consolidated financial statements of EFGH Ltd and OP Ltd were presented to the Board. The Board is alarmed that the economic entity’s balance sheet (consolidated balance sheet) shows a deferred tax balance when the accounts for EFGH Ltd had no deferred tax asset or deferred tax liability. EFGH management is also planning to acquire another entity XYZ Investments Ltd in the near future. Management pointed out to the Board that on the acquisition, the financial results of this new subsidiary (XYZ 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 EFGH Ltd is an investment company. Its financial statements should not be consolidated because it is involved in the investments industry, whereas all of the other companies in the economic entity are involved in the 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?
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(b) Should the financial statements of proposed acquired business, XYZ Investments Ltd, be consolidated into the economic entity and why?
(Please note that in your response you must make reference to relevant paragraphs of the Accounting Standard and/or AASB Framework and to other sources of material.)