1. IAS 12 : Income Taxes
The Institute of Chartered Accountants of India (Set up by an Act of Parliament)

2. IAS 12 v AS 22 Concept IAS 12 : Temporary Difference
AS 22 : Timing Difference
Approach
IAS 12 : Balance Sheet
AS 22 : Profit & Loss Account
Method
IAS 12 : BS liability method
AS 22 : Deferral method

3. 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

4. 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

5. 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.

6. Computation of Deferred Tax Balance 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)

7. Computation of Deferred Tax
Step (a)
Compute Carrying Amount

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

9. Computation of Deferred Tax
Step (b)
Compute Tax Base

10. 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

11. 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

12. Tax Base of an Asset
Tax base of an asset = Carrying value – Future taxable amounts + Future deductible amounts
Illustration follows:-

13. Tax Base of an Asset Illustration:
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 deductible amounts =
Tax base 80 70

14. 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

15. Tax Base of a Liability
Tax base of a liability = Carrying value – Future deductible amounts + Future taxable amounts
Illustration follows:-

16. Tax Base of a Liability Illustration:
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.
Applying the formula we have:
Carrying value of liability -
Future deductible amounts +
Future taxable amounts =
Tax base
100

17. Tax Base of a Liability Illustration:
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.
Applying the formula we have:
Carrying value of liability -
Future deductible amounts +
Future taxable amounts =
Tax base 95 5
100

18. Tax Base of a Liability
Tax base of revenue received in advance = Carrying value – Amount of revenue that will not be taxable in future periods amounts
Illustration follows:-

19. Tax Base of a Liability Tax base of revenue received in advance
Illustration:
Rents 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

20. Tax Base of a Liability Carrying value of revenue received in advance
Tax base of revenue received in advance
Illustration:
A 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 -
Amount of revenue that will not be taxable in future periods =
Tax base
100

21. Tax base with no Recognized Carrying Amounts
Expenditure expensed out in accounts but is carried forward in the tax balance sheet
Illustration:
IPO 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 we have:
Carrying value of expense -
Future taxable amounts +
Future deductible amounts =
Tax base 80

22. 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.

23. Computation of Deferred Tax
Step (c)
Compute Temporary Difference

24. 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

25. Compute Temporary Difference
Exercise :
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 deductible amounts =
Tax base 80 70
Temporary Difference = 10

26. Temporary Differences
May be either
Taxable temporary difference (DTL)
Deductible temporary difference (DTA)

27. Temporary Differences
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
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:-

28. Compute Temporary Difference
Exercise :
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 deductible amounts =
Tax base 80 70
Taxable Temporary Difference = 10

29. Compute Temporary Difference / Nature
Exercise:
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 deductible amounts =
Tax base 95 5
100
Deductible Temporary Difference = 5

30. 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)
<

31. Computation of Deferred Tax
Step (d)
Compute Tax Rate

32. 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

33. 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

34. 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.

35. Computation of Deferred Tax
Step (e)
Recognize Deferred Tax

36. Deferred Tax Deferred tax liabilities Are the amounts of income taxes
payable in future periods
in respect of
taxable temporary differences

37. 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

38. Deferred Tax - Recognition
Deferred tax liability
should be recognized for all taxable temporary differences.

39. 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

40. Deferred Tax Asset Recognition

41. 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

42. 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)

43. Discounting Should deferred tax assets and liabilities be discounted?No

44. 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

45. 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.

46. Disclosures
Balance Sheet
Performance Statement
Notes

47. Disclosures 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? [IAS 1(61)]

48. Disclosures
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

49. Disclosures
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

50. 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 rates

51. Pravin Tulsyan