1. Workshop on Deferred Taxation
Tahmeen Ahmad (ACA)

2. Understanding Deferred Tax
An entity shall, with certain limited exceptions, recognize a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of the asset or liability will make the future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences.

3. Understanding Deferred Tax (contd.)
Accounting profit versus taxable profit
The temporary difference
Why calculate deferred tax assets or liabilities?
The balance sheet liability method

4. Identifying temporary differences
The carrying amount
The tax base of:
An asset-future tax deductible amounts
A liability- carrying amount less future tax deductible amounts
Revenue received in advance- carrying amount less any future non taxable amount
Two kinds of temporary differences : taxable and deductible

5. Identifying temporary differences (contd.)
B/s item
Taxable Temporary difference
Deductible temporary difference
Asset
Carrying amount greater than tax base
Tax base greater than carrying amount
Liability

6. Identifying temporary differences (contd.)
Examples
Group A to identify tax base and carrying amount
Group B to identify taxable temporary differences
Group C to identify deductible temporary differences

7. Recognition criteria DTL
“Deferred tax liability shall be recognized on all taxable temporary differences except to the extent that it arises from
Initial recognition of Goodwill
Initial recognition of an asset or liability in a transaction that :
Is not a Business combination; and
At the time of the transaction, affects neither accounting nor taxable profit (tax loss)
However, for taxable temporary differences associated with investment in subsidiaries, branches, associates and interests in joint ventures, a deferred tax liability shall be recognized with exceptions.”
* inv. In subsidiaries etc… deferred tax liability recognized unless parent can control timing of reversal of differences and the reversal of differences are not probable in the near future

8. Recognition criteria DTA
“a deferred tax asset shall 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, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:
Is not a business combination
At the time of the transaction affects neither accounting profit not taxable profit (tax loss)
However for deductible temporary differences associated with investment in subsidiaries, associates, branches and interests in joint ventures, a deferred tax asset shall be recognized subject to conditions
Conditions: profits will be available against which utilization of differences. And it is probable that the differences will reverse in the foreseeable future

9. Specific guidance on Deferred tax Recognition
Goodwill
business combinations
Assets at fair value
Initial recognition of assets and liabilities
Share based payments

10. I. Goodwill
Initial recognition –deferred tax not recognized as goodwill is a residual
Subsequent reductions in unrecognized DTL that arose from the initial recognition of goodwill- deferred tax liability not recognized
Subsequent tax allowable differences – deferred tax liability recognized
Good will is the excess of the cost of the combination over the acquirers interest in the net fair value of identifiable assets, liabilities and contingent liabilities.

11. II. Business combinations
Identifiable assets and liabilities are valued at fair value at acquisition date
Tax base may be different
Temporary differences arise
Deferred tax calculated and corresponding effect adjusted in goodwill or negative goodwill*
Case : Acquirer’s own deferred tax asset not recognized in a business combination due to unavailable taxable profits
Case: Acquiree’s deferred tax asset not recognized due to non satisfaction of separate recognition criteria
*excess of acquirer’s interest over net fair value of accquiree’s identifiable assets liabilities and contingent liabilities over the cost of the combination
Case 1Recognize it if it can be utilized against acquiree’s profit but not accounted for as part of
Case 2 the deferred tax asset will be subsequently recognized in the combination books if the criteria is then being met with an corresponding decrease in goodwill (charge to expense)

12. III. Assets at fair value
Revaluations as per IASs
Different tax base and carrying amount
Temporary difference arises and a deferred tax asset/ liability is calculated

13. IV. Initial recognition of assets/ liabilities
where tax base is different carrying amount at initial recognition, temporary differences arise
Deferred tax asset/ liability recognized with:
Adjustment in goodwill (Part of a business combination)
Recognition of deferred tax expense/ income( where the transaction affects profits)
Adjustment to equity (for transactions that affect equity)
Deferred tax asset/liability not recognized if the transaction is not a business combination or does not affect accounting or tax profits.
deferred tax not recognized if the initial recognition is not part of a business combination/ doesnt affect a/c or tax profits

14. V. Investment in subsidiaries etc
When carrying amount of investment in subsidiaries, branches and associates or interests in joint ventures differs from tax base
Reason for difference include:
Undistributed profits
Change in forex rates
Impairment
The DTL recognized for taxable temporary differences except
where the parent can control the timing of reversal and
the differences are not probable to reverse in the foreseeable future
The DTA recognized for all deductible temporary differences where:
The differences are probable to reverse in the foreseeable future
Taxable profit will be available against which the temporary difference can be utilized.

15. VI. Share based payments
Timing of expense allowed in case of share based payments may differ
Employee remuneration in share options
Tax authorities normally may allow deduction at a different date eg of actual exercise of share rights
Deductible temporary difference arises on which deferred tax is recognized

16. Applicable rates and measurement
Rate applicable in the period the differences are expected to reverse
Average rate applied in case of slab rates
Rate depends on intended manner of recovery or settlement of the asset or liability
Tax rate may depend on dividend payout. (higher for non distribution) deferred tax computed at ‘undistributed profit’ rate
DTL and DTA not discounted
DTA reviewed at each B/s date*
*reduced for unavailability of profit

17. Items credited or charged directly to equity
Deferred tax will be charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or different period, directly to equity.
Examples are on:
Revaluation surplus
Adjustment to the opening balance of retained earnings
Forex differences on translation of foreign operation’f f/s

18. Unrecognized deferred tax assets
Reassessed at each b/s date
Recognized to the extent it is probable that future taxable profits will be available

19. Presentation and disclosure
Offsetting of deferred tax assets and liabilities allowed under certain conditions
Tax expense in income statement
Disclosures of:
Components of tax expense
Aggregate deferred tax on items charged to equity
Reconciliation of tax expense (income) with accounting profit
Unrecognized deferred tax assets- amount of deductible differences
Changes in tax rates from previous period explained
Amt and expiry date of deductible temporary differences, unused tax losses and tax credits for which no deferred tax asset has been recognized
Aggregate amount of temp diff related to inv in subs etc for which no deferred tax liabilities have been recognized
An entity shall offset the deferred tax asset and deferred tax liabilities if and only if:
The entity has a legally enforceable right to set off current taxes assets against current tax liabilities, &
The deferred tax asset/liability relate to the same tax authority on same taxable entity or entities that intend to settle current tax assets and liabilities on a net basis. An entity shall offset the deferred tax asset and deferred tax liabilities if and only if:
The deferred tax asset/liability relate to the same tax authority on same taxable entity or entities that intend to settle current tax assets and liabilities on a net basis.

20. Presentation and disclosure (contd.)
For each type of temporary difference (and unused tax loss and tax credit):
DTL & DTA in b/s
DTI and DTE in income statement
For DTA, supporting evidence for recognition when:
The utilization of the DTA will exceed the available taxable temporary differences in the period of reversal
Losses suffered in the current or prior period to DTA
Potential income tax consequences of payment of dividends to shareholders

21. Illustrations Group C to work out deferred tax assets and liabilities
Group B to present the f/s portions as relevant
Group A to prepare the reconciliations