1. Income Taxes and Deferred Taxes

2. Scope of Ind AS 12 Deals with accounting for income taxes
Income taxes include
All domestic and foreign taxes which are based on taxable profits
Taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint venture on distributions to the reporting entity
Does not deal with
Accounting for government grants
Investment tax credits

3. Example
Identify if the following taxes are covered under the scope of Ind AS 12
Tonnage Tax No
Withholding Taxes
Yes
Wealth Tax No
Dividend Distribution Tax
Yes
Investment Tax Credits No

4. Current and deferred tax

5. Current and deferred tax
Current Tax
Tax Consequences that are legal assets or liabilities at the reporting date
Deferred Tax
Tax Consequences which are expected to become or form part of legal assets or liabilities in a future period

6. Deferred Tax Accounting B/S Tax B/S Temporary Differences
Indian GAAP
Financial Statements
Profit and Loss A/c
Tax Profits
Timing Differences
Deferred Tax Asset or Liability
Tax Return
Ind AS
Financial Statements
Accounting B/S
Tax B/S
Temporary Differences
Deferred Tax Asset or Liability
Tax Return

7. Temporary vs. Timing Difference
Financial Statements
Tax base
B/S appl’n
P/L appl’n
At 01/01/X5 15
Charge for the year
(3)
(5) 2
At 31/12/X5 12 10
(4) 1
At 31/12/X6 9 6 3
Revaluation 4 - 13 7

8. Calculation of DTA and DTL

9. Step-wise approach to deferred tax
Determine the
book base
Determine the tax
base
3. Calculate temporary
differences
Consider
recoverability of DTAs
Determine tax
rates
4. Identify exceptions
Recognise
Deferred tax
Presentation and
offsetting
9. Disclosure

10. Amount deductible for tax purpose against future economic benefits
Tax base of an asset
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
Tax base of non taxable items = Carrying amount
Tax Base
Amount deductible for tax purpose against future economic benefits =

11. Amount deductible for tax purposes for that liability in future
Tax base of a liability
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 case of revenue received in advance, the tax base is its carrying amount less any amount of revenue that will not be taxable in future periods
Tax Base
Carrying Amounts
Amount deductible for tax purposes for that liability in future = -

12. Temporary differences
Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base.
Temporary differences may be either:
Taxable temporary differences: that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or
Deductible temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled

13. Temporary differences
Carrying Amounts
Tax Base = -
Asset/liability
Carrying amount higher or lower than tax base?
Nature of temporary difference
Resulting deferred tax
Asset
Higher
Taxable
Liability
Lower
Deductible

14. Example
An entity has an item of PP&E whose cost is fully tax deductible
Depreciation under tax rate is higher that that under Ind AS 16
At the balance sheet date
PP&E has been depreciated to INR 500,000 for financial reporting
Tax WDV is INR300,000
Calculate Tax base, accounting base and temporary differences
Accounting Base
INR500,000
Tax Base
INR300,000
Taxable Temporary Difference
INR200,000

15. Nil (€since €2,000,000 income has already been taxed)
Example
During the year ended 31 March 2016, an entity received an advance of INR€2,000,000, toward 5 years' rent of an investment property
In the balance sheet as at 31 March 2016, INR1,600,000 is carried forward as deferred income.
For tax purpose, the entire amount of INR€2 million is taxed on receipt basis
Calculate Tax base, accounting base and temporary differences
Accounting Base
1,600,000
Tax Base
Nil (€since €2,000,000 income has already been taxed)
Deductible Temporary Difference

16. Example
An entity recognized land at a cost of INR1,000,000, which was also its fair value at that time.
The entity’s policy is to carry land at fair value under Ind AS 16
At year-end, land was revalued to INR 4,000,000
The tax cost base available on sale of the land is its original cost
Accounting Base
INR4,000,000
Tax Base
INR1,000,000
Taxable Temporary Difference
INR3,000,000

17. Example XYZ issued additional shares on 31 March 2016
Costs associated with the issue of equity were INR20,000,000 and recorded directly in equity
Under tax laws, deduction can be claimed over five year period from the date of share issue
Response
Items are not recognized as assets/ liabilities in the financial statements, but may have a tax base resulting in DTA/ DTL
Accounting Base`
Nil
Tax Base
INR20,000,000
Deductible Temporary Difference

18. Temporary Differences
Temporary Differences = Difference between carrying amount and its tax base
Temporary difference gives rise to:
Deferred Tax Asset
Probability Test
Deferred Tax Liability
Except
Initial recognition of assets & liabilities
Goodwill
Initial recognition (DTL)
Investments in subs, Associates and JVs

19. Initial recognition exception
Do not recognize temporary differences arising on initial recognition when:
It arises from a transaction that is not a business combination; and
At the time of the transaction affects neither accounting profit nor taxable profit
'accounting profit' clearly means any item recognised in total comprehensive income, whether recognised in profit or loss or in other comprehensive income.)
Limited application – mainly where assets have deemed values under tax laws

20. Example
A company acquired an intangible asset (license) for INR100,000 that has a life of 5 years
No tax deductions can be claimed either as licence is amortised or when it expires
Trading profits from using the license is taxed at 30%
Since tax base is nil, a temporary difference of INR1,00,000 arises.
Should DTL be recognized?
No deferred tax is recognized on the asset’s initial recognition that arose from a transaction that was not a business combination and did not affect accounting or taxable profit at the time of recognition
The reason behind is if the entity acquired the asset in arm’s length transaction, the price would reflect the non deductibility of the asset for tax purposes. Therefore it would not appropriate to recognize a loss on date of purchase

21. Goodwill Exception Initial recognition of goodwill
Recognition of deferred tax prohibited
Subsequent treatment of non tax deductible goodwill
Do not recognize deferred tax
Subsequent treatment of tax-deductible goodwill
Recognize deferred tax on temporary differences
- Goodwill has a tax base of nil since
Taxation authorities do not allow reductions in the carrying amount/amortization of goodwill as a deductible tax expense
Cost of goodwill is also not deductible on disposal of the underlying business.
Any difference between the carrying amount of goodwill and its tax base of nil is a taxable temporary difference
- However, Ind AS 12 does not allow the recognition of the resulting deferred tax liability
This is because goodwill is measured as a residual and the recognition of the deferred tax liability would further increase the carrying amount of goodwill
Since initial liability is not recognized, subsequent reductions/reversals in deferred tax liability are also not recognized
- If reductions in the carrying amount/amortization of goodwill are deductible as tax expense or cost of goodwill is deductible on disposal of the underlying business
Goodwill has initial tax base equal to carrying amount.
There will not be any temporary difference on the date of initial recognition
DTL for taxable temporary differences are recognized to the extent they do not arise from the initial recognition of goodwill.

22. Investments in subsidiaries, associates and JVs
Temporary differences must be considered at the parent & consolidated entity level
Temporary differences may arise from:
Undistributed profits
Changes in FX rates
Valuation adjustments to the carrying value of the investment in the parent or impairment of goodwill
Temporary differences must be recognized subject to exceptions

23. Investments in subsidiaries, associates and JVs – DTL Exception
Recognize DTL for all taxable temporary differences except when:
The parent controls timing of the reversal of the temporary difference (i.e., distributions); and
It is probable that the temporary differences will not reverse in the foreseeable future

24. Investments in Subsidiaries, Associates and JVs – DTA Exception
Recognize DTA only to the extent that it is probable that:
The temporary difference will reverse in the foreseeable future; and
Taxable profit will be available against which the temporary difference can be used

25. Investments in Subsidiaries, Associates and JVs –Exception
As a parent controls dividend policy of its subsidiary, it is able to control the timing of the reversal of temporary differences associated with that investment (including any foreign exchange translation differences)
When the parent has determined that undistributed profits of subsidiaries will not be distributed in the foreseeable future the parent does not recognize a deferred tax liability

26. (taxable)/deductible temporary difference
Example
On 1 April 2015, entity H acquired 100% of the shares of entity S, whose functional currency is different from that of H, for INR600m. The tax rate in H's tax jurisdiction is 30% and the tax rate in S's tax jurisdiction is 40%.
The fair value of the identifiable assets and liabilities (excluding deferred tax assets and liabilities) of S acquired by H is set out in the following table, together with their tax base in S's tax jurisdiction and the resulting temporary differences (all figures in INR millions).
Particulars
Fair value
Tax base
(taxable)/deductible temporary difference
PP&E
270
155
(115)
Accounts receivable
210 -
Inventory
174
124
(50)
Retirement benefits obligation
(30) 30
Accounts Payable
(120)
Fair value of net assets excluding goodwill
504
369
(135)

27. Example Fair value of net assets acquired 504
Deferred tax liability: 135 * 40% (54)
Fair value of net assets 450
Good will (bal. fig.) 150
Carrying amount
No deferred tax is recognized on the goodwill, in accordance with Ind AS 12 requirements
At the date of combination, tax base, in H's tax jurisdiction, of H's investment in S is INR600 million. Therefore, in H's jurisdiction, no temporary difference is associated with the investment, either in CFS of H (where the investment is represented by net assets and goodwill of INR600 million), or in its SFS (where the investment is shown as an investment at cost of INR600 million).

28. Example Consolidated Financial statement:
As at year end, H's consolidated financial statements the carrying value of its investment in S is INR645 million, comprising
INR Million
Carrying amount 600
Retained profit
Exchange loss (15) Impairment of goodwill (10)
Carrying amount 645
Consolidated Financial statement:
Assuming that the tax base in H's jurisdiction remains INR600 million, there is a taxable temporary difference of INR45 million (carrying amount INR645m less tax base INR600m) associated with S in H's CFS.
Whether or not any deferred tax is required to be provided for on this difference is determined in accordance principles discussed earlier. Irrespective of whether provision is made for deferred tax, H would be required to make disclosures in respect of this difference .

29. Example
H, an entity taxed at 30% has a subsidiary, which is taxed at 34%. On 15 March 2015, S sells inventory with a cost of INR120,000, giving rise to a taxable profit of INR20,000 and tax at 34% of INR6,800
What would be the treatment in the consolidated financial statement of H as at 31 December 2014, which is the reporting date?

30. Solution The profit made by S on sale to H would be eliminated
Under Ind AS 12, a deferred tax asset would be recognised on the unrealized profit of CU 20,000 based on H’s 30% tax rate, i.e. ,CU 6,000
The accounting entry as at 31 December 2014 being
Dr Current Tax (income statement) INR6,800
Cr Current Tax (balance sheet) INR6,800
Dr Deferred Tax (balance sheet) INR6,000
Cr Deferred Tax (income statement) INR6,000

31. DTA recognition
DTA should be recognised to the extent it is probable that taxable profit will be available against which the deductible temporary difference can be utilised
Probable is not defined in Ind AS 12 but is interpreted as “more likely than not”
Review of carrying amount of a DTA at each reporting date
Reassessment of unrecognized DTA at each reporting date
Discounting prohibited

32. General recognition criteria for deductible temporary differences and tax losses
Sufficient DTL available
relating to same tax authority
and same entity
in same period
yes
Recognise DTA no
Probable sufficient taxable profit
to same tax authority
and same entity
in period of DTA reversal
yes no
yes
No recognition of DTA
Tax planning opportunities
available to create taxable profits? no

33. Presentation and Disclosure
An explanation of the relationship between tax expense (income) and accounting profit in either or both of the following forms:
A numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s)
Disclose the basis on which the applicable tax rate (s) is (are) computed
A numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed;
Disclose tax-related contingencies in accordance with Ind AS 37

34. Sample : Reconciliation of tax expense

35. Thank you