ind as 12 income taxes [email protected] s s kothari mehta & co

Ind AS 12

Income Taxes

[email protected] S S Kothari

Mehta & Co.

Scheme of presentation

Part A : General Part B : Exceptions Part C : Specific Applications Part D : Disclosures


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Part A

General


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Ind AS 12 v AS 22

Concept Ind AS 12 : Temporary Difference AS 22 : Timing Difference

Approach Ind AS 12 : Balance Sheet AS 22 : Profit & Loss

Account Method

Ind AS 12 : BS liability method AS 22 : Deferral method


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Objective

Prescribe accounting treatment in current period for Current tax consequences Future tax consequences

Why prescribe Accrual concept Periodicity concept Matching concept


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Objective

How to account For

Current tax consequences and Future tax consequences

Of The future recovery (settlement) of the

carrying amount of assets (liabilities) that are recognized in an entity’s statement of financial position; and

Transactions and other events of the current period that are recognized in an entity’s financial statement.


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Objective

Where to account the tax consequences Principle

In the same way that it accounts for the transactions and events themselves

Tax consequences of transactions and events recognized In profit or loss account: Outside profit & loss account

Statement of other comprehensive income Equity


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Scope

Accounting for income taxes Income tax

Tax based on taxable profits Includes

Domestic taxes Foreign taxes Withholding taxes payable by a subsidiary,

associate or joint venture on distribution to reporting entities

Taxes not covered by Ind AS 12 Are covered by Ind AS 37: Provisions,

contingent liabilities and contingent [email protected] S S Kothari

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Scope

Also deals with Recognition of deferred tax assets arising

from: Unused tax losses Unused tax credits

The presentation of income-taxes in the financial statements

The disclosure of information relating to income-taxes


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Definitions


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Profit

Accounting profit Is profit or loss for a period before deducting tax expense

Taxable profit Is the profit for a period, determined in accordance with the

rules established by the taxation authorities,

Upon which income-taxes are [email protected] S S Kothari

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Tax

Tax expense Is the aggregate amount included in the determination of profit or loss in respect of current tax and deferred tax

Current tax is the amount of income taxes payable in respect of the taxable profit for a period

Deferred tax Fundamental principle – see next slide Computed as per Balance Sheet Liability Method (not defined) but comprises of (net of – where offset

permissible) Deferred tax liabilities Deferred tax assets


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Deferred Tax

Fundamental Principle An entity should recognize a deferred

tax liability (asset) whenever recovery or settlement of the

carrying amount of an asset or liability would make future tax payments larger

(smaller) than they would be if such recovery or settlement were to

have no tax consequences.


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Computation of Current Tax

Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to be paid to (recovered

from) the taxation authorities, using the tax rates and tax laws that have been enacted or

substantively enacted by the end of the reporting period


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Computation of Deferred TaxBalance Sheet Liability Method

(a) Carrying amount of asset / liability

(b) Tax base of asset / liability (c) Temporary Difference (a-b) (d) Applicable tax rate: x % (e) Deferred tax: (c x d)


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Computation of Deferred Tax

Step (a)Compute Carrying Amount


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Carrying amount

Carrying amount of an asset or liability is the value of the asset or liability appearing in the balance sheet


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Step (b)Compute Tax Base


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Tax base

Tax base of an asset or liability is the amount attributable to that asset or liability for tax purposes

Four types: Tax base of an asset Tax base of a liability Tax base with no recognized carrying

amounts Tax base not immediately apparent


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Tax base of an asset

Is the amount that will be deductible for tax purposes against any taxable economic benefits

that will flow to an entity when it recovers the carrying amount of

the asset

If those economic benefits will not be taxable, the tax base of the

asset is equal to its carrying amount


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deductible for tax purposes such as Depreciation Indexation benefits May be for the full amount, a portion or

none May be in the year of acquisition or

over a number of years


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taxable economic benefits such as Income earned from the asset’s use Proceeds arising from its disposal that

enter into the determination of taxable profits

Though the entity may generally generate economic benefits in excess of carrying value, such excess is not to be estimated


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Tax base of an asset = Carrying value – Future taxable amounts + Future deductible amounts

Illustration follows:-


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Tax base of an assetIllustration: 01

A machine cost INR 100. For tax purposes, depreciation of INR 30 has already been deducted. Revenue generated by using the machine will be taxable. For accounting purposes, the machine has been depreciated by INR 20.

Applying the formula we have:

Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

80 - 80 + 70 = 70


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Tax base of an asset Four scenarios could be anticipated Recovery of asset

gives rise to both taxable amounts and deductible amounts (A) Taxable amounts but not to deductible amounts (B)

Does not give rise to Taxable amount but gives rise to deductible amounts

(C) Either taxable amounts or deductible amounts (D)


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Tax base of an asset Scenario A:

Recovery of asset gives rise to both taxable amounts and deductible amounts



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Tax base of an assetScenario A: Recovery of asset gives rise to both taxable amounts and deductible amounts

Illustration: 02A machine cost INR 100. For tax purposes, depreciation of INR 30 has already been deducted. Revenue generated by using the machine will be taxable. For accounting purposes, the machine has been depreciated by INR 20.

Applying the formula we have:Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

80 - 80 + 70 = 70


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Scenario A: Recovery of asset gives rise to both taxable amounts and deductible amounts

Illustration: 03Inventory at the balance sheet date has a carrying value of INR 100. The inventory will be deductible for tax purposes when sold.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

100 - 100 + 100 = 100


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Scenario A: Recovery of asset gives rise to both taxable amounts and deductible amounts

Illustration: 04Land was acquired for INR 100 at the beginning of the financial year. It is revalued to INR 150 at the balance sheet date. The cost of land at the balance sheet date for tax purposes is INR 110 due to indexation of cost for tax purposes.


asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

150 - 150 + 110 = 110


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Tax base of an asset Scenario B:

Recovery of asset gives rise to taxable amounts but not to deductible amounts



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Scenario B: Recovery of asset gives rise to taxable amounts but not to deductible amounts

Illustration: 05Interest receivable has a carrying value of INR 100. The related interest will be taxed on a cash basis.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

100 - 100 + 0 = 0


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Tax base of an assetScenario B: Recovery of asset gives rise to taxable amounts but not to deductible amounts

Illustration: 06Foreign Exchange debtor has a carrying value of INR 115 after recognizing an exchange gain of INR 5 in the income statement. The original amount of INR 110 was included in taxable profit. Exchange gains are taxable only when realized.


asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

115 - 5 + 0 = 110


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Illustration: 07Research expenditure has a carrying value of INR 100 that was claimed as a deduction when paid. For accounting purposes the research expenditure is amortized over 5 years.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

100 - 100 + 0 = 0


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Illustration: 08Interest paid of INR 100 is capitalized as part of asset’s carrying value. Tax deductions were obtained when the interest was paid.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

100 - 100 + 0 = 0


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Tax base of an asset Scenario C:

Recovery of asset does not give rise to taxable amount but gives rise to deductible amounts



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Scenario C: Recovery of asset does not give rise to taxable amounts but gives rise to deductible amounts

Illustration: 09Trade debtors have a carrying value of INR 95 after recognizing a general bad debt provision of INR 5. The original amount of INR 100 has already been included in taxable profits. The provision for bad debts is not tax deductible, but would be so when the provision becomes specific.Applying the formula we have:Carrying

value of asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

95 - 0 + 5 = 100


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Tax base of an asset Scenario D:

Recovery of asset does not give rise to either taxable amounts or deductible amounts



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Tax base of an assetScenario D: Recovery of asset does not give rise to either taxable amounts or deductible amounts

Illustration: 10Trade debtors have a carrying value of INR 95 after recognizing a specific bad debt provision of INR 5. The original amount of INR 100 has already been included in taxable profits. Specific provision for bad debts is tax deductible at the time it is made.


asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

95 - 0 + 0 = 95


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Tax base of a liability

Is its carrying amount, less any amount that will be

deductible for tax purposes in respect of that liability in future

periods

In the case of revenue that is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods


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Tax base of a liability = Carrying value – Future deductible amounts + Future taxable amounts



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Illustration: 11

A loan payable has a carrying value of INR 100 at the balance sheet date. The repayment of the loan will have no tax consequences.


Carrying value of liability

- Future deductible amounts

+ Future taxable

amounts

= Tax base

100 - 0 + 0 = [email protected] S S Kothari

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Illustration: 12

Foreign currency loan payable has a carrying value of INR 95 after recognizing an exchange gain of INR 5 in the income statement. Exchange gains are taxable only when realized.




+ Future taxable

amounts

= Tax base


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Illustration: 13

Wages payable to employees amounting to INR 100 were accrued at the balance sheet date and allowed as a deduction at the time of expense recognition.




+ Future taxable

amounts

= Tax base


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Illustration: 14

A liability of INR 100 for long service leave has been accrued at the balance sheet date under IAS 19, “employee benefits”. No deduction will be available for tax until the long service leave is paid.




+ Future taxable

amounts

= Tax base


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Tax base of revenue received in advance = Carrying value – Amount of revenue that will not be taxable in future periods amounts



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Tax base of revenue received in advance

Illustration: 15Rents received in advance at the balance sheet date amounted to INR 100. The rental income will be taxed in future periods.

Applying the formula we have:Carrying value of revenue received

in advance

- Amount of revenue that will not be taxable in

future periods

= Tax base

100 - 0 = [email protected] S S Kothari

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Tax base of revenue received in advance

Illustration: 16Interest received in advance at the balance sheet date amounted to INR 100. The interest revenue was taxed by reference to the amount credited in the income statement.

Applying the formula we have:Carrying value of revenue received

in advance


future periods

= Tax base


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Tax base of revenue received in advanceIllustration: 17A government grant of INR 100 is recognized at the balance sheet date as deferred income rather than being deducted against the cost of the asset. No tax is payable on receipt or subsequent amortization. The cost of the asset is fully deductible.Applying the formula we have:Carrying value of revenue received

in advance


future periods

= Tax base


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Tax base of revenue received in advanceIllustration: 18Royalties from users of licensed technology relating to the following financial year amounted to INR 100 at the balance sheet date. Royalties are taxed on a cash receipt basis. The royalty income is deferred in the accounts until the period to which it relates.Applying the formula we have:Carrying value of revenue received

in advance


future periods

= Tax base


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Tax base with no recognized carrying amounts

Expenditure expensed out in accounts but is carried forward in the tax balance sheet



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Tax base with no recognized carrying amounts

Expenditure expensed out in accounts but is carried forward in the tax balance sheet

Illustration: 19IPO expenditure of INR 100 expensed out in accounts in the year of IPO but as per taxation laws allowable equally over 5 years.


Carrying value of expense

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

0 - 0 + 80 = 80


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Tax base not immediately apparent

Apply fundamental principle Fundamental Principle

An entity should recognize a deferred tax liability (asset)

whenever recovery or settlement of the carrying amount of an asset or liability

would make future tax payments larger (smaller) than they would be

if such recovery or settlement were to have no tax consequences.


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Step (c)Compute Temporary Difference


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Temporary Differences

Are differences between the carrying amount of an asset or

liability in the statement of financial position

and its tax base.

Formula

Temporary Difference

= Carrying amount - Tax Base


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Examples:-

Timing Differences: An item of income or expenditure is included in

accounting profit of the period, but recognized in taxable profits in later periods

An item of income or expenditure is included in taxable profit of the period, but recognized in accounting profits in later periods.

The cost of a business combination is allocated by recognizing the identifiable assets acquired and liabilities assumed at their fair values, but no equivalent adjustments is made for tax purposes


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Examples:-

Assets are revalued and no equivalent adjustment is made for tax purposes.

Goodwill arises in a business combination.

The tax base of an asset or liability on initial recognition differs from the initial carrying amount. For example, when an entity benefits from non-taxable government grants related to assets.


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Examples:-

The carrying amount of investment in subsidiaries, branches and associates or interests in joint ventures becomes different from the tax base of the investment or interest.

The non-monetary assets and liabilities of an entity are measured in functional currency, but the taxable profit or loss (and, hence, the tax base of its non-monetary assets and liabilities) is determined in a different currency.


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Compute Temporary DifferenceExercise : 01

A machine cost INR 100. For tax purposes, depreciation of INR 30 has already been deducted. Revenue generated by using the machine will be taxable. For accounting purposes, the machine has been depreciated by INR 20.

Applying the formula of ‘Tax Base’ we have:

Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

80 - 80 + 70 = 70


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May be either Taxable temporary difference (DTL) Deductible temporary difference (DTA)


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Taxable temporary differences Which are temporary differences that will result in taxable amounts in determining taxable profit of future periods when

the carrying amount of the asset is recovered or settled.

Deductible temporary differences Which are temporary differences that will result in amounts that are deductible in determining taxable profit of future periods when

the carrying amount of the asset is recovered or settled

Exercises follows:-


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Compute Temporary Difference / Nature

Exercise: 02A machine cost INR 100. For tax purposes, depreciation of INR 30 has already been deducted. Revenue generated by using the machine will be taxable. For accounting purposes, the machine has been depreciated by INR 20.

Applying the formula of ‘Tax Base’ we have:

Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

80 - 80 + 70 = 70


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Exercise: 03

Inventory at the balance sheet date has a carrying value of INR 100. The inventory will be deductible for tax purposes when sold.

Applying the formula of 'Tax Base', we have:

Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

100 - 100 + 100 = 100


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Exercise: 04

Land was acquired for INR 100 at the beginning of the financial year. It is revalued to INR 150 at the balance sheet date. The cost of land at the balance sheet date for tax purposes is INR 110 due to indexation of cost for tax purposes.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

150 - 150 + 110 = 110


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Exercise: 05

Interest receivable has a carrying value of INR 100. The related interest will be taxed on a cash basis.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

100 - 100 + 0 = 0


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Exercise: 06

Foreign Exchange debtor has a carrying value of INR 115 after recognizing an exchange gain of INR 5 in the income statement. The original amount of INR 110 was included in taxable profit. Exchange gains are taxable only when realized.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

115 - 5 + 0 = 110


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Exercise: 07

Research expenditure has a carrying value of INR 100 that was claimed as a deduction when paid. For accounting purposes the research expenditure is amortized over 5 years.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

100 - 100 + 0 = 0


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Exercise: 08

Interest paid of INR 100 is capitalized as part of asset’s carrying value. Tax deductions were obtained when the interest was paid.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

100 - 100 + 0 = 0


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Exercise: 09

Trade debtors have a carrying value of INR 95 after recognizing a general bad debt provision of INR 5. The original amount of INR 100 has already been included in taxable profits. The provision for bad debts is not tax deductible, but would be so when the provision becomes specific.Applying the formula of 'Tax Base', we have:

Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

95 - 0 + 5 = 100


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Exercise: 10

Trade debtors have a carrying value of INR 95 after recognizing a specific bad debt provision of INR 5. The original amount of INR 100 has already been included in taxable profits. Specific provision for bad debts is tax deductible at the time it is made.


Carrying value of

asset

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

95 - 0 + 0 = 95


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Exercise: 11

A loan payable has a carrying value of INR 100 at the balance sheet date. The repayment of the loan will have no tax consequences.




+ Future taxable

amounts

= Tax base


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Exercise: 12

Foreign currency loan payable has a carrying value of INR 95 after recognizing an exchange gain of INR 5 in the income statement. Exchange gains are taxable only when realized.




+ Future taxable

amounts

= Tax base


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Exercise: 13

Wages payable to employees amounting to INR 100 were accrued at the balance sheet date and allowed as a deduction at the time of expense recognition.




+ Future taxable

amounts

= Tax base


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Exercise: 14

A liability of INR 100 for long service leave has been accrued at the balance sheet date under IAS 19, “employee benefits”. No deduction will be available for tax until the long service leave is paid.




+ Future taxable

amounts

= Tax base


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Exercise: 15

Rents received in advance at the balance sheet date amounted to INR 100. The rental income will be taxed in future periods.


Carrying value of revenue received

in advance


future periods

= Tax base


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Exercise: 16Interest received in advance at the balance sheet date amounted to INR 100. The interest revenue was taxed by reference to the amount credited in the income statement.



in advance


future periods

= Tax base


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Exercise: 17A government grant of INR 100 is recognized at the balance sheet date as deferred income rather than being deducted against the cost of the asset. No tax is payable on receipt or subsequent amortization. The cost of the asset is fully deductible.Applying the formula of 'Tax Base', we have:


in advance


future periods

= Tax base


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Exercise: 18Royalties from users of licensed technology relating to the following financial year amounted to INR 100 at the balance sheet date. Royalties are taxed on a cash receipt basis. The royalty income is deferred in the accounts until the period to which it relates.Applying the formula of 'Tax Base', we have:Carrying value of revenue received

in advance


future periods

= Tax base


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Exercise: 19IPO expenditure of INR 100 expensed out in accounts in the year of IPO but as per taxation laws allowable equally over 5 years.

Applying the formula of 'Tax Base', of ‘Tax Base’, we have:

Carrying value of expense

- Future taxable

amounts

+ Future deductibl

e amounts

= Tax base

0 - 0 + 80 = 80


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Temporary differences - Summary

For assets For liabilities

If Carrying amount

>Tax base

Taxable temporary difference(TTD)

-Deferred tax liability

(DTL)

Deductible temporary difference(DTD)

-Deferred tax asset

(DTA)

If Carrying amount

<Tax base

Deductible temporary difference(DTD)

-Deferred tax asset

(DTA)

Taxable temporary difference(TTD)

-Deferred tax liability

(DTL)[email protected] S S Kothari

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Step (d)Compute Tax Rate


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Measurement – Tax rate

Deferred tax assets and liabilities shall shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is

settled based on the tax rates and tax laws that have been enacted or substantively

enacted by the end of the reporting period


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General Principle - Measurement

How recovery Use Sale Use and sale

How tax If use – business profits If sale – capital gains In sale – indexation

Principle Consistent with the manner in which the entity’s

management expects at the balance sheet date to recover or settle the carrying amount of assets or liabilities


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Measurement – Tax rate

Change in tax rates:-The tax rate applicable to an entity

may change as a result of changes in relevant legislation. Any impact of the changes will be recognized in accounting periods ending on or after the date of substantive enactments.


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Step (e)Recognize Deferred Tax


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Deferred tax

Deferred tax liabilities Are the amounts of income taxes payable in future periods in respect of

taxable temporary differences


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Deferred tax

Deferred tax assets are the amounts of income taxes payable in future periods in respect of

Deductible temporary differences The carry forward of unused tax losses The carry forward of unused tax credits


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Deferred tax - Recognition

Deferred tax liability should be recognized for all taxable temporary

differences.


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Deferred tax - recognition

Deferred tax asset should be recognized for all deductible temporary

differences To the extent that it is probable that taxable profit will be available against which the deductible temporary

difference can be utilized Probable means more likely than

not [email protected] S S Kothari

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Deferred Tax Asset Recognition


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Tax Planning Opportunities

Mercantile basis v Cash basis Deferring certain tax deductions Change in method of depreciation Sell & lease back of assets


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Deferred tax asset shall be recognized for

The carry forward of unused tax losses And unused tax credits

To the extent that it is probable that future taxable profit will be available against which the unused tax losses and tax

credits can be utilized Probable means more likely than not


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Deferred tax asset The carry forward of unused tax losses And unused tax credits

Probable means more likely than not Existence of unused tax losses is strong

evidence that future taxable profits may not be available

In such case recognize DTA for these items to the extent Taxable temporary difference is available; or Convincing evidence that sufficient taxable

profits will be available [email protected] S S Kothari

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Criteria in assessing

That sufficient taxable profits will be available for utilization of unused tax losses or tax credits: Availability of sufficient taxable temporary differences

with respect to same taxable entity and same taxation authority

It is probable that entity will have sufficient taxable profits before the expiry of unused tax losses or tax credits

Unused tax losses are due to identifiable causes are unlikely to recur

Tax planning opportunities will be available


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Deferred tax - reassessment

Reassess at each reporting period Recognize unrecognized deferred tax

assets to the extent it has become probable that future taxable profits will be available

Reduce the carrying amount of deferred tax asset to the extent it is no longer probable that sufficient taxable profit will be available


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Deferred tax – change in amount

Query Can the carrying amount of deferred tax change even though there is no change in the amount of related temporary difference?

Yes, for example:- Change in tax rates Change in tax laws A reassessment of the recoverability of DTA A change in the expected manner of recovery

of an asset – (from use to sale or vice-versa) [email protected] S S Kothari

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Discounting

Should deferred tax assets and liabilities be discounted?


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Offset

Current tax assets and current tax liabilities

if and only if the entity has a legally enforceable right to set off

the recognized amounts; and Intends

either to settle on a net basis, or to realize the asset and settle the liability

simultaneously


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Offset

Deferred tax assets and deferred tax liabilities if and only if

the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and

The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on

either the same taxable entities; or Different taxable entities

which intend either to settle current tax liabilities and assets on a net basis, or

to realize the assets and settle the liabilities simultaneously,

In each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.


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Part B : Exceptions

Business Combinations – Goodwill

Initial recognition of an asset or liability


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Business Combinations - Goodwill

Goodwill arising on a business combination is the excess of the cost of the combination over the acquirer’s interest in the fair value of assets and liabilities acquired.

Under Ind AS 103, ‘Business Combinations’, goodwill is recognized as an asset and is not amortized. Instead it is tested for impairment.

Where the cost of purchased goodwill is non-deductible for tax purposes, the goodwill has a tax base of Nil.

The difference between the carrying amount and tax base of Nil of goodwill gives rise to taxable temporary difference to result into deferred tax liability.

Ind AS 12 does not permit recognition of goodwill as this is measured as a residual being difference of cost of acquisition and fair value of assets acquired and any recognition of DTL will only increase the goodwill.


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Initial recognition of an asset or liability

Where a temporary difference arises on initial recognition of an asset or liability, other than on a business combination, and the recognition affects neither accounting profit nor taxable profit at the time of the transaction, the standard prohibits the recognition of any deferred tax asset or liability in respect of that temporary difference.

Example: Non-taxable government grant Not set off against any asset not settled in accounts


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Part C: Specific applications


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Specific Applications

Revaluation of assets Tax consequences of dividend Share based payments Consolidated Financial Statements Investment in

Branches Subsidiaries Joint Ventures Associates


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Revaluation of assets

IFRSs permit or require certain assets to be carried at fair value or to be revalued

In tax jurisdictions, where it is permitted, the tax base is adjusted and no temporary difference arise

In tax jurisdictions, where it is not permitted, the tax base remains unaffected and temporary difference arises and gives rise to DTL or DTA

The resulting DTL or DTA is recognized directly in equity


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Tax consequences of dividends

What if the tax on undistributed income is different from the tax on distributed income? Recognize current and deferred tax assets and

liabilities at the rate applicable to undistributed profits

The income-tax consequences of dividends are recognized when a liability to pay dividend is recognized


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Tax consequences of dividends Illustration:

Facts: Company A has undistributed profits of INR

100,000 in its statement of financial position as on 31.12.2008

The tax rate is 50% for undistributed profits and 35% for distributed profits

It declares a dividend of INR 40,000 on 28.02.2009 Solution:

Recognize current tax expense / liability of INR 50,000 in 31.12.2008 (100,000 x 50%)

Recognize current tax income / asset of INR 6,000 in 31.12.2009 [40,000 x (50% - 35%)] [email protected]

S S Kothari Mehta & Co.

Tax consequences of dividends Illustration:

Facts: Company A has undistributed profits of INR

100,000 in its statement of financial position as on 31.12.2008

The tax rate is 40% for undistributed profits and 50% for distributed profits

It declares a dividend of INR 40,000 on 28.02.2009 Solution:

Recognize current tax expense / liability of INR 40,000 in 31.12.2008 (100,000 x 40%)

Recognize current tax expense / liability of INR 4,000 in 31.12.2009 [40,000 x (50% - 40%)] [email protected]


Share based payments Where tax deduction is received for

remuneration paid in shares, etc.

However, the tax deduction may arise in a later accounting period and may differ from the related cumulative remuneration

In accordance with Ind AS 102, ‘Share-based Payment’, expense is recognized for consumption of employee services received as consideration for share options granted

The difference between the carrying amount of ‘Nil’ and tax base (deduction that tax authorities will allow in future) will result in DTD & DTA.


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Consolidated Financial Statements

Basis: As in stand-alone As if it is a single entity

Issues: How to compute ‘Carrying Amount’? How to compute ‘Tax Base’? Which ‘Tax Rate’ to adopt?


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How to compute ‘Carrying Amount’? As per IND AS : Consolidated and Separate

Financial Statement What to do:

When no uniform accounting policies When adjustments effected to eliminate intra-

group transactions Way forward:

Ensure appropriate adjustments in consolidation

Will lead to additional temporary differences Additional DTL or DTA to be recognized


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How to compute ‘Tax Base’? If consolidated tax return, then as per

the return If not, then as per individual tax returns


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Which tax rate to adopt? Where reporting entity is domiciled


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Investment : Branches / Subsidiaries / JVs / Associates

General Rule:-

Recognize DTL for TTD unless One is able to control the timing of the reversal of the

temporary difference, AND; It is probable that the temporary difference will not reverse

in the foreseeable future

Recognize DTA for DTD only if it is probable that: The temporary difference will reverse in the foreseeable

future, AND; Taxable profits will be available against which the

temporary difference can be utilized.


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Investment : Branches / Subsidiaries / JVs / Associates

Why temporary difference: Undistributed profits Changes in foreign rates when a parent &

subsidiary are based in different countries Reduction in carrying amount of investment

in associate to its recoverable amount


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Investment in Subsidiaries

Role: Parent In Consolidated Financial Statements Temporary difference:

Net investment – tax base Power of Parent:

Controls dividend policy Therefore not to recognize deferred tax liability

However, Where part distribution, recognize proportionate DTL If circumstances change: probable distribution in future

then recognize DTL [email protected] S S Kothari

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Investment in Branches

Aka - subsidiary


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Investment in Associates

Role: Investor In Consolidated Financial Statement Carrying Amount: As per equity method Tax Base: generally amount paid Existence of temporary difference Power of Investor: Significant influence Thus, investor cannot control dividend policy Therefore recognize DTL / DTA as the case may be.


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Investment in Joint Ventures

Type: Jointly controlled – operations (JCO) / assets (JCA) / entities (JCE)

In JCO / JCA, recognize temporary difference as in normal manner

In JCE, if method used for consolidation is: Proportionate consolidation method: aka subsidiary Equity method:

Carrying Amount: As per equity method Tax Base: generally amount paid Existence of temporary difference Provision of deferred tax depends on contractual arrangement If venturer can control dividend policy do not recognize deferred


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Subsidiary to Associate

How: Parent sells a part of holding Subsidiary issues additional shares to others


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Foreign currency translation

Additional temporary difference may arise when translating: Foreign Currency Assets Foreign subsidiaries, associates & JVs Foreign Branches

Recognize additional DTL or DTA as the case may be


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Investments in subsidiaries, branches, associates and JVs - summary

When the parent or investor acquires such an investment, it is accounted for in its separate financial statements at cost.

In the consolidated financial statements of parent / investor, the investment is recorded on a line by line method (in case of subsidiaries) or equity method (in case of associates & JVs)

A temporary difference may arise between the investment’s carrying value in the separate and consolidated financial statements and its tax base.

For such investments or interests, the carrying amounts may be recovered either through distributions or through disposals.

Therefore the standard requires the investor to recognize DTL unless:– investor is able to control the timing of reversal of temporary

difference and– it is probable the difference will not reverse in foreseeable future

And recognize DTA only if:– temporary differences will reverse in the foreseeable future and

recovery is probable


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Part D : Disclosures


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Disclosures

Balance Sheet Performance Statement Notes


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Disclosures – Balance Sheet

Current / Non-current classification Current tax: Current asset – liability Deferred tax: Non-current asset - liability

Classification based on liquidity Current tax: more liquid Deferred tax: less liquid

Question: Do we need to disclose amount of deferred tax

to be recovered or settled after more than 12 months? [Ind AS 1(61)]


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Disclosures – Performance Statement

Recognize current & deferred tax in Income (PL) Statement except when tax arises out of transaction recognized in Other comprehensive income Directly in equity Business combination


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Items that could be recognized in ‘Other comprehensive income’

Examples: A change in carrying amount arising from the

revaluation of PPE; Exchange differences arising on the translation

of the financial statements of a foreign operation

Disclose: In statement of other comprehensive income The amount of income-tax relating to each


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Items that could be recognized ‘directly to equity’

Examples: An adjustment to the opening balance of retained

earnings resulting from Either a change in accounting policy that is applied

retrospectively; Or the correction of an error

Amounts arising on initial recognition of the equity component of a compound financial instrument

Disclose The aggregate current and deferred tax relating to

items that are charged or credited directly to equity


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What if there are graduated rates of income-tax and it is not possible to determine the rate at which a specific component of taxable profit has been taxed?

Adopt Reasonable pro-rata allocation Any other method that adopts a more

appropriate allocation


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Disclosures - Notes

General Analysis of tax expense Discontinued operation Explanation of relationship between tax expense and

accounting profit Analysis of deferred tax assets / liabilities Unrecognized temporary differences Tax consequences of dividends Deferred tax asset of loss making entities Business combinations Tax related contingencies Post balance sheet changes in tax [email protected]


General

Disclose Accounting Policies – [Ind AS 1(117)]

Accounting policy to include measurement basis

Judgements – [Ind AS 1(122)] Sources of estimation uncertainty - [Ind AS

1(125)]


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Analysis of Tax Expense

Recollect: What is ‘Tax Expense’ Tax expense

Is the aggregate amount included in the determination of profit or loss in respect of current tax and deferred tax

Disclose separately Major components of tax expense

Current tax Deferred tax


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Analysis of Tax Expense

Illustration: Disclosure of major components of tax

Major component of tax expense Year 1 Year 2

Current tax expense 3,570 2,359

Deferred tax expense relating to origination and reversal of temporary differences

420 822

Deferred tax expense (income resulting from reduction in tax rate

- (1,127)

Tax expense 3,990 2,054


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Analysis of tax expense – Current Tax The amount of current tax expense Adjustment recognized in current period for

current tax of prior periods The amount of benefit arising from a previously

unrecognized: Tax loss, tax credit or temporary difference That is used to reduce current tax expense

The amount of tax expense relating to those changes in accounting policies and errors That are included in profit or loss as per IAS 8 Because they cannot be accounted for retrospectively


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Analysis of tax expense – Deferred Tax The amount of deferred tax expense relating to

Origination and reversal of temporary differences Changes in tax rates or the imposition of new taxes

The amount of benefit arising from a previously unrecognized:

Tax loss, tax credit or temporary difference That is used to reduce deferred tax expense

Deferred tax expense arising from the write-down, or reversal of a previous write-down of a deferred tax asset on its review at balance sheet date

The amount of tax expense relating to those changes in accounting policies and errors That are included in profit or loss as per Ind AS 8 Because they cannot be accounted for retrospectively


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Discontinued operation

Disclose, the tax expense relating to: The gain or loss on discontinuance The profit or loss from ordinary activities of the

discontinued operation for the period, together with the corresponding amounts for each

period presented


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Explanation of relationship between tax expense and accounting profit

Why To enable users of financial statements to

understand whether the relationship between the tax

expense and accounting profit is unusual and to understand the significant factors that could

affect the relationship in future


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What could be the significant factors: Examples

Significant tax-free incomes Significant disallowances The effect of tax losses utilized The effect of different tax rates of foreign based

operations Adjustments relating to prior periods Unrecognized deferred tax Effects of changes in tax rates


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How Two methods Numerical reconciliation between:

Tax expense and the product of accounting profit multiplied by the applicable tax rate (amount method)

Average effective tax rate and the applicable tax rate (% method)

Also: Disclose the basis on which applicable tax rate is

computed Provide explanation of changes in the applicable tax

rates as compared to the previous accounting period


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Illustration:Method 1Method 1 : Amount method Year 1 Year 2

Accounting profit 8,775 8,740

Tax at the applicable rate of 35% (Y1:40%) 3,510 3,059

Tax effect of expenses that are not deductible in determining taxable profits

- Charitable donations 200 122

- Fines for environment pollution 280 -

Reduction in opening deferred taxes resulting from reduction in tax rates

- (1,127)

Tax expense 3,990 2,054

The applicable tax rate is the aggregate of the income tax rate of 30% (Y1: 35%) and the surcharge of 5% (Y1: 5%

Explanation for change in applicable tax rate: in Y2, the government enacted a change in the income-tax rate from 35% to 30%


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Illustration:Method 2Method 1 : Amount method Year 1 Year 2

% %Applicable tax rate 40.0 35.0

Tax effect of expenses that are not deductible in determining taxable profits

- Charitable donations 2.3 1.4

- Fines for environment pollution 3.2 -

Reduction in opening deferred taxes resulting from reduction in tax rates

- (12.9)

Tax expense 45.5 23.5

The applicable tax rate is the aggregate of the income tax rate of 30% (Y1: 35%) and the surcharge of 5% (Y1: 5%

Explanation for change in applicable tax rate: in Y2, the government enacted a change in the income-tax rate from 35% to 30%


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Analysis of deferred tax assets / liabilities

In respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits:the amount of the deferred tax assets and

liabilities recognized in the balance sheet for each period presented;

the amount of the deferred tax income or expense recognized in the income statement, if this is not apparent from the changes in the amounts recognized in the balance sheet;


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Analysis of deferred tax assets / liabilities

IllustrationY1 Y2

Accelerated depreciation for tax purposes 9,720 10,322

Liabilities fo healthcare benefits that are deducted for tax purposes only when paid

(800) (1,050)

Product development costs deducted from taxable profit in earlier years

100 -

Revaluation, net of related depreciation - 10,573

Deferred tax liability 9,020 19,845

Note: the amount of the deferred tax income or expense recognized in profit or loss for the current year is apparent from the changes in the amounts recognized in the statement of financial position


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Disclose in respect of‘Unrecognized temporary differences’

The amount (and expiry date, if any) of deductible temporary differences, unused losses and unused tax credits for which no deferred tax asset has been provided

The aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized However, if practicable, disclose the amount of deferred

tax liabilities also


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Where tax rates of undistributed profits and distributed profits do not vary: Disclose the amount of the income-tax

consequences of dividends that were proposed or declared after the balance sheet date but before the financial statements were authorized for issue

Example: Corporate Dividend Tax in India


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Where tax rates of undistributed profits and distributed profits vary: Disclose the nature of potential tax consequences that

would result from the payment of dividends The important features of the tax systems and the

factors that will affect the amount of the potential income-tax consequences of dividends

The amount of potential tax consequences that arises from the payment of dividends to shareholders where such amounts are practically determinable

Whether there are any potential tax consequences that are not practically determinable


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Deferred tax asset of loss making entities

The amount of deferred tax asset and the nature of evidence supporting its recognition

should be disclosed where an entity

has incurred a loss in the current or preceding period and

The recovery of the deferred tax asset is dependant on future taxable profits in excess of those arising from the reversals of existing taxable temporary differences

Query: Why this disclosure?


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Business combinations

If a business combination in which the entity is the acquirer causes a change in the amount recognized for its pre-acquisition deferred tax asset, disclose the amount of that change

If the deferred tax benefits acquired in a business combination are not recognized at the acquisition date but are recognized after the acquisition date, disclose a description of the event or change in circumstances that caused the deferred tax benefits to recognized


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Tax related contingencies

When arises Tax assessments of earlier years are open Tax assessments are disputed by taxation

authorities Disclose

Its nature An indication of the uncertainty affecting

whether the further tax will become payable An estimate of financial effect


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Post balance sheet changes in tax rates

IAS 12 (46 – 47) requires the tax rates/laws to be adopted that have been enacted or substantially enacted by the balance sheet date

Therefore, where changes are announced or enacted after such date: Disclose significant effect of these changes on

Current tax Deferred tax


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Summary


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Summary 9 step approach to deferred tax


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Comparison from Indian GAAP to IFRSSignificant ones (not inclusive)

Ind AS 12 AS 22

Balance Sheet Approach Income Statement Approach

Temporary differences Timing differences

DTA recognized based on probability assessment

DTA recognized based on reasonable/ virtual certainty

DT recognized on revaluation DT not recognized on revaluation

MAT considered as DT MAT considered as prepaid asset

On consolidation, DT is recognized for outside basis difference and other consolidation adjustment.

On consolidation, DT is not recognized for any difference.

Rate reconciliation and other disclosures No rate reconciliation


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Thank You

[email protected] Partner, Technical Head – IFRS



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ind as 12 income taxes [email protected] s s kothari mehta & co

Documents

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deferred taxcurrent

tax expensetaxable profitis

lossin respect of current

profit loss accountmethodind

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