K.tulshan@sskmin.com S S Kothari Mehta & Co. Ind AS 12 Income Taxes k.tulshan@sskmin.com S S Kothari.

Name: K.tulshan@sskmin.com S S Kothari Mehta & Co. Ind AS 12 Income Taxes k.tulshan@sskmin.com S S Kothari.
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k.tulshan@sskmin.com S S Kothari Mehta & Co.
Ind AS 12 Income Taxes S S Kothari Mehta & Co.

Scheme of presentation
Part A : General Part B : Exceptions Part C : Specific Applications Part D : Disclosures S S Kothari Mehta & Co.

Part A General S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Objective Prescribe accounting treatment in current period for Current tax consequences Future tax consequences Why prescribe Accrual concept Periodicity concept Matching concept S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 assets S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Definitions S S Kothari Mehta & Co.

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 payable S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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) S S Kothari Mehta & Co.

Computation of Deferred Tax
Step (a) Compute Carrying Amount S S Kothari Mehta & Co.

Carrying amount Carrying amount of an asset or liability is the value of the asset or liability appearing in the balance sheet S S Kothari Mehta & Co.

Step (b) Compute Tax Base S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Tax base of an asset 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 S S Kothari Mehta & Co.

Tax base of an asset 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 S S Kothari Mehta & Co.

Tax base of an asset Tax base of an asset = Carrying value – Future taxable amounts + Future deductible amounts Illustration follows:- S S Kothari Mehta & Co.

Tax base of an asset Illustration: 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 deductible amounts = Tax base 80 70 S S Kothari Mehta & Co.

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) S S Kothari Mehta & Co.

Tax base of an asset Scenario A: Recovery of asset gives rise to both taxable amounts and deductible amounts Illustration follows:- S S Kothari Mehta & Co.

Tax base of an asset Scenario A: Recovery of asset gives rise to both taxable amounts and deductible amounts Illustration: 02 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 S S Kothari Mehta & Co.

Tax base of an asset Scenario A: Recovery of asset gives rise to both taxable amounts and deductible amounts Illustration: 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 we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 100 S S Kothari Mehta & Co.

Tax base of an asset Scenario A: Recovery of asset gives rise to both taxable amounts and deductible amounts Illustration: 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. Applying the formula we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 150 110 S S Kothari Mehta & Co.

Tax base of an asset Scenario B: Recovery of asset gives rise to taxable amounts but not to deductible amounts Illustration follows:- S S Kothari Mehta & Co.

Tax base of an asset Scenario B: Recovery of asset gives rise to taxable amounts but not to deductible amounts Illustration: 05 Interest receivable has a carrying value of INR 100. The related interest will be taxed on a cash basis. Applying the formula we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 100 S S Kothari Mehta & Co.

Tax base of an asset Scenario B: Recovery of asset gives rise to taxable amounts but not to deductible amounts Illustration: 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. Applying the formula we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 115 5 110 S S Kothari Mehta & Co.

Tax base of an asset Scenario B: Recovery of asset gives rise to taxable amounts but not to deductible amounts Illustration: 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. Applying the formula we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 100 S S Kothari Mehta & Co.

Tax base of an asset Scenario B: Recovery of asset gives rise to taxable amounts but not to deductible amounts Illustration: 08 Interest paid of INR 100 is capitalized as part of asset’s carrying value. Tax deductions were obtained when the interest was paid. Applying the formula we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 100 S S Kothari Mehta & Co.

Tax base of an asset Scenario C: Recovery of asset does not give rise to taxable amount but gives rise to deductible amounts Illustration follows:- S S Kothari Mehta & Co.

Tax base of an asset Scenario C: Recovery of asset does not give rise to taxable amounts but gives rise to deductible amounts Illustration: 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 we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 95 5 100 S S Kothari Mehta & Co.

Tax base of an asset Scenario D: Recovery of asset does not give rise to either taxable amounts or deductible amounts Illustration follows:- S S Kothari Mehta & Co.

Tax base of an asset Scenario D: Recovery of asset does not give rise to either taxable amounts or deductible amounts Illustration: 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. Applying the formula we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 95 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Tax base of a liability Tax base of a liability = Carrying value – Future deductible amounts + Future taxable amounts Illustration follows:- S S Kothari Mehta & Co.

Tax base of a liability 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. Applying the formula we have: Carrying value of liability - Future deductible amounts + Future taxable amounts = Tax base 100 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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. Applying the formula we have: Carrying value of liability - Future deductible amounts + Future taxable amounts = Tax base 100 S S Kothari Mehta & Co.

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. Applying the formula we have: Carrying value of liability - Future deductible amounts + Future taxable amounts = Tax base 100 S S Kothari Mehta & Co.

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:- S S Kothari Mehta & Co.

Tax base of a liability Tax base of revenue received in advance
Illustration: 15 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 S S Kothari Mehta & Co.

Illustration: 16 Interest 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 - Amount of revenue that will not be taxable in future periods = Tax base 100 S S Kothari Mehta & Co.

Illustration: 17 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 S S Kothari Mehta & Co.

Illustration: 18 Royalties 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 - Amount of revenue that will not be taxable in future periods = Tax base 100 S S Kothari Mehta & Co.

Tax base with no recognized carrying amounts
Expenditure expensed out in accounts but is carried forward in the tax balance sheet Illustration follows:- S S Kothari Mehta & Co.

Tax base with no recognized carrying amounts
Expenditure expensed out in accounts but is carried forward in the tax balance sheet Illustration: 19 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 S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

Step (c) Compute Temporary Difference S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

Compute Temporary Difference
Exercise : 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 deductible amounts = Tax base 80 70 S S Kothari Mehta & Co.

May be either Taxable temporary difference (DTL) Deductible temporary difference (DTA) S S Kothari Mehta & Co.

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:- S S Kothari Mehta & Co.

Compute Temporary Difference / Nature
Exercise: 02 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 S S Kothari Mehta & Co.

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 deductible amounts = Tax base 100 S S Kothari Mehta & Co.

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. Applying the formula of 'Tax Base', we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 150 110 S S Kothari Mehta & Co.

Exercise: 05 Interest receivable has a carrying value of INR 100. The related interest will be taxed on a cash basis. Applying the formula of 'Tax Base', we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 100 S S Kothari Mehta & Co.

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. Applying the formula of 'Tax Base', we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 115 5 110 S S Kothari Mehta & Co.

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. Applying the formula of 'Tax Base', we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 100 S S Kothari Mehta & Co.

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. Applying the formula of 'Tax Base', we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 100 S S Kothari Mehta & Co.

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 deductible amounts = Tax base 95 5 100 S S Kothari Mehta & Co.

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. Applying the formula of 'Tax Base', we have: Carrying value of asset - Future taxable amounts + Future deductible amounts = Tax base 95 S S Kothari Mehta & Co.

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. Applying the formula of 'Tax Base', we have: Carrying value of liability - Future deductible amounts + Future taxable amounts = Tax base 100 S S Kothari Mehta & Co.

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. Applying the formula of 'Tax Base', we have: Carrying value of liability - Future deductible amounts + Future taxable amounts = Tax base 95 5 100 S S Kothari Mehta & Co.

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. Applying the formula of 'Tax Base', we have: Carrying value of liability - Future deductible amounts + Future taxable amounts = Tax base 100 S S Kothari Mehta & Co.

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. Applying the formula of 'Tax Base', we have: Carrying value of liability - Future deductible amounts + Future taxable amounts = Tax base 100 S S Kothari Mehta & Co.

Exercise: 15 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 of 'Tax Base', we have: Carrying value of revenue received in advance - Amount of revenue that will not be taxable in future periods = Tax base 100 S S Kothari Mehta & Co.

Exercise: 16 Interest 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 of 'Tax Base', we have: Carrying value of revenue received in advance - Amount of revenue that will not be taxable in future periods = Tax base 100 S S Kothari Mehta & Co.

Exercise: 17 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 of 'Tax Base', we have: Carrying value of revenue received in advance - Amount of revenue that will not be taxable in future periods = Tax base 100 S S Kothari Mehta & Co.

Exercise: 18 Royalties 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 - Amount of revenue that will not be taxable in future periods = Tax base 100 S S Kothari Mehta & Co.

Exercise: 19 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 of 'Tax Base', of ‘Tax Base’, we have: Carrying value of expense - Future taxable amounts + Future deductible amounts = Tax base 80 S S Kothari Mehta & Co.

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) < S S Kothari Mehta & Co.

Step (d) Compute Tax Rate S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

Step (e) Recognize Deferred Tax S S Kothari Mehta & Co.

Deferred tax Deferred tax liabilities Are the amounts of income taxes payable in future periods in respect of taxable temporary differences S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Deferred tax - Recognition
Deferred tax liability should be recognized for all taxable temporary differences. S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Deferred Tax Asset Recognition S S Kothari Mehta & Co.

Tax Planning Opportunities
Mercantile basis v Cash basis Deferring certain tax deductions Change in method of depreciation Sell & lease back of assets S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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) S S Kothari Mehta & Co.

Discounting Should deferred tax assets and liabilities be discounted? S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

Part B : Exceptions Business Combinations – Goodwill Initial recognition of an asset or liability S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Part C: Specific applications
S S Kothari Mehta & Co.

Specific Applications
Revaluation of assets Tax consequences of dividend Share based payments Consolidated Financial Statements Investment in Branches Subsidiaries Joint Ventures Associates S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Illustration: Facts: Company A has undistributed profits of INR 100,000 in its statement of financial position as on The tax rate is 50% for undistributed profits and 35% for distributed profits It declares a dividend of INR 40,000 on Solution: Recognize current tax expense / liability of INR 50,000 in (100,000 x 50%) Recognize current tax income / asset of INR 6,000 in [40,000 x (50% - 35%)] S S Kothari Mehta & Co.

Illustration: Facts: Company A has undistributed profits of INR 100,000 in its statement of financial position as on The tax rate is 40% for undistributed profits and 50% for distributed profits It declares a dividend of INR 40,000 on Solution: Recognize current tax expense / liability of INR 40,000 in (100,000 x 40%) Recognize current tax expense / liability of INR 4,000 in [40,000 x (50% - 40%)] S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

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? S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

How to compute ‘Tax Base’? If consolidated tax return, then as per the return If not, then as per individual tax returns S S Kothari Mehta & Co.

Which tax rate to adopt? Where reporting entity is domiciled S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Investment in Branches
Aka - subsidiary S S Kothari Mehta & Co.

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. S S Kothari Mehta & Co.

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 tax S S Kothari Mehta & Co.

Subsidiary to Associate
How: Parent sells a part of holding Subsidiary issues additional shares to others S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Part D : Disclosures S S Kothari Mehta & Co.

Disclosures Balance Sheet Performance Statement Notes S S Kothari Mehta & Co.

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)] S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 component S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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)] S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Illustration:Method 1 Method 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% S S Kothari Mehta & Co.

Illustration:Method 2 Method 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% S S Kothari Mehta & Co.

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; S S Kothari Mehta & Co.

Analysis of deferred tax assets / liabilities
Illustration Y1 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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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? S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

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 S S Kothari Mehta & Co.

Summary S S Kothari Mehta & Co.

Summary 9 step approach to deferred tax S S Kothari Mehta & Co.

Comparison from Indian GAAP to IFRS Significant 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 S S Kothari Mehta & Co.

Thank You Senior Partner, Technical Head – IFRS S S Kothari Mehta & Co. S S Kothari Mehta & Co.

K.tulshan@sskmin.com S S Kothari Mehta & Co. Ind AS 12 Income Taxes k.tulshan@sskmin.com S S Kothari.

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