10

IND AS ON ITEMS IMPACTING

THE FINANCIAL STATEMENTS
UNIT 1:
INDIAN ACCOUNTING STANDARD 12 : INCOME TAXES

LEARNING OUTCOMES
After studying this unit, you will be able to:
 Understand the objective and scope of the standard
 Define the terms used in the standard like accounting profit, taxable profit
(tax loss), tax expense (tax income), current tax, deferred tax liabilities,
deferred tax assets, temporary differences, taxable temporary differences,
deductible temporary differences and the tax base
 Recognise current tax liabilities and current tax assets
 Recognise deferred tax liabilities and deferred tax assets
 Appreciate when Ind ASs permit or require certain assets to be carried at
fair value or to be revalued
 Identify the situations where temporary difference may arise on initial
recognition of an asset or liability
 Recognise deferred tax asset for all deductible temporary differences
 Evaluate the cases, when a deferred tax asset arises on initial recognition
of an asset

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 10.2 FINANCIAL REPORTING

 Measure current tax liabilities (assets) for the current and prior periods
 Measure deferred tax assets and liabilities using the tax rates
 Identify the items recognised outside profit or loss
 Calculate the deferred tax arising from a business combination
 Calculate current and deferred tax arising from share-based payment
transactions
 Account for tax assets and tax liabilities
 Offset tax assets with tax liabilities
 Present the tax expense in the Statement of Profit and Loss with respect to
various transactions
 Disclose the major components of tax expense (income)
 Account for the Income Taxes on account of changes in the tax status of
an entity or its shareholders.

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 INDIAN ACCOUNTING STANDARD 12 10.3

UNIT OVERVIEW
• Accounting profit
• Taxable profit (tax loss)
• Tax expense (tax income)
• Current tax
• Deferred tax liabilities
Definition • Deferred tax assets
• Temporary differences
• Taxable temporary differences
• Deductible temporary differences
• Tax base

• Current Tax
Tax Expense • Deferred Tax

• Recognition
• Measurement
Current tax • Accounting of Current Tax Effects
• Offsetting Current Tax Assets and Current Tax Liabilities

• Compute carrying amount

• Compute tax base
• Compute temporary differences
• Classify temporary differences
• Identify exceptions
Deferred Tax • Assess (also reassess) deductible temporary differences, tax losses and
tax credits
• Determine the tax rate (law)
• Calculate and recognise deferred tax
• Accounting of deferred tax
• Offsetting deferred tax assets and deferred tax liabilities

• Deferred tax arising from a business combination

Practical Application • Current and deferred tax arising from share-based payment transactions
• Change in tax status of an entity or its shareholders

• Disclose components of tax expenses (income)

• Tax related to items charged directly to equity
• Tax related to items recognised in statement of other comprehensive
income
• Explanation of the relationship between tax expense (income) and
Disclosure accounting profit
• Change in tax rates
• Unrecognised deductible temporary differences, unused tax losses and
unused tax credits
• Temporary differences associated with investments in subsidiaries etc.
• Amount of deferred tax liabilities (assets) or income (expense)

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 10.4 FINANCIAL REPORTING

1.1 INTRODUCTION
There was a time in India, few decades back when the concept of zero income tax entities was
prevalent. Due to various income tax benefits, these companies had no current tax liability for any
income tax that was payable based on that year’s accounting profit. Thus, no provision of income
tax was created. Profit after tax used to be equal to profit before tax. But from accounting
perspective, this was not a correct reflection of results. Quite a few of these tax benefits were
primarily accelerated benefits.
For example, depreciation was deductible in taxation on written down value method (WDV) whereas
in the books of accounts, entities could claim depreciation on straight line method (SLM). As
everybody knows that under WDV method, in initial years’ depreciation charge is greater than
depreciation under SLM. This resulted into accounting profits but no taxable profits. But over the
useful life of the asset, depreciation under both methods is equal. In later years, depreciation charge
under SLM would be higher than in depreciation under WDV. Therefore, in later years, in such a
situation, the taxable profits will be higher than the book profits. This will require a higher tax
provision in books when compared to the accounting profits of that year. Basically, this differential
will be due to non-provision of tax liability in an earlier year.
Example 1
An entity has acquired an asset for ` 10,000. The depreciation rate as per income tax is 40% on
WDV basis. In books of account, entity claims depreciation on equivalent SLM basis of 16.21%.
The entity has accounting and taxable profits of ` 20,000 from year 1 to year 4, inclusive, before
any allowance of depreciation in either case.
The tax rate is 30%. Assuming no concept of deferred tax, the provision for current tax would be
computed as under:
Year 1 2 3 4
Cost of the asset 10,000 10,000 10,000 10,000
Depreciation rate – WDV 40% 40% 40% 40%
Depreciation amount – WDV 4,000 2,400 1,440 864
Taxable profits before depreciation 20,000 20,000 20,000 20,000
Less: Depreciation (4,000) (2,400) (1,440) (864)
Taxable profits after depreciation 16,000 17,600 18,560 19,136
Tax rate 30% 30% 30% 30%
Tax amount 4,800 5,280 5,568 5,741
However, in the books of accounts, the situation will be as under:
Year 1 2 3 4
(a) Cost of the asset 10,000 10,000 10,000 10,000
(b) Depreciation rate – SLM 16.21% 16.21% 16.21% 16.21%

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 INDIAN ACCOUNTING STANDARD 12 10.5

(c) Depreciation amount – SLM 1,621 1,621 1,621 1,621

(d) Accounting profits before depreciation 20,000 20,000 20,000 20,000
(e) Less: Depreciation (1,621) (1,621) (1,621) (1,621)
(f) Accounting profits after depreciation 18,379 18,379 18,379 18,379
(g) Tax amount – as above 4,800 5,280 5,568 5,741
(h) Effective tax rate=(g)/(f) 26.12% 28.73% 30.30% 31.24%
(i) Tax provision @ 30% tax rate {30%*(f)} 5,514 5,514 5,514 5,514
Thus, from the above two tables, for an accountant the tax should be ` 5,514 in all cases as per
the accounting profit. The results are distorted. You will observe that in year 3, in books, the amount
of tax provision is higher by ` 54 (5,568 – 5,514) and in year 4, it is higher by ` 227
(5,741 - 5,514). This is so because in year 1 & 2, these figures are lower by ` 714 (5,514 – 4,800)
& ` 234 (5,514 – 5,280). Thus, the liability that was incurred in year 1 & 2 is paid year 3 onwards.
However, no provision of the differential (` 714 in year 1 & ` 234 in year 2) is made.
The provision of differential should have been made by the entity following three major accounting
concepts and convention of periodicity, matching and accrual. The entity has merely deferred the
payment of tax to subsequent year. This understanding and appreciation of situation gave rise to
the concept of deferred tax liabilities or deferred tax assets.
In earlier years, deferred tax was recognised based on concepts of timing differences and permanent
differences based on differences in accounting profits and taxable profits known as income tax
liability method. This concept stands revised with this Accounting Standard which recognised
deferred tax based on temporary differences that arises due to difference in the carrying value of an
item of asset or liability as per books of accounts with the carrying value of that item as per income
tax provisions, known as tax base. This method is known as balance sheet approach.
This Accounting Standard though titled as ‘income taxes’ primarily deals with deferred tax though
guidance is provided on current tax.

Differences

Other than Temporary

Temporary Differences
Differences

Taxable Temporary Deductible Temporay Cannot be

Difference Difference reversed
(Results in DTL) (Results in DTA)

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 10.6 FINANCIAL REPORTING

1.2 SCOPE
• The objective of this Standard is to prescribe the accounting treatment for income taxes.
Income taxes for the purpose of this Standard includes:
(a) all domestic and foreign taxes which are based on taxable profits;
(b) taxes, such as withholding taxes (Tax Deducted at Source), which are payable by a
subsidiary, associate or joint venture on distributions to the reporting entity.

Domestic and Foreign Methods of Accounting for

Taxes; Including Government Grants or
withholding taxes which Investment tax credits (But
are payable by a it deals with accounting for
subsidiary, Associate or temporary differences
Joint Arrangements on arising from such grants
distributions to the and investment tax credits)
Reporting Entity

• Further, the income-tax for the purpose of this Standard could be classified as:
(a) Current tax being current tax consequence that arises due to transactions and other
events of the current period that are recognised in an entity’s financial statements.
(b) Deferred tax being future tax consequence that arises due to the future
(i) recovery of the carrying amount of assets or
(ii) settlement of carrying amount of the liabilities that are recognised in an entity’s
balance sheet. For example: Recovery of fixed assets means by way of depreciation
or sale and for other assets by way of realization.
• Before we proceed further, it is essential to understand the fundamental principle in recognising
deferred tax. This is enunciated in the Standard as under:
It is inherent in the recognition of an asset or liability that the reporting entity expects to recover
or settle the carrying amount of that asset or liability. If it is probable that recovery or settlement
of that carrying amount will make future tax payments larger (smaller) than they would be if
such recovery or settlement were to have no tax consequences, this Standard requires an
entity to recognise a deferred tax liability (deferred tax asset).

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 INDIAN ACCOUNTING STANDARD 12 10.7

Let us try to understand the aforesaid principle with the help of an example:
Example 2
(a) Whenever an entity recognises an asset, it expects that it will recover the carrying value
of that asset. For example, if an entity recognises an item of land at ` 1,00,000, it expects
that it will be able to recover at least ` 1,00,000 if that land is sold sometime in future.
(b) The income tax provisions, assuming, provides that if this piece of land is sold after one
year, there will be an indexation benefit @ 10% per year. Thus, if the land is sold after
one year, the cost of the land will for the purpose of taxation will be assumed at
` 1,10,000 (` 1,00,000 + 10%). If it is sold after two years, the cost of the land for the
purpose of taxation will be assumed at ` 1,21,000 (` 1,10,000 + 10%).
(c) The tax rate in all years continues to be flat 30%.
(d) Thus, the recovery of the carrying value of land after two years will result into a tax saving
of ` 6,300 i.e. 30% of 21,000 (1,21,000-1,00,000).
(e) Thus, if after two and half year, land is sold for ` 1,50,000, the entity will pay a tax of
` 8,700 at 30% of ` 29,000 (` 1,50,000 – ` 1,21,000). If there would have been no
indexation benefits, the tax liability would have been ` 15,000 at 30% of ` 50,000
(` 1,50,000 – ` 1,00,000). Saving in tax is of ` 6,300 (15,000-8,700).
(f) The entity should recognise a deferred tax asset of ` 6,300 in this case.
(g) This principle has to be applied to each item of asset or liability.
Note: There are controversial view in case of Indexation of land for a temporary difference
because if the land is not going to be sold in a near future particularly in business then in such
case it is not advisable to calculate temporary difference.
• The Standard also provides guidance as to where the current tax or deferred tax should be
recognised, accounted and presented.
• An entity may incur a loss in the current period and set off against a profit in the earlier period.
As the entity would recover a tax paid in the earlier year, the entity should recognize the benefit
of tax recoverable as an asset.
• Items of current tax or defer tax recognized in profit and loss are subject to two exceptions:
1. An item of current tax or defer tax pertaining to other comprehensive income should be
recognized in other comprehensive income
2. An item of current tax or defer tax pertaining to direct equity should be recognized in direct equity

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 10.8 FINANCIAL REPORTING

Tax Accounting

Transactions and Events recognised Transactions and events

Outside Profit and Loss recognised in Profit or Loss

Related Tax effects Related Tax effects also

Related Tax Effect recognised in
recognised in Other recognised in Profit or
Statement of changes in Equity
Comprehensive Income Loss

• In addition, the Standard deals with the:

(a) recognition of deferred tax assets arising from unused tax losses or unused tax credits;
(b) presentation of income taxes in the financial statements; and
(c) disclosure of information relating to income taxes.

The recognition of deferred tax assets

arising from unused tax losses or
unused tax credits

The presentation of income taxes in

the financial statements and

The disclosure of information relating

to income taxes

• The Standard however, does not deal with the methods of accounting for government grants
(see Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance)
or investment tax credits. However, it deals with the accounting for temporary differences that
may arise from such grants or investment tax credits.

1.3 DEFINITIONS
Having understood, the basic concepts of current tax and deferred tax, the following definitions
needs to be appreciated:
(a) Accounting profit is profit or loss for a period before deducting tax expense.
(b) Taxable profit (tax loss) is the profit (loss) for a period, computed as per the income tax act,
upon which income taxes are payable (recoverable).

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 INDIAN ACCOUNTING STANDARD 12 10.9

(c) Tax expense (tax income) is the aggregate amount included in the determination of profit or
loss for the period in respect of current tax and deferred tax.
(d) Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit
(tax loss) for a period.
(e) Deferred tax liabilities are the amounts of income taxes payable in future periods in respect
of taxable temporary differences.
(f) Deferred tax assets are the amounts of income taxes recoverable in future periods in respect
of:
♦ deductible temporary differences;
♦ the carry forward of unused tax losses; and
♦ the carry forward of unused tax credits.
(g) Temporary differences are differences between the carrying amount of an asset or liability in
the balance sheet and its tax base.
(h) Temporary differences may be either:
♦ taxable temporary differences, which are 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, which are 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.
(i) The tax base of an asset or liability is the carrying amount to that asset or liability for tax
purposes.
To facilitate, easy understanding, this chapter has been divided as under:
(a) Part A : Tax Expense
(b) Part B : Current Tax, its Recognition, Measurement and Presentation
(c) Part C : Deferred Tax, its Recognition, Measurement and Presentation
(d) Part D : Practical Application
(e) Part E : Disclosures

1.4 PART A: TAX EXPENSE (TAX INCOME)

• Tax expense or tax income is the aggregate amount included in the determination of profit or
loss for the period in respect of current tax and deferred tax.

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 10.10 FINANCIAL REPORTING

• The following needs to be appreciated:

(a) Tax expense could be positive or negative. Thus, there could be a tax income.
(b) Tax expense is the aggregate of:
♦ current tax; and
♦ deferred tax.

1.5 PART B: CURRENT TAX, ITS RECOGNITION,

MEASUREMENT AND PRESENTATION
1.5.1 Current Tax
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax
loss) for a period.
1.5.2 Recognition
(a) Current tax liability
♦ Current tax for current and prior periods shall, to the extent unpaid, be recognised as a
liability.
♦ The exact liability of current tax crystallises only on preparation and finalisation of financial
statements at the end of the reporting period.
♦ Any excess of this liability over the prepaid taxes (advance tax) and withhold taxes (TDS)
is to be treated as current liability. This liability may be for the current reporting period
or may relate to earlier reporting periods.
(b) Current tax assets
If the amount already paid in respect of current and prior periods exceeds the amount due
for those periods, the excess shall be recognised as an asset.

1.5.3 Measurement
(a) 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.
(b) Uncertain tax position interpretations
♦ An entity computes its current income-taxes in accordance with the provisions contained
in the taxation laws. Taxation laws provide certain benefits or require enhancements in
accordance with the fiscal, economic and other policies of the country. These at times are

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 INDIAN ACCOUNTING STANDARD 12 10.11

prone to varying interpretations and settled by the appellate authorities after a

considerable period from the reporting period. The taxability remains uncertain.
♦ Ind AS 12 requires that current tax liabilities or assets for the current period or the period
should be computed based on the amount it expects to pay. It is suggested that statistical
tools may be used in computing the current tax with respect to the uncertain tax
interpretations.
♦ Thus, computation of current tax at best is an estimate. Any change in this estimate based
on subsequent developments should be treated as a change in estimate in accordance
with Ind AS 8.
(c) Enacted or substantive enacted
♦ The tax rates in computing the current tax should be based on taxation laws that have
enacted or substantively enacted.
♦ A proposed legislation is enacted when all the formalities with respect to the legislation is
completed. In India, the enactment occurs when the legislation is notified in the gazette
on and from the date it comes into force as mentioned in the said gazette notification.
♦ Implicit in the word ‘substantively enacted’ is the emphasis that in the relevant situation
the enactment process is not fully completed. The process of enactment of a taxation
laws in India is as under:
— Finance bill is presented in Lok Sabha of Indian Parliament.
— It is discussed and passed by the Lok Sabha.
— It then moves to Rajya Sabha of Indian Parliament.
— It is discussed in the Rajya Sabha.
— It is then presented before the President for assent.
— It is then notified in the gazette of India.
♦ Now, at which stage an entity should conclude that the legislation is substantively enacted
becomes a key consideration. More so, the finance bill in India is normally presented on
the last day of February and is enacted by the 3rd week of May. The reporting period of
most of the entities ends on 31st March and listed entities attempt to issue their financial
statements within 4-6 weeks of the reporting date.
♦ Ind AS 12 does not provide any guidance.
♦ It is therefore suggested that the entity should explicitly disclose in its financial statements
the accounting policy with respect to the adoption of tax rates based on the principle of
‘substantive enactment’. Needless to add, the policy should be applied consistently. If
material, the variation due to adoption of rates based on ‘substantive enactment’ should
also be disclosed.

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1.5.4 Accounting of Current Tax Effects

(a) The accounting of current tax effects of a transaction of an event is consistent with the
accounting for that transaction or event.
(b) The current tax effects of a transaction shall follow its accounting treatment if the item is
recognised in statement of profit or loss, its current tax effect will be recognised in statement
of profit or loss.
(c) For further discussion on this topic, refer Accounting for Deferred Tax.
1.5.5 Offsetting Current Tax Assets and Current Tax Liabilities
(a) An entity shall offset current tax assets and current tax liabilities if, and only if, the entity:
♦ has a legally enforceable right to set off the recognised amounts; and
♦ intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
(b) Although current tax assets and liabilities are separately recognised and measured they are
offset in the balance sheet subject to criteria similar to those established for financial
instruments in Ind AS 32. An entity will normally have a legally enforceable right to set off a
current tax asset against a current tax liability when they relate to income taxes levied by the
same taxation authority and the taxation laws permit the entity to make or receive a single net
payment.
(c) In consolidated financial statements, a current tax asset of one entity in a group is offset against
a current tax liability of another entity in the group if, and only if, the entities concerned have a
legally enforceable right to make or receive a single net payment and the entities intend to
make or receive such a net payment or to recover the asset and settle the liability
simultaneously.

1.6 PART C: DEFERRED TAX, ITS RECOGNITION,

MEASUREMENT AND PRESENTATION
The following steps should be followed in the recognition, measurement and presentation of deferred
tax liabilities or assets:
Step 1: Compute carrying amounts of assets and liabilities
Step 2: Compute tax base
Step 3: Compute temporary differences

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Step 4: Classify temporary differences into either:

♦ Taxable temporary difference
♦ Deductible temporary difference
Step 5: Identify exceptions
Step 6: Assess deductible temporary differences, tax losses and tax credits
Step 7: Determine the tax rate
Step 8: Calculate and recognise deferred tax
Step 9: Accounting of deferred tax
Step 10: Offsetting of deferred tax liabilities and deferred tax assets
These are now discussed in detail.
1.6.1 Step 1: Compute carrying amount
For the purpose of this Standard, we can define carrying amount at which an asset or liability is
recognised in the balance sheet, after making necessary adjustments like depreciation, impairment,
etc. In other words, carrying amount of the assets and liabilities means balance as per the ledger.
Example 3
Entity A had acquired an item of plant and machinery for ` 1,00,000 on 1st April, 20X1. It depreciated
this item @ 10% per annum on SLM basis. For the year ended 31st March, 20X2, it provides
depreciation of ` 10,000. The carrying amount of this item of plant and machinery as on 31st March,
20X2 is ` 90,000.

1.6.2 Step 2: Compute tax base

(a) The tax base of an asset or liability is the amount attributed to that asset or liability for tax
purposes.
Example 4
Entity A had acquired an item of plant and machinery for ` 1,00,000 on 1st April, 20X1. It
depreciated this item @ 10% per annum on SLM basis. For the year ended 31st March, 20X2,
it provides depreciation of ` 10,000. The carrying amount of this item of plant and machinery
as on 31st March, 20X2 is ` 90,000. As per taxation laws, this item of plant and machinery has
to be depreciated @ 30% per annum on WDV basis. The entity thus for the purposes of taxation
computes depreciation of ` 30,000. The tax base of this item of plant and machinery is
` 70,000 (` 1,00,000 – ` 30,000).
In the above scenario, if Entity A decides to revalue the item of plant and machinery and
measures it at ` 1,50,000, the carrying value of the item of plant and machinery will be `

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1,50,000. For tax purposes, if the revaluation is ignored, the tax base is ` 70,000 (Initial cost
` 1,00,000 – ` 30,000).
(b) Four scenarios could be anticipated for computation of the tax base of either an asset or a
liability:
♦ Tax base of an asset.
♦ Tax base of a liability.
♦ Items with a tax base but no carrying amount.
♦ Items of assets and liabilities where tax base is not apparent.
Let us examine and compute tax base under each of the four scenarios:
(i) Tax base of an asset
The principle to compute tax base of an asset is as under:
 The 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.
 The carrying amount of the asset could be recovered either through sale of the asset
or through its use or partly through use and partly through sale. The method of
recovery has to be determined at each reporting date.
Examples 5-9
5. Entity A has inventory with carrying amount of ` 1,00,000 as at the reporting
date. It recovers the value of inventory through sale in a subsequent reporting
period. The sale value is the economic benefit derived by the entity and is
taxable. However, as per the matching and other concepts, against this sale
the entity is entitled to deduct its cost. The cost is the carrying amount of the
inventory i.e., ` 1,00,000. The tax base in this case is ` 1,00,000.
6. Entity A has acquired an item of asset for ` 1,00,000 for production of certain
items to be sold by the entity. It is deductible equally over two years in the books
of accounts. The carrying amount as the end of first reporting period is ` 50,000
(` 1,00,000 – ` 50,000). In the income tax, ` 75,000 is deductible in year 1 and
balance is deductible in year 2. We have to compute its tax base as on the last
day of the first reporting period. However, in income-tax, it can claim only
` 25,000 being 25% of the cost of the asset as 75% has already been claimed
in year 1. Thus, the tax base in this case is ` 25,000.
7. Interest receivable have a carrying amount of 100. The related interest revenue
will be taxed on a cash basis. The tax base of the interest receivable is nil.

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8. An entity that follows mercantile system of accounting has trade receivables of

` 1,000. It creates a general bad debt allowance of ` 50. The carrying amount
in the books of accounts of trade receivables is thus ` 950. However, in
income-tax, general bad debt provision is not deductible. In the subsequent
period, entity is able to recover only ` 950. The amount recovered is a taxable
economic benefit. But for tax purposes, entity is entitled for a deduction of
` 1,000 against this recovery of trade receivable. The tax base is ` 1,000.
9. An entity that follows mercantile system of accounting has trade receivables of
` 1,000. It creates a specific bad debt of ` 50. The carrying amount in the books
of accounts of trade receivables is thus ` 950. However, in income-tax, specific
bad debt provision is deductible in the very year it is created. In the subsequent
period, entity is able to recover only ` 950. The amount recovered is a taxable
economic benefit. For tax purposes, entity will be entitled for a deduction of ` 950
against this recovery of trade receivable; ` 50 already deducted in the earlier
period. The tax base is ` 950.
 If those economic benefits will not be taxable, the tax base of the asset is equal to
its carrying amount.
 It is quite feasible that in certain cases, the economic benefits that are derived from
the recovery of an asset are not taxable. In these situations, the tax base of the asset
is taken at its carrying amount.
Examples 10 & 11
10. An entity has an investment in listed equity shares. There is no tax on gains
that arise on sale of these listed equity shares. Thus, the tax base in this case
will be the carrying amount of the investments.
11. An entity has given a loan of ` 10,000 which is the carrying amount. The
repayment of loan has no tax consequences. The tax base is ` 10,000.
(ii) Tax base of a liability
The principle to compute tax base of a liability is as under:
 The 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.
Examples 12 & 13
12. Current liabilities include accrued expenses with a carrying amount of ` 100.
The related expense will be deducted for tax purposes on a cash basis.
The tax base of the accrued expenses is nil.
13. Current liabilities include accrued expenses with a carrying amount of ` 100.
The related expense has already been deducted for tax purposes.
The tax base of the accrued expenses is ` 100.

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 If those liabilities are not tax deductible, the tax base of that liability is equal to its
carrying amount.
Example 14
Current liabilities include accrued fines and penalties with a carrying amount of
` 100. Fines and penalties are not deductible for tax purposes.
The tax base of the accrued fines and penalties is ` 100.
 It is an other than temporary difference, as the expenses are not allowable as per
income tax.
Example 15
A loan payable has a carrying amount of ` 100. The repayment of the loan will have
no tax consequences.
The tax base of the loan is ` 100.
 In the case of revenue which 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.
Example 16
Current liabilities include interest revenue received in advance, with a carrying
amount of ` 100. The related interest revenue was taxed on a cash basis.
The tax base of the interest received in advance is nil.
(iii) Items with a tax base but no carrying amount
 There are certain items that have a tax base but no carrying amount. These include
items that are charged to revenue statement in the period in which they are incurred
but are allowed as a deduction over a number of periods as per the taxation laws.
Examples 17 & 18
17. A Limited has been incorporated recently. It incurred ` 1,00,000 on its
incorporation. It has been charged to revenue in the very first accounting
period. The taxation laws allow deduction over a period of 5 years. The carrying
amount at the end of year 1 is Nil.
The tax base will be ` 80,000 (20,000 x 4) as ` 20,000 being 1/5th is allowable
as a deduction in taxation laws over 4 years.
18. Public issue expenses. The entity may have written off the public issue
expenses in the very first year. But since tax laws permit deduction over 5
years, the temporary differences will exist till complete deduction is claimed in
taxation laws.

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(iv) Items of assets and liabilities where tax base is not apparent
 There could be situations where it may be difficult to compute the tax base of an
item. One however, knows the carrying amount. This is because of the provisions
of taxation laws. Whereas in books of accounts, all or most of the revenue and gains
are included as part of one single performance statement, in the taxation laws they
are charged under different head.
 The taxable amount amongst other things depends under which head an item at the
time of recovery may be charged. In India, income or gains are charged either as
‘Salaries’, ‘Income from house property’, ‘Profits and gains of business’, ‘Capital
Gain’ & ‘Income from other sources’. Further certain specific or weighted deductions
are also permissible. For example, rental income is subject to a flat deduction. So
how will you compute the rental income received in advance? Moreover, there are
cases depending upon the substance of the transaction, the rental income is to be
charged as business income. At times, reverse may be the case. Many more similar
situations could be anticipated.
Example 19
Entity A has an industrial undertaking that consists of land, building, plant and
machinery. It is contemplating disposing the entity. It has the option to recover the
carrying amount of the entity either by disposing the entire entity as a slump sale or
dispose of each asset on a piecemeal basis. Depending upon the manner of recovery
and period of holding, the carrying amount may be subject to indexation benefit, the
recovery may be charged either as a business profit or capital gains. Again it could
be long term gain capital gain or short term capital gain. As at the end of the reporting
period, the entity is not sure of the manner and time of recovery.
 So, how should one proceed with the determination of the tax base? It is a matter of
judgment. The Standard states that one should refer the fundamental principle as
enumerated in the Standard. The principle is reproduced hereunder:
It is inherent in the recognition of an asset or liability that the reporting entity expects
to recover or settle the carrying amount of that asset or liability. If it is probable that
recovery or settlement of that carrying amount will make future tax payments larger
(smaller) than they would be if such recovery or settlement were to have no tax
consequences, this Standard requires an entity to recognise a deferred tax liability
(deferred tax asset)
 It is recommended, if material, the basis of judgment and related uncertainties should
be disclosed.
(c) Tax base is determined with reference to the tax returns of each entity. This poses no problems
when computing tax base of a stand-alone entity. In some jurisdiction, taxation laws, in the

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case of a group permits a consolidated tax return. In such cases, tax bases should be
determined based on a consolidated tax returns. If this is not so, then the basis should be
individual tax returns. The carrying amount in both the cases shall be determined on the basis
of consolidated financial statements.
1.6.3 Step 3: Compute temporary differences

Temporary
Differences

Deferred Tax Deferred Tax

Assets Liabilities

In respect of In respect of In respect of In respect of

Deductible carry forward of carry forward of Taxable
Temporary unused tax unused tax Temporary
Differences losses credit Differences

(a) The term temporary difference is defined as the difference between the carrying amount of an
asset or liability in the balance sheet and its tax base.
Example 20
An entity has an item of plant and machinery acquired on the first day of the reporting period
for ` 1,00,000. It depreciates it @ 20% p.a on SLM basis. The carrying amount in balance
sheet is ` 80,000. The taxation laws require depreciation @ 30% on WDV basis. The tax
base at the end of the reporting period is ` 70,000. The temporary difference is ` 10,000
(` 80,000 – ` 70,000).
(b) The contention in favor of temporary difference is that at the end of the day, all differences
between the carrying amount and tax base of an asset or liability will reverse. At most the
entity may be able to delay the timing of reversal but the difference will ultimately have
reversed, therefore the term ‘temporary difference’ is used. The cumulative impact is ‘zero’.
Example 21
An entity acquires an asset on the first day of reporting period for ` 120 with a useful life of
6 years and no residual value. It depreciates the asset on SLM basis. The tax rate is 30%.
The tax depreciation is as assumed in the computation below.

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The following computations are performed.

Financial Statements
Year 1 2 3 4 5 6
Gross Block 120 120 120 120 120 120
Cumulative Depreciation (20) (40) (60) (80) (100) (120)
Carrying Amount 100 80 60 40 20 0

Tax Computation
Year 1 2 3 4 5 6
Tax base brought forward 120 30 20 13 8 3
Depreciation charge (assumed) (90) (10) (7) (5) (5) (3)
Tax base carried forward 30 20 13 8 3 0
Temporary Difference
Year 1 2 3 4 5 6
Carrying Amount 100 80 60 40 20 0
Tax base carried forward (30) (20) (13) (8) (3) 0
Temporary difference 70 60 47 32 17 0
Cumulative impact +70 –10 –13 –15 –15 –17
+70 –70
Movement in Balance Sheet
Year 1 2 3 4 5 6
Temporary difference 70 60 47 32 17 0
Deferred tax liability 21 18 14 10 5 0
Movement in provision +21 -3 -4 -4 -5 -5
Cumulative +21 -21
(c) To some, it may appear that temporary differences and timing differences are one and the
same term. It is not so. It can however, be said that temporary difference includes timing
differences. Timing differences arise when income or expense is included in accounting profit
in one period but is included in taxable profit in a different period.
(d) Examples of temporary differences in the nature of timing differences are as under.
Example 22
• Interest income recognized in income statement on a time proportion basis but recognized
in taxable profit on cash basis as and when income is received.

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• Depreciation used in determining taxable income may differ from that used in determining
accounting profit.
• Development costs may be capitalized and amortize over future periods in determining
accounting profit but deducted in determining taxable profit in the period in which they are
incurred.
(e) Examples of temporary differences other than in the nature of timing differences are as under:
Example 23: Business combinations
The identifiable assets acquired and liabilities assumed in a business combination are
recognised at their fair values in accordance with Ind AS 103, Business Combinations, but no
equivalent adjustment is made for tax purposes.
With limited exceptions, the identifiable assets acquired and liabilities assumed in a business
combination are recognised at their fair values at the acquisition date. Temporary differences
arise when the tax bases of the identifiable assets acquired and liabilities assumed are not
affected by the business combination or are affected differently.
For example, when the carrying amount of an asset is increased to fair value but the tax base
of the asset remains at cost to the previous owner, a taxable temporary difference arises which
results in a deferred tax liability. However, it may be noted that the resulting deferred tax liability
affects goodwill.
Example 24: Revaluation: assets are revalued and no equivalent adjustment is made for
tax purposes.
Indian Accounting Standards permit or require certain assets to be carried at fair value or to be
revalued (see, for example, Ind AS 16, Property, Plant and Equipment, Ind AS 38, Intangible
Assets, Ind AS 109, Financial Instruments and Ind AS 116 Leases).
In some jurisdictions, the revaluation or other restatement of an asset to fair value affects
taxable profit (tax loss) for the current period. As a result, the tax base of the asset is adjusted
and no temporary difference arises.
In other jurisdictions, the revaluation or restatement of an asset does not affect taxable profit
in the period of the revaluation or restatement and, consequently, the tax base of the asset is
not adjusted.
Nevertheless, the future recovery of the carrying amount will result in a taxable flow of economic
benefits to the entity and the amount that will be deductible for tax purposes will differ from the
amount of those economic benefits. The difference between the carrying amount of a revalued
asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset.
This is true even if:
(a) the entity does not intend to dispose of the asset. In such cases, the revalued carrying
amount of the asset will be recovered through use and this will generate taxable income

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which exceeds the depreciation that will be allowable for tax purposes in
future periods; or
(b) tax on capital gains is deferred if the proceeds of the disposal of the asset are invested in
similar assets. In such cases, the tax will ultimately become payable on sale or use of the
similar assets.

1.6.4 Step 4: Classify temporary differences

(a) Temporary differences are to be classified into:
♦ Taxable temporary differences
♦ Deductible temporary differences
(b) Taxable temporary differences are those temporary differences that results 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.
As the name ‘taxable temporary difference’ suggests, these are the temporary differences that
will be taxed in future. These taxable temporary differences will increase tax liabilities. All
taxable temporary differences, subject to limited exceptions, give rise to deferred tax liability.
Taxable temporary difference arises where the:
• carrying amount of an asset exceeds its tax base; or
• tax base of a liability exceeds its carrying amount.
Example 25
An asset which costs ` 150 has a carrying amount of ` 100. Cumulative depreciation for
tax purposes is ` 90 and the tax rate is 25%.
The tax base of the asset is ` 60 (cost of ` 150 less cumulative tax depreciation of
` 90). To recover the carrying amount of ` 100, the entity must earn taxable income of
` 100, but will only be able to deduct tax depreciation of ` 60. Consequently, the entity
will pay income taxes of ` 10 (` 40 at 25%) when it recovers the carrying amount of the
asset. The difference between the carrying amount of ` 100 and the tax base of ` 60 is
a taxable temporary difference of ` 40.
(c) Deductible temporary differences are those temporary differences that results 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.
Again, it should be noted, the name ‘deductible temporary difference’ suggests, these are the
temporary differences that will be deducted in future when computing the tax liability. These
deductible temporary differences will reduce tax liabilities. All deductible temporary differences,
subject to exceptions/recognition criteria, give rise to deferred tax assets.

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Deductible temporary difference arises where the:

• carrying amount of a liability exceeds its tax base; or
• tax base of an asset exceeds its carrying amount.
Example 26
An entity recognises a liability of ` 100 for gratuity and leave encashment expenses by
creating a provision for gratuity and leave encashment. For tax purposes, any amount
with regard to gratuity and leave encashment will not be deductible until the entity pays
the same. The tax rate is 25%.
The tax base of the liability is nil (carrying amount of ` 100, less the amount that will be
deductible for tax purposes in respect of that liability in future periods). In settling the
liability for its carrying amount, the entity will reduce its future taxable profit by an
amount of ` 100 and, consequently, reduce its future tax payments by ` 25 (` 100 at
25%). The difference between the carrying amount of ` 100 and the tax base of nil is
a deductible temporary difference of ` 100.
(d) Based on the above discussions, a matrix as under may be drawn:
For Assets For Liabilities
If carrying amount > tax Taxable Temporary Deductible Temporary
base Difference Difference
↓ ↓
Deferred Tax Liability Deferred Tax Asset
(e.g. WDV as per books > (e.g. Provision for Bonus as
WDV as per Income Tax) per books > Provision for
Bonus as per IT)
If carrying amount < tax Deductible Temporary Taxable Temporary
base Difference Difference
↓ ↓
Deferred Tax Asset Deferred Tax Liability
(e.g. WDV as per books < (e.g. Loan carrying amount
WDV as per Income Tax) as per books< Loan carrying
amounts as per tax)
If carrying amount = tax No temporary difference No temporary difference
base
(e) Further examples of taxable temporary differences:
• Transactions that affect profit or loss
Example 27
1. Interest revenue is received in arrears and is included in accounting profit on a time
apportionment basis but is included in taxable profit on a cash basis.

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2. Revenue from the sale of goods is included in accounting profit when goods are
delivered but is included in taxable profit when cash is collected.
In this case, there is also a deductible temporary difference associated with any
related inventory.
3. Depreciation of an asset is accelerated for tax purposes.
4. Development costs have been capitalised and will be amortised to the statement of
profit and loss but were deducted in determining taxable profit in the period in which
they were incurred.
5. Prepaid expenses have already been deducted on a cash basis in determining the
taxable profit of the current or previous periods.
• Transactions that affect the balance sheet
Example 28
1. Depreciation of an asset is not deductible for tax purposes and no deduction will be
available for tax purposes when the asset is sold or scrapped.
2. A borrower records a loan at the proceeds received (which equal the amount due at
maturity), less transaction costs. Subsequently, the carrying amount of the loan is
increased by amortisation of the transaction costs to accounting profit. The
transaction costs were deducted for tax purposes in the period when the loan was
first recognised.
3. A loan payable was measured on initial recognition at the amount of the net proceeds,
net of transaction costs. The transaction costs are amortised to accounting profit over
the life of the loan. Those transaction costs are not deductible in determining the
taxable profit of future, current or prior periods.
4. The liability component of a compound financial instrument (for example a convertible
bond) is measured at a discount to the amount repayable on maturity (see Ind AS 32,
Financial Instruments: Presentation). The discount is not deductible in determining
taxable profit (tax loss).
• Fair value adjustments and revaluation
Example 29
1. Financial assets are carried at fair value which exceeds cost but no equivalent
adjustment is made for tax purposes.
2. An entity revalues property, plant and equipment (under the revaluation model
treatment in Ind AS 16, Property, Plant and Equipment) but no equivalent adjustment
is made for tax purposes.

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• Business combinations and consolidation

Example 30
1. The carrying amount of an asset is increased to fair value in a business combination
and no equivalent adjustment is made for tax purposes.
2. Reductions in the carrying amount of goodwill are not deductible in determining
taxable profit and the cost of the goodwill would not be deductible on disposal of the
business.
3. Unrealised losses resulting from intragroup transactions are eliminated by inclusion
in the carrying amount of inventory or property, plant and equipment.
4. Retained earnings of subsidiaries, branches, associates and joint ventures are
included in consolidated retained earnings, but income taxes will be payable if the
profits are distributed to the reporting parent.
5. Investments in foreign subsidiaries, branches or associates or interests in foreign joint
ventures are affected by changes in foreign exchange rates.
6. The non-monetary assets and liabilities of an entity are measured in its functional
currency but the taxable profit or tax loss is determined in a different currency.
• Hyperinflation

Example 31

Non-monetary assets are restated in terms of the measuring unit current at the end of the
reporting period (see Ind AS 29, Financial Reporting in Hyperinflationary Economies) and
no equivalent adjustment is made for tax purposes.
(f) Further examples of deductible temporary differences:

• Transactions that affect profit or loss

Example 32
1. Retirement benefit costs are deducted in determining accounting profit as service is
provided by the employee, but are not deducted in determining taxable profit until the
entity pays either retirement benefits or contributions to a fund. (note: similar
deductible temporary differences arise where other expenses, such as gratuity and
leave encashment or interest, are deductible on a cash basis in determining taxable
profit.)
2. Accumulated depreciation of an asset in the financial statements is greater than the
cumulative depreciation allowed up to the end of the reporting period for tax purposes.

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3. The cost of inventories sold before the end of the reporting period is deducted in
determining accounting profit when goods or services are delivered but is deducted
in determining taxable profit when cash is collected. (it may be noted, there is also a
taxable temporary difference associated with the related trade receivable.)
4. The net realisable value of an item of inventory, or the recoverable amount of an item
of property, plant or equipment, is less than the previous carrying amount and an
entity therefore reduces the carrying amount of the asset, but that reduction is ignored
for tax purposes until the asset is sold.
5. Preliminary expenses (or organisation or other start-up costs) are recognised as an
expense in determining accounting profit but are not permitted as a deduction in
determining taxable profit until a later period.
6. Income is deferred in the balance sheet but has already been included in taxable
profit in current or prior periods.
7. A government grant which is included in the balance sheet as deferred income will
not be taxable in future periods.
• Fair value adjustments and revaluation
Example 33
Financial assets are carried at fair value which is less than cost, but no equivalent
adjustment is made for tax purposes.
• Business combinations and consolidation
Example 34
1. A liability is recognised at its fair value in a business combination, but none of the
related expense is deducted in determining taxable profit until a later period.
2. Unrealised profits resulting from intragroup transactions are eliminated from the
carrying amount of assets, such as inventory or property, plant or equipment, but no
equivalent adjustment is made for tax purposes.
3. Investments in foreign subsidiaries, branches or associates or interests in foreign
joint ventures are affected by changes in foreign exchange rates.
4. The non-monetary assets and liabilities of an entity are measured in its functional
currency but the taxable profit or tax loss is determined in a different currency.
 Deferred tax liabilities are created for all taxable temporary differences with limited
exceptions. Similarly, deferred tax assets are created for all deductible temporary
differences subject to limited exceptions and recognition criteria. In Step 5 we will
discuss the exceptions with respect to creation to deferred tax and in Step 6 we will

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discuss the recognition criteria area for deferred tax assets. However, before we
proceed further, let’s discuss the principle in recognising deferred tax liabilities or
deferred tax asset.
 These are:
(a) Deferred tax liability
• A deferred tax liability shall be recognized for all taxable temporary
differences, except to the extent that the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit
nor taxable profit (tax loss)
• However, for taxable temporary differences associated with investments
in subsidiaries, branches and associates, and interests in joint ventures,
a deferred tax liability shall be recognised in accordance with
paragraph 39 of Ind AS 12.
(b) Deferred tax asset
• 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
utilised, unless the deferred tax asset arises from the initial recognition of
an asset or liability in a transaction that:
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss).
• However, for deductible temporary differences associated with
investments in subsidiaries, branches and associates, and interests in
joint ventures, a deferred tax asset shall be recognised in accordance with
paragraph 44 of Ind AS 12.
 From a reading of the aforesaid principles, deferred tax liabilities and deferred tax
assets needs to be recognised in most of the cases. But the recognition of deferred
tax liabilities or deferred tax assets are subject to exceptions with respect to the
following items:
(a) the initial recognition of goodwill arising in a business combination (exception 1);

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(b) the initial recognition of an asset or liability in a transaction which:

(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable
profit (tax loss) (exception 2);
(c) temporary differences associated with investments in subsidiaries, branches
and associates, and interests in joint ventures (exception 3).
These exceptions are discussed in Step 5.
 Also deferred tax assets should be created only to the extent of the probability of
availability of taxable profits. In case, this probability of availability of taxable profits
is missing, deferred tax assets should not be created. The profit probability
recognition criterion is discussed in Step 6.
1.6.5 Step 5: Identify exceptions
(a) Exception 1: The initial recognition of goodwill in the case of a business combination
• In the case of a business combination, when the consideration paid exceeds the net
identifiable assets, goodwill is created.
• Technically speaking, goodwill arising in a business combination is measured as the
excess of (a) over (b) below:
(a) the aggregate of:
(i) the consideration transferred measured in accordance with Ind AS 103, which
generally requires acquisition date fair value;
(ii) the amount of any non-controlling interest in the acquiree recognized in
accordance with Ind AS 103; and
(iii) in a business combination achieved in stages, the acquisition-date fair value of
the acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and
liabilities assumed measured in accordance with Ind AS 103.
• As per principles enunciated in this Ind AS 12, the entity has to determine the tax base of
this goodwill to compute the temporary difference, either taxable or deductible, at the time
of recognition and subsequently when impairment takes place. The Standard provides
separate guidance for taxable temporary difference (Situation A) and deductible
temporary difference (Situation B).
• Situation A: Where the temporary difference is in the nature of taxable temporary
difference. Again in this case, the prescribed treatment is different where good will is not
tax deductible (Situation A1) and where it is tax deductible (Situation A2).

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• (Situation A1: Where it is not tax deductible)

(a) At the time of initial recognition of goodwill:
(i) Quite a few tax jurisdictions do not permit this goodwill as a tax deductible
expense. Also, the cost of goodwill is often not deductible when a subsidiary
dispose of its underlying business. Put simply, the tax base of goodwill is Nil.
But the entity has a taxable temporary difference as the goodwill (an asset) has
a carrying amount leading to a deferred tax liability.
(ii) The Standard does not permit the recognition of the resulting deferred tax
liability as goodwill is measured as a residual and the recognition of the
deferred tax liability would increase the carrying amount of goodwill, resulting
into a circular type of computation.
Deferred tax liability is not recognised for goodwill since the recognition shall
be done through goodwill itself. This is going to result in inflating the goodwill
amount, and therefore is not permitted.
Example 35
An entity acquires a subsidiary and pays ` 1,00,000. The fair value of net
identifiable assets is ` 65,000. The following entry shall be made in the books:
Entry 1:
Goodwill Dr. 35,000
Net Assets Dr. 65,000
To Consideration 1,00,000
The tax base of goodwill is Nil. Hence the taxable temporary difference is
` 35,000. Assuming tax rate to be 30%, deferred tax liability of ` 10,500 needs
to be created. Now because of recognition of this deferred tax liability, the
following entry needs to be passed instead of the above entry:
Entry 2:
Goodwill Dr. 45,500
Net assets Dr. 65,000
To Consideration 1,00,000
To Deferred tax liability 10,500
The temporary difference now is ` 45,500 and not ` 35,000 and the resultant
deferred tax liability should be ` 13,650 (45,500 x 30%) and not ` 10,500.
Thus, deferred tax liability in entry 2 should be increased by ` 3,150 which in

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turn will increase goodwill by a similar amount. This is going to inflate the
goodwill since the impact is taken in goodwill itself.
Therefore, no deferred tax liability is to be recognised in the case of taxable
temporary difference arising on the initial recognition of goodwill in a business
combination in tax jurisdiction where such goodwill is not tax deductible.

(b) Subsequently at the time of impairment, if required, in the carrying amount:

(i) This goodwill as per Ind AS 103 is not amortised though tested for impairment.
(ii) Subsequent reduction in a deferred tax liability that is unrecognised because it
arises from the initial recognition of goodwill is also regarded as arising from
the initial recognition of goodwill and is therefore not recognised.
Example 36
In the aforesaid Example 35, after 2 years goodwill is tested for impairment and
the entity recognises an impairment loss of ` 10,000, the amount of the taxable
temporary difference relating to the goodwill is reduced from ` 35,000 to
` 25,000, with a resulting decrease in the value of the unrecognised deferred
tax liability. That decrease in the value of the unrecognised deferred tax liability
is also regarded as relating to the initial recognition of the goodwill and is
therefore prohibited from being recognised as per this Ind AS 12.
• Situation A2: Where it is tax deductible
In tax jurisdiction, where goodwill is tax deductible, deferred tax liability should be
recognised for the taxable temporary difference.
• Situation B: where the difference is in the nature of deductible difference
In all cases, deferred tax asset, subject to recognition criteria discussed in step 6 below,
should be recognised.
• Summary of Exception 1
No deferred tax liability is to be recognised for taxable temporary difference arising on
goodwill arising in a business combination in tax jurisdictions where such goodwill is not
tax deductible.
In all other cases of temporary difference, either taxable or deferred, either deferred tax
liability or deferred tax asset should be recognised in accordance with other provisions of
this Ind AS.
(b) Exception 2: The initial recognition of an asset or liability in a transaction which: (i) is
not a business combination; and (ii) at the time of the transaction, affects neither
accounting profit nor taxable profit (tax loss)
• The Standard prohibits recognition of deferred tax liability or deferred tax assets in cases
of either taxable or deductible temporary difference arising in a transaction:

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(a) is not a business combination; and

(b) does not affect neither the accounting profit nor the taxable profit.
• As per the Standard, three types of transactions of assets or liabilities could be
anticipated:
Type 1: In the nature of business combination
In such a case, recognise deferred tax liabilities or deferred tax assets on temporary
differences between the carrying amount and respective tax base of assets or liabilities
except on goodwill (in certain circumstances)
Type 2: Where the transaction impacts accounting profit (i.e. statement of profit or
loss) (like sale of goods, recognition of debtors)
In such a case, recognise any deferred tax in statement of profit or loss:
Type 3: Where the transaction is not a business combination & does not impact
accounting profit nor taxable profit, such as purchase of assets or receipt of
government grants.
This exception relates to the transaction of the third type.
Example 37
Entity A acquires a foreign made vehicle for ` 1,00,000 directly from the vehicle
manufacturer. The transaction is not a part of any business combination. The tax laws
do not permit any depreciation thereon. Also, any profits at the time of sale are not taxable
or losses are not tax deductible. This vehicle thus has a tax base of Nil. There is a taxable
temporary difference of ` 1,00,000. Assuming a tax rate of 30%, the entity should create
a deferred tax liability of ` 30,000. But the Standard does not permit.
• The Standard implies that if the carrying amount of any asset or liability is not equal to its
tax base at the time of its transaction where the transaction is:
(i) Not in the nature of business combination.
(ii) Not impacting either the accounting profit or the taxable profit.
(iii) Neither deferred tax liability nor deferred tax asset should be recognised.
• The following is a brief checklist:
(i) Is the transaction in the nature of business combination?
(ii) Whether the transaction impacts accounting profit?
(iii) Whether the transaction impacts taxable profits?
(iv) Whether the carrying amount is equal to tax base?

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• Depending on the answers to the checklist, deferred tax asset or liability needs to be
determined in accordance with the guidance under this exception.
• Furthermore, an entity does not recognise subsequent changes in unrecognised deferred
tax liability or asset as the asset is depreciated.
Example 38
Entity X acquired an intangible asset (a license) for ` 10 Cr that has a life of five years. The
asset will be solely recovered through use. No tax deductions can be claimed, as the license
is amortised or as when the license expires. No tax deductions are available on disposal.
Trading profits from using the license will be taxed at 30%.
The tax base of the asset is nil, because the cost of the intangible asset is not deductible for
tax purposes (either in use or on disposal). A temporary difference of ` 10 Cr arises; prima
facie a deferred tax liability of ` 3 Cr should be recognized on this amount. However, no
deferred tax is recognised on the asset’s initial recognition. This is because the temporary
difference did not arise from a business combination and did not affect accounting or taxable
profit at the time of the recognition.
The asset will have a carrying amount of ` 8 Cr at the end of year 1. The entity will pay tax of
` 2.40 Cr through recovery of the asset by earning taxable amounts of ` 8 Cr. The deferred
tax liability is not recognised, because it arises from initial recognition of an asset. Similarly,
no deferred tax is recognised in later periods.
(c) Exception 3: Temporary differences associated with investments in subsidiaries,
branches and associates, and interests in joint ventures
• Temporary differences arise when the carrying amount of investments in subsidiaries,
branches and associates or interests in joint ventures (namely the parent or investor’s
share of the net assets of the subsidiary, branch, associate or investee, including the
carrying amount of goodwill) becomes different from the tax base (which is often cost) of
the investment or interest.
• Such differences may arise in a number of different circumstances, for example:
(i) the existence of undistributed profits of subsidiaries, branches, associates and joint
ventures;
(ii) changes in foreign exchange rates when a parent and its subsidiary are based in
different countries; and
(iii) a reduction in the carrying amount of an investment in an associate to its recoverable
amount.
In consolidated financial statements, the temporary difference may be different from
the temporary difference associated with that investment in the parent’s separate

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financial statements if the parent carries the investment in its separate financial
statements at cost or revalued amount.
• Should an entity recognise a deferred tax liability in these cases? The guiding principle
is:
An entity shall recognise a deferred tax liability for all taxable temporary differences
associated with investments in subsidiaries, branches and associates, and interests in
joint ventures, except to the extent that both of the following conditions are satisfied:
(i) the parent, investor or venturer is able to control the timing of the reversal of the
temporary difference; and
(ii) it is probable that the temporary difference will not reverse in the foreseeable future.
Now let us examine where the parent, investor or venture is able to control the timing of
reversal of taxable temporary difference. Generally, the taxable temporary difference will
get reversed on distribution of dividends.
• Subsidiary/branches: As a parent controls the dividend policy of its subsidiary, it is able
to control the timing of the reversal of temporary differences associated with that
investment (including the temporary differences arising not only from undistributed profits
but also from any foreign exchange translation differences). Furthermore, it would often
be impracticable to determine the amount of income taxes that would be payable when
the temporary difference reverses. Therefore, when the parent has determined that those
profits will not be distributed in the foreseeable future the parent does not recognise a
deferred tax liability. The same considerations apply to investments in branches.
• The non-monetary assets and liabilities of an entity are measured in its functional currency
(see Ind AS 21, The Effects of Changes in Foreign Exchange Rates) in the exchange rate
which give rise to temporary differences that result in a recognised deferred tax liability or
(subject to recognition criteria) asset. The resulting deferred tax is charged or credited to
profit or loss.
• Associate: An investor in an associate does not control that entity and is usually not in a
position to determine its dividend policy. Therefore, in the absence of an agreement
requiring that the profits of the associate will not be distributed in the foreseeable future,
an investor recognises a deferred tax liability arising from taxable temporary differences
associated with its investment in the associate. In some cases, an investor may not be
able to determine the amount of tax that would be payable if it recovers the cost of its
investment in an associate, but can determine that it will equal or exceed a minimum
amount. In such cases, the deferred tax liability is measured at this amount.
• Joint Venture: The arrangement between the parties to a joint venture usually deals with
the sharing of the profits and identifies whether decisions on such matters require the
consent of all the venturers or a specified majority of the venturers. When the venturer

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can control the sharing of profits and it is probable that the profits will not be distributed
in the foreseeable future, a deferred tax liability is not recognised.
The aforesaid discussion related to recognition of deferred tax liability on taxable temporary
difference. But there could be deductible temporary differences. So what is the guiding principle
for recognition of deferred tax assets on deductible temporary differences?
• The principle is:
An entity shall recognise a deferred tax asset for all deductible temporary differences
arising from investments in subsidiaries, branches and associates, and interests in joint
ventures, to the extent that, and only to the extent that, it is probable that:
(i) the temporary difference will reverse in the foreseeable future; and
(ii) taxable profit will be available against which the temporary difference can be utilised.
Both the conditions have to be satisfied.
• In deciding whether a deferred tax asset is recognised for deductible temporary
differences associated with its investments in subsidiaries, branches and associates, and
its interests in joint ventures, an entity considers the guidance set out in Step 6 below.
1.6.6 Step 6: Assess (also reassess) deductible temporary differences,
tax losses and tax credits
(a) As we are aware that deductible temporary differences reduce the taxable profits of future
periods. It signifies that future tax payments will be smaller by a particular amount. However,
economic benefits will flow to the entity in the form of lower tax liability in future only in case it
has future profits. If there are no future profits, it means there are no tax payments which in
turn mean that deductible temporary differences are of no benefit.
Illustration 1
The directors of H wish to recognise a material deferred tax asset in relation to ` 250 Cr of
unused trading losses which have accumulated as at 31st March 20X1. H has budgeted
profits for ` 80 Cr for the year ended 31st March 20X2. The directors have forecast that
profits will grow by 20% each year thereafter. However, the improvement in trading results
may occur after the next couple of years to come at the position of breakeven. The market
is currently depressed and sales orders are at a lower level for the first quarter of 20X2 than
they were for the same period in any of the previous five years. H operates under a tax
jurisdiction which allows for trading losses to be only carried forward for a maximum of two
years.
Analyse whether a deferred tax asset can be recognized in the financial statements of H for
the year ended 31st March 20X1?

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Solution
In relation to unused trading losses, the carrying amount is zero since the losses have not yet
been recognised in the financial statements of H. A potential deferred tax asset does arise but
the determination of the tax base is more problematic.
The tax base of an asset is the amount which will be deductible against taxable economic
benefits from recovering the carrying amount of the asset. Where recovery of an asset will
have no tax consequences, the tax base is equal to the carrying amount. H operates under a
tax jurisdiction which only allows losses to be carried forward for two years. The maximum the
tax base could be is therefore equal to the amount of unused losses for years 20X0 and 20X1
since these only are available to be deducted from future profits. The tax base though needs
to be restricted to the extent that there is a probability of sufficient future profits to offset the
trading losses. The directors of H should base their forecast of the future profitability on
reasonable and supportable assumptions. There appears to be evidence that this is not the
case.
H has accumulated trading losses and there is little evidence that there will be an improvement
in trading results within the next couple of years. The market is depressed and sales orders
for the first quarter of 20X2 are below levels in any of the previous five years.
The forecast profitability for 20X2 and subsequent growth rate therefore appear to be
unrealistically optimistic.
Given that losses can only be carried forward for a maximum of two years, it is unlikely that
any deferred tax asset should be recognised.
Hence, the contention of directors to recognized deferred tax assets in relation to `250 crores
is not correct.
*****
Example 39
Entity A has deductible temporary difference of ` 1,00,000 for the financial year ended
31st March, 20X1. It anticipates a future profit of ` 3,00,000 in next year against which the
said deductible temporary differences could be set off. The tax rate is 30%. Thus, in future
the entity will pay tax on ` 2,00,000 (` 3,00,000 – ` 1,00,000). The tax liability is ` 60,000
@ 30% tax rate.
Had there been no deductible temporary difference, the tax liability would be ` 90,000
@ 30% on ` 3,00,000. Thus, there is an inflow of economic benefit of ` 30,000 through a
lower cash outflow.
However, if there is no probability of taxable profits in future, the entity is not able to derive
any economic benefit (by way of lower cash outflow in future) because of the existing of
deductible temporary difference.

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(b) Therefore, an entity should recognise deferred tax assets only when it is probable that taxable
profits will be available against which the deductible temporary differences can be utilised. This
is based on the principle of prudence and conservatism. It should be noted that the entity has
to make sufficient taxable profits in future. Not making losses will not suffice.
(c) If tax law does not impose any restrictions on sources of taxable profits against which it may
make deductions on the reversal of that deductible temporary difference, an entity assesses a
deductible temporary difference in combination with all of its other deductible temporary
differences.
(d) If tax law restricts the utilisation of losses to deduction against income of a specific type, a
deductible temporary difference is assessed in combination only with other deductible
temporary differences.
(e) Probable means more likely than not. The Standard provides a three step criteria to be applied
in a serial order. The criterion is applied in the case of the same taxable entity assessed by the
same taxation authority.
Criteria No. 1 : Existence of taxable temporary differences
The entity at the balance sheet should see whether there are sufficient taxable temporary
differences whose reversal pattern matches with the reversal profile of deductible temporary
differences.
Particulars Year (` )
1 2 3
Taxable temporary difference
Opening balance 10,000 5,000 2,000
Recognised in taxable income 5,000 3,000 2,000
Closing balance 5,000 2,000 -
Deductible temporary difference
Opening balance 8,000 4,000 1,000
Recognised in taxable income 4,000 3,000 1,000
Closing balance 4,000 1,000 -
Statement of taxable income
Taxable temporary difference 5,000 3,000 2,000
Deductible temporary difference 4,000 3,000 1,000

The entity can recognise deferred tax assets for the entire deductible temporary differences.
Example 40
As at 31st March, 20X1, an entity has both taxable temporary differences and deductible
temporary difference with the following reversal pattern. Deductible temporary differences
cannot be carried forward.

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Year (` )
Particulars
1 2 3
Taxable temporary difference
Opening balance 10,000 5,000 2,000
Recognized in taxable income 5,000 3,000 2,000
Closing balance 5,000 2,000 -
Deductible temporary difference
Opening balance 8,000 4,000 -
Recognized in taxable income 4,000 4,000 -
Closing balance 4,000 - -
Statement of taxable income
Taxable temporary difference 5,000 3,000 2,000
Deductible temporary difference 4,000 4,000 -

The entity can recognize deferred tax assets for the deductible temporary differences up to
` 7,000 (` 4,000 for year 1 & ` 3,000 for year 2) as a taxable temporary difference of that
amount is available.
Criteria No. 2: Probability of future profits
The entity has to apply probability criteria on its future profitability. If it is probable that there
will be sufficient taxable profits, then to the extent of available profits, deductible temporary
differences should be applied for recognition of deferred tax assets.
Examples 41 - 43
41. If in the aforesaid example 39, the entity expects a profit of ` 750 in year 2, then deferred
tax asset should be created on ` 7,750 (` 4,000 + ` 3,000 + ` 750).
However, taxable profits arising in future from future origination of deductible temporary
differences should not be considered as deductible temporary differences will require
future taxable profits for utilisation.
42. An entity has unutilised deductible temporary difference of ` 1,000 at the end of year 1
that is going to be reversed in the year 2. In year 2, taxable profits are computed because
of tax disallowances of unpaid statutory liabilities of ` 1,000 which can be claimed as
deduction only in year 3, if paid, but cannot be carried forward. The entity expects nil
taxable profit in year 3. In this case, no deferred tax asset will be created.
43. An entity has unutilised deductible temporary difference of ` 1,000 at the end of year 1
that is going to be reversed in the year 2. In year 2, taxable profits are computed because
of tax disallowances of unpaid statutory liabilities of ` 1,000 which can be claimed as
deduction only in year 3, if paid, but cannot be carried forward. The entity expects taxable

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profit of ` 450 in year 3. In this case, deferred tax asset will be created at appropriate
rate on deductible temporary difference of ` 450 only.
Criteria No. 3: Availability of tax planning opportunities
If even after applying criteria no. 2, still there are unrecognised deductible temporary
differences, the entity endeavour to see whether any tax planning opportunities are available.
Tax planning opportunities are actions that the entity would take in order to create or increase
taxable income in a particular period before the expiry of a tax loss or tax credit carry forward.
For example, in some jurisdictions, taxable profit may be created or increased by:
(i) electing to have interest income taxed on either a received or receivable basis;
(ii) deferring the claim for certain deductions from taxable profit;
(iii) selling, and perhaps leasing back, assets that have appreciated but for which the tax base
has not been adjusted to reflect such appreciation; and
(iv) selling an asset that generates non-taxable income (such as, in some jurisdictions, a
government bond) in order to purchase another investment that generates taxable
income.
Where tax planning opportunities advance taxable profit from a later period to an earlier
period, the utilisation of a tax loss or tax credit carry forward still depends on the existence
of future taxable profit from sources other than future originating temporary differences.
(d) Unused tax losses and unused tax credits:
• A deferred tax asset shall be recognised 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 unused tax credits can be utilised.
• The criteria for recognising deferred tax assets arising from the carry forward of unused
tax losses and tax credits are the same as the criteria for recognising deferred tax assets
arising from deductible temporary differences. However, the existence of unused tax
losses is strong evidence that future taxable profit may not be available. Therefore, when
an entity has a history of recent losses, the entity recognises a deferred tax asset arising
from unused tax losses or tax credits only to the extent that the entity has sufficient taxable
temporary differences or there is convincing other evidence that sufficient taxable profit
will be available against which the unused tax losses or unused tax credits can be utilised
by the entity. In such circumstances, paragraph 82 of Ind AS 12 requires disclosure of
the amount of the deferred tax asset and the nature of the evidence supporting its
recognition.
(e) When an entity has a history of recent losses, the entity should consider the following guidance:
• The criteria for recognising deferred tax assets arising from the carry forward of unused

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tax losses and tax credits are the same as the criteria for recognising deferred tax assets
arising from deductible temporary differences.
• However, the existence of unused tax losses is strong evidence that future taxable profit
may not be available. Therefore, when an entity has a history of recent losses, the entity
recognises a deferred tax asset arising from unused tax losses or tax credits only to the
extent that the entity has sufficient taxable temporary differences or there is convincing
other evidence that sufficient taxable profit will be available against which the unused tax
losses or unused tax credits can be utilised by the entity.
• In such circumstances, this Ind AS requires disclosure of the amount of the deferred tax
asset and the nature of the evidence supporting its recognition.
• To assess the probability that taxable profit will be available against which the unused tax
losses or unused tax credits can be utilised, the entity should consider the following:
(i) whether the entity has sufficient taxable temporary differences relating to the same
taxation authority and the same taxable entity, which will result in taxable amounts
against which the unused tax losses or unused tax credits can be utilised before they
expire;
(ii) whether it is probable that the entity will have taxable profits before the unused tax
losses or unused tax credits expire;
(iii) whether the unused tax losses result from identifiable causes which are unlikely to
recur; and
(iv) whether tax planning opportunities are available to the entity that will create taxable
profit in the period in which the unused tax losses or unused tax credits can be
utilised.
• To the extent that it is not probable that taxable profit will be available against which the
unused tax losses or unused tax credits can be utilised, the deferred tax asset is not to
be recognised.
(f) Reassessment of unrecognised Deferred Tax Assets:
• At the end of each reporting period, the entity should reassess unrecognised deferred tax
assets. It may need to recognise a previously unrecognised deferred tax asset to the
extent it has now become probable that future taxable profits will be available for deferred
tax assets to be recovered. For example, improvement in trading conditions may make it
probable for an entity to generate sufficient taxable profits in future years to enable it to
meet the recognition criteria laid down above.
(g) Uncertainty over income tax treatment
♦ In assessing whether and how an uncertain tax treatment affects the determination of taxable
profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, an entity shall

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assume that a taxation authority will examine amounts it has a right to examine and have full
knowledge of all related information when making those examinations.
♦ If an entity concludes it is probable that the taxation authority will accept an uncertain tax
treatment, the entity shall determine the taxable profit (tax loss), tax bases, unused tax
losses, unused tax credits or tax rates consistently with the tax treatment used or planned
to be used in its income tax filings.
♦ If an entity concludes it is not probable that the taxation authority will accept an uncertain
tax treatment, the entity shall reflect the effect of uncertainty in determining the related
taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates. An
entity shall reflect the effect of uncertainty for each uncertain tax treatment by using either
of the following methods, depending on which method the entity expects to better predict
the resolution of the uncertainty:
(a) The most likely amount—the single most likely amount in a range of possible
outcomes. The most likely amount may better predict the resolution of the
uncertainty if the possible outcomes are binary or are concentrated on one value.
(b) The expected value—the sum of the probability-weighted amounts in a range of
possible outcomes. The expected value may better predict the resolution of the
uncertainty if there is a range of possible outcomes that are neither binary nor
concentrated on one value.
♦ If an uncertain tax treatment affects current tax and deferred tax (for example, if it affects
both taxable profit used to determine current tax and tax bases used to determine deferred
tax), an entity shall make consistent judgements and estimates for both current tax and
deferred tax.
1.6.7 Step 7: Determine the tax rate (law)
(a) Having determined the taxable temporary differences and deductible temporary difference that
needs to be considered for recognition of deferred tax liabilities or assets respectively, we now
need to determine the tax for creation to deferred tax liabilities or assets. The principal is:
Deferred tax assets and liabilities shall be measured:
(i) at the tax rates that are expected to apply to the period when the asset is realised or the
liability is settled;
(ii) based on tax rates (and tax laws) that have been enacted or substantively enacted by the
end of the reporting period.
(b) We have already discussed above the meaning of ‘enacted’ or ‘substantively enacted’.
The same discussion applies here also. But another key word that needs to be understood in
the principle is ‘expected to apply’. Since, we are dealing in the future and future is uncertain,

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we have to measure this uncertainty. This leads to application of judgment. The tax rates or
the tax laws that will apply in future depends on various factors such as manner of recovery of
asset or settlement of liability, levels of income, distribution of profits among others. These are
now discussed below.
It should however be remembered that the measurement of deferred tax liabilities and deferred
tax assets shall reflect the tax consequences that would follow from the manner in which the
entity expects, at the end of the reporting period, to recover or settle the carrying amount of its
assets and liabilities.
(c) Manner of recovery of asset or settlement of liability:
• In some jurisdictions, the manner in which an entity recovers (settles) the carrying amount
of an asset (liability) may affect either or both of (a) the tax rate applicable when the entity
recovers (settles) the carrying amount of the asset (liability); and (b) the tax base of the
asset (liability). In such cases, an entity measures deferred tax liabilities and deferred tax
assets using the tax rate and the tax base that are consistent with the expected manner
of recovery or settlement.
Examples 44 & 45
44. An asset has a carrying amount of ` 100 and a tax base of ` 60. A tax rate of 20%
would apply if the asset was sold and a tax rate of 30% would apply to other income.
The entity recognises a deferred tax liability of ` 8 (` 40 at 20%) if it expects to sell
the asset without further use or a deferred tax liability of ` 12 (` 40 at 30%) if it
expects to retain the asset and recover its carrying amount through use.
45. An asset with a cost of ` 100 and a carrying amount of ` 80 is revalued to ` 150.
No equivalent adjustment is made for tax purposes. Cumulative depreciation for tax
purposes is ` 30 and the tax rate is 30%. If the asset is sold for more than cost, the
cumulative tax depreciation of ` 30 will be included in taxable income but sale
proceeds in excess of cost will not be taxable.
The tax base of the asset is ` 70 and there is a taxable temporary difference of ` 80
(` 150 the revalued amount is the carrying amount).
If the entity expects to recover the carrying amount by using the asset, it must
generate taxable income of ` 150, but will only be able to deduct depreciation of
` 70. On this basis, there is a deferred tax liability of ` 24 (` 80 at 30%).
If the entity expects to recover the carrying amount by selling the asset immediately
for proceeds of ` 150, the deferred tax liability is computed as follows:
(i) Sale proceeds ` 150
(ii) Sale proceeds in excess of cost (` 100) ` 50
(iii) Taxable proceeds ` 100

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(iv) Tax base ` 70

(v) Taxable temporary difference ` 30
(vi) Tax rate 30%
(vii) Deferred tax liability ` 9
• Thus, the measurement of deferred tax liabilities and deferred tax assets shall reflect the
tax consequences that would follow from the manner in which the entity expects, at the
end of the reporting period, to recover or settle the carrying amount of its assets and
liabilities.
• However, an issue may arise as to how to interpret the term ‘recovery’ in relation to an
asset that is not depreciated (non-depreciable asset) and is revalued in accordance with
paragraph 31 (revaluation model) of Ind AS 16.
• The accounting principle in this case is as under:
♦ The deferred tax liability or asset that arises from the revaluation of a non-
depreciable asset in accordance with paragraph 31 of Ind AS 16 shall be measured
on the basis of the tax consequences that would follow from recovery of the carrying
amount of that asset through sale, regardless of the basis of measuring the carrying
amount of that asset.
♦ Accordingly, if the tax law specifies a tax rate applicable to the taxable amount
derived from the sale of an asset that differs from the tax rate applicable to the
taxable amount derived from using an asset, the former rate (tax rate applicable to
the taxable amount derived from the sale of an asset) is applied in measuring the
deferred tax liability or asset related to a non-depreciable asset.
(d) Levels of taxable income:
When different tax rates apply to different levels of taxable income, deferred tax assets and
liabilities are measured using the average rates that are expected to apply to the taxable profit
(tax loss) of the periods in which the temporary differences are expected to reverse.
(e) Distribution of dividends:
In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net
profit or retained earnings is paid out as a dividend to shareholders of the entity. In some other
jurisdictions, income taxes may be refundable or payable if part or all of the net profit or retained
earnings is paid out as a dividend to shareholders of the entity. In these circumstances, current
and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed
profits.

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Example 46
The following example deals with the measurement of current and deferred tax assets and
liabilities for an entity in a jurisdiction where income taxes are payable at a higher rate on
undistributed profits (50%) with an amount being refundable when profits are distributed. The
tax rate on distributed profits is 35%. At the end of the reporting period, 31st December, 20X1,
the entity does not recognise a liability for dividends proposed or declared after the reporting
period. As a result, no dividends are recognised in the year 20X1. Taxable income for 20X1
is ` 1,00,000. The net taxable temporary difference for the year 20X1 is ` 40,000.
The entity recognises a current tax liability and a current income tax expense of ` 50,000. No
asset is recognised for the amount potentially recoverable as a result of future dividends. The
entity also recognises a deferred tax liability and deferred tax expense of ` 20,000
(` 40,000 at 50%) representing the income taxes that the entity will pay when it recovers or
settles the carrying amounts of its assets and liabilities based on the tax rate applicable to
undistributed profits.
Subsequently, on 15th March, 20X2 the entity recognises dividends of ` 10,000 from previous
operating profits as a liability.
On 15th March, 20X2, the entity recognises the recovery of income taxes of ` 1,500 (15% of
the dividends recognised as a liability) as a current tax asset and as a reduction of current
income tax expense for 20X2.

1.6.8 Step 8: Calculate and recognise deferred tax

(a) This is the simplest of all steps. Having determined the taxable temporary differences and the
deductible temporary differences as per Step 6 and the applicable tax rates with reference to
tax laws, one has to multiply amount determined in Step 6 with the rates determined in Step 7.
• Taxable temporary differences when multiplied with tax rates will lead to deferred tax
liabilities.
• Deductible temporary differences when multiplied with rates will lead to deferred tax
assets.
(b) The following should be kept in mind:
• Deferred tax liabilities or assets should not be discounted.
• The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period.
• An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is
no longer probable that sufficient taxable profit will be available to allow the benefit of
part or all of that deferred tax asset to be utilised.
• Any such reduction shall be reversed to the extent that it becomes probable that
sufficient taxable profit will be available.

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1.6.9 Step 9: Accounting of deferred tax

(a) The accounting of deferred tax effects of a transaction of an event is consistent with the
accounting for that transaction or event.
(b) A transaction and the deferred tax effects of a transaction may be accounted for in:
• Statement of profit and loss;
• Outside profit and loss account:
(i) In other comprehensive income such as revaluation amount in accordance with
Ind AS 16, Property, Plant and Equipment
(ii) Directly in equity such as correction of an error in accordance with Ind AS 8,
Accounting Policies, Changes in Accounting Estimates and Errors.
(c) However, the carrying amount of deferred tax assets and liabilities may change even though
there is no change in the amount of the related temporary differences.
• This can result, for example, from:
— a change in tax rates or tax laws;
— a reassessment of the recoverability of deferred tax assets; or
— a change in the expected manner of recovery of an asset.
• In such cases, the resulting deferred tax is recognised in profit or loss, except to the extent
that it relates to items previously recognised outside profit or loss.
(d) In exceptional circumstances, it may be difficult to determine the amount of current and
deferred tax that relates to items recognised outside profit or loss (either in other
comprehensive income or directly in equity).
• This may be the case, for example, when a change in the tax rate or other tax rules affects
a deferred tax asset or liability relating (in whole or in part) to an item that was previously
recognised outside profit or loss; or
• In such cases, the current and deferred tax related to items that are recognised outside
profit or loss are based on a reasonable pro rata allocation of the current and deferred tax
of the entity in the tax jurisdiction concerned, or other method that achieves a more
appropriate allocation in the circumstances.
(e) Ind AS 16 does not specify whether an entity should transfer each year from revaluation surplus
to retained earnings an amount equal to the difference between the depreciation or amortisation
on a revalued asset and the depreciation or amortisation based on the cost of that asset.
• If an entity makes such a transfer, the amount transferred is net of any related deferred tax.
• Similar considerations apply to transfers made on disposal of an item of property, plant or
equipment.

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(f) When an asset is revalued for tax purposes and that revaluation is related to an accounting
revaluation of an earlier period, or to one that is expected to be carried out in a future period,
the tax effects of both the asset revaluation and the adjustment of the tax base are recognised
in other comprehensive income in the periods in which they occur.
(g) When an entity pays dividends to its shareholders, it may be required to pay a portion of the
dividends to taxation authorities on behalf of shareholders. In many jurisdictions this amount
is referred to as a withholding tax. Such an amount paid or payable to taxation authorities is
charged to equity as a part of the dividends.
1.6.10 Step 10: Offsetting deferred tax assets and deferred tax liabilities
(a) An entity shall 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:
(i) the same taxable entity; or
(ii) different taxable entities which intend either to settle current tax liabilities and assets
on a net basis, or to realise 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.
(b) To avoid the need for detailed scheduling of the timing of the reversal of each temporary
difference, this Standard requires an entity to set off a deferred tax asset against a deferred
tax liability of the same taxable entity if, and only if, they relate to income taxes levied by the
same taxation authority and the entity has a legally enforceable right to set off current tax
assets against current tax liabilities.
(c) In rare circumstances, an entity may have a legally enforceable right of set off, and an intention
to settle net, for some periods but not for others. In such rare circumstances, detailed
scheduling may be required to establish reliably whether the deferred tax liability of one taxable
entity will result in increased tax payments in the same period in which a deferred tax asset of
another taxable entity will result in decreased payments by that second taxable entity.
Illustration 2
On 1st April 20X1, S Ltd. leased a machine over a 5 year period. The present value of lease liability
is ` 120 Cr (discount rate of 8%) and is recognized as lease liability and corresponding Right of Use
(RoU) Asset on the same date. The RoU Asset is depreciated under straight line method over the
5 years. The annual lease rentals are ` 30 Cr payable starting 31st March 20X2. The tax law permits
tax deduction on the basis of payment of rent.

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Assuming tax rate of 30%, you are required to explain the deferred tax consequences for the above
transaction for the year ended 31st March 20X2.
Solution
A temporary difference effectively arises between the value of the machine for accounting purposes
and the amount of lease liability, since the rent payment is eligible for tax deduction.
Tax base of the machine is nil as the amount is not eligible for deduction for tax purposes.
Tax base of the lease liability is nil as it is measured at carrying amount less any future tax deductible
amount
Recognition of deferred tax on 31st March 20X2:
Carrying amount in balance sheet
RoU Asset (120 Cr – 24 Cr (Depreciation)) ` 96.00 Dr
Lease Liability (120 Cr + 9.60 Cr (120 Cr x 8%) - 30 Cr) ` 99.60 Cr
Net Amount ` 3.60 Cr
Tax Base ` 0.00 Cr
Temporary Difference (deductible) ` 3.60 Cr
Deferred Tax asset to be recognized (` 3.60 Cr x 30%) ` 1.08 Cr

1.7 PART D: PRACTICAL APPLICATION

1.7.1 Deferred tax arising from a business combination
(a) As discussed above, temporary differences may arise in a business combination. In accordance
with Ind AS 103, an entity recognises any resulting deferred tax assets (to the extent that they
meet the recognition criteria) or deferred tax liabilities as identifiable assets and liabilities at
the acquisition date. Consequently, those deferred tax assets and deferred tax liabilities affect
the amount of goodwill or the bargain purchase gain the entity recognises. However, in
accordance with this Ind AS, in certain circumstances, an entity does not recognise deferred
tax liabilities arising from the initial recognition of goodwill.
Illustration 3
On 1 April 20X1, A Ltd. acquired 12 Cr shares (representing 80% stake) in B Ltd. by means
of a cash payment of ` 25 Cr. It is the group policy to value the non-controlling interest in
subsidiaries at the date of acquisition at fair value. The market value of an equity share in
B Ltd. at 1 April 20X1 can be used for this purpose. On 1 April 20X1, the market value of a
B Ltd. share was ` 2.00

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On 1 April 20X1, the individual financial statements of B Ltd. showed the net assets at
` 23 Cr.
The directors of A Ltd. carried out a fair value exercise to measure the identifiable assets
and liabilities of B Ltd. at 1 April 20X1. The following matters emerged:
– Property having a carrying value of ` 15 Cr at 1 April 20X1 had an estimated market
value of ` 18 Cr at that date.
– Plant and equipment having a carrying value of ` 11 Cr at 1 April 20X1 had an estimated
market value of ` 13 Cr at that date.
– Inventory in the books of B Ltd. is shown at a cost of ` 2.50 Cr. The fair value of the
inventory on the acquisition date is ` 3 Cr.
The fair value adjustments have not been reflected in the individual financial statements of
B Ltd. In the consolidated financial statements, the fair value adjustments will be regarded
as temporary differences for the purposes of computing deferred tax. The rate of deferred
tax to apply to temporary differences is 20%.
Calculate the deferred tax impact on above and calculate the goodwill arising on acquisition
of B Ltd.
Solution
Purchase Consideration: ` 25 Cr
Non-Controlling Interest [{(12 Cr x (20% / 80%)} x ` 2 per share] ` 6 Cr
Computation of Net Assets of B Ltd.
As per books ` 23.00 Cr
Add: Fair value differences not recognized in books of B Ltd.:
Property (18 Cr – 15 Cr) ` 3.00 Cr
Plant and Equipment (13 Cr – 11 Cr) ` 2.00 Cr
Inventory (3 Cr – 2.5 Cr) ` 0.50 Cr
` 28.5 Cr
Less: Deferred tax liability on fair value difference @ 20%
[(3 Cr + 2 Cr + 0.50 Cr) x 20%] (` 1.10 Cr)
Total Net Assets at Fair Value ` 27.40 Cr
Computation of Goodwill:
Purchase Consideration ` 25.00 Cr

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Add: Non-Controlling Interest ` 6.00 Cr

` 31.00 Cr
Less: Net Assets at Fair Value (` 27.40 Cr)
Goodwill on acquisition date ` 3.60 Cr
*****
(b) As a result of a business combination, the probability of realising a pre-acquisition deferred tax
asset of the acquirer could change. An acquirer may consider it probable that it will recover its
own deferred tax asset that was not recognised before the business combination. For example,
the acquirer may be able to utilise the benefit of its unused tax losses against the future taxable
profit of the acquiree. Alternatively, as a result of the business combination it might no longer
be probable that future taxable profit will allow the deferred tax asset to be recovered. In such
cases, the acquirer recognises a change in the deferred tax asset in the period of the business
combination, but does not include it as part of the accounting for the business combination.
Therefore, the acquirer does not take it into account in measuring the goodwill or bargain
purchase gain it recognises in the business combination.
(c) The potential benefit of the acquiree’s income tax loss carry forwards or other deferred tax
assets might not satisfy the criteria for separate recognition when a business combination is
initially accounted for but might be realised subsequently. An entity shall recognise acquired
deferred tax benefits that it realises after the business combination as follows:
♦ Acquired deferred tax benefits recognised within the measurement period that result from
new information about facts and circumstances that existed at the acquisition date shall
be applied to reduce the carrying amount of any goodwill related to that acquisition. If the
carrying amount of that goodwill is zero, any remaining deferred tax benefits shall be
recognised in other comprehensive income and accumulated in equity as capital reserve
or recognised directly in capital reserve, depending on whether paragraph 34 or paragraph
36A of Ind AS 103 would have applied had the measurement period adjustments been
known on the date of acquisition itself.
♦ All other acquired deferred tax benefits realised shall be recognised in profit or loss (or, if
this Standard so requires, outside profit or loss).
1.7.2 Current and deferred tax arising from share-based payment
transactions
(a) In some tax jurisdictions, an entity receives a tax deduction (i.e., an amount that is deductible
in determining taxable profit) that relates to remuneration paid in shares, share options or other
equity instruments of the entity. The amount of that tax deduction may differ from the related
cumulative remuneration expense, and may arise in a later accounting period. For example,
in some jurisdictions, an entity may recognise an expense for the consumption of employee

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services received as consideration for share options granted, in accordance with Ind AS 102,
Share- based Payment, and not receive a tax deduction until the share options are exercised,
with the measurement of the tax deduction based on the entity’s share price at the date of
exercise.
(b) As with the preliminary expenses, the difference between the tax base of the employee services
received to date (being the amount permitted as a deduction in future periods under taxation
laws), and the carrying amount of nil, is a deductible temporary difference that results in a
deferred tax asset. If the amount permitted as a deduction in future periods under taxation
laws is not known at the end of the period, it shall be estimated, based on information available
at the end of the period. For example, if the amount permitted as a deduction in future periods
under taxation laws is dependent upon the entity’s share price at a future date, the
measurement of the deductible temporary difference should be based on the entity’s share
price at the end of the period.
(c) As noted above, in (a), the amount of the tax deduction or estimated future tax deduction,
measured in accordance with paragraph (b) above may differ from the related cumulative
remuneration expense. This Standard requires that current and deferred tax should be
recognised as income or an expense and included in profit or loss for the period, except to the
extent that the tax arises from (a) a transaction or event that is recognised, in the same or a
different period, outside profit or loss, or (b) a business combination. If the amount of the tax
deduction (or estimated future tax deduction) exceeds the amount of the related cumulative
remuneration expense, this indicates that the tax deduction relates not only to remuneration
expense but also to an equity item. In this situation, the excess of the associated current or
deferred tax should be recognised directly in equity.
Illustration 4
On 1st April 20X1, P Ltd. had granted 1 Cr share options worth ` 4 Cr subject to a two-year vesting
period. The income tax law permits a tax deduction at the exercise date of the intrinsic value of the
options. The intrinsic value of the options at 31st March 20X2 was ` 1.60 Cr and at 31st March 20X3
was ` 4.60 Cr. The increase in the fair value of the options on 31st March 20X3 was not foreseeable
at 31st March 20X2. The options were exercised at 31st March 20X3.
Give the accounting for the above transaction for deferred tax for period ending 31st March, 20X2
and 31st March, 20X3. Assume that there are sufficient taxable profits available in future against
any deferred tax assets. Tax rate of 30% is applicable to P Ltd.
Solution:
On 31st March 20X2:
The tax benefit is calculated as under:
Carrying amount of Share based payment ` 0.00 Cr

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Tax Base of Share based payment (` 1.60 Cr x ½) ` 0.80 Cr

Temporary Difference (Carrying amount – tax base) ` 0.80 Cr
Deferred Tax Asset recognized (Temporary Difference x Tax rate)
(0.80 Cr x 30%) ` 0.24 Cr
Journal Entry for above:
Deferred Tax Asset Dr. ` 0.24 Cr
To Tax Expense ` 0.24 Cr
(Being DTA recognized on equity option)
On 31st March 20X3:
The options have been exercised and a current tax benefit will be available to the entity on the basis
of intrinsic value of ` 4.60 Cr. Initially recognized deferred tax asset will no longer be required.
The accounting entry will be done as under:
Tax Expense Dr ` 0.24 Cr
To Deferred Tax Asset ` 0.24 Cr
(Being DTA reversed on the exercise of the option)
1.7.3 Change in tax status of an entity or its shareholders
(a) A change in the tax status of an entity or of its shareholders may have consequences for an
entity by increasing or decreasing its tax liabilities or assets. This may, for example, occur
upon the public listing of an entity’s equity instruments or upon the restructuring of an entity’s
equity. It may also occur upon a controlling shareholder’s move to a foreign country. As a
result of such an event, an entity may be taxed differently; it may for example gain or lose tax
incentives or become subject to a different rate of tax in the future.
(b) A change in the tax status of an entity or its shareholders may have an immediate effect on the
entity’s current tax liabilities or assets. The change may also increase or decrease the deferred
tax liabilities and assets recognised by the entity, depending on the effect the change in tax
status has on the tax consequences that will arise from recovering or settling the carrying
amount of the entity’s assets and liabilities.
(c) The issue is how an entity should account for the tax consequences of a change in its tax status
or that of its shareholders.
(d) The accounting principles that should be adopted in this situation are as under:
♦ A change in the tax status of an entity or its shareholders does not give rise to increases
or decreases in amounts recognised outside profit or loss.

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♦ The current and deferred tax consequences of a change in tax status shall be included in
profit or loss for the period,
— unless those consequences relate to transactions and events that result,
— in the same or a different period,
— in a direct credit or charge to the recognised amount of equity or in amounts
recognised in other comprehensive income.
♦ Those tax consequences that relate to changes in the recognised amount of equity, in the
same or a different period (not included in profit or loss), shall be charged or credited
directly to equity.
♦ Those tax consequences that relate to amounts recognised in other comprehensive
income shall be recognised in other comprehensive income.

1.8 PART E: DISCLOSURES

This Ind AS not only deals with recognition and measurement of income-taxes but also requires
quite a few disclosures with respect to these income tax. These are discussed as under.
1.8.1 Disclosure 1: Disclose components of tax expenses (income)
(a) Each of the major components of tax expense (income) is to be disclosed separately.
(b) As we know, tax expense (tax income) is the aggregate amount included in the determination
of profit or loss for the period in respect of current tax and deferred tax. The tax expense
(income) related to profit or loss or loss from ordinary activities shall be presented in statement
of profit or loss.
(c) The components of tax expense (income) include:
♦ current tax expense (income);
♦ any adjustments recognised in the period for current tax of prior periods;
♦ the amount of deferred tax expense (income) relating to the origination and reversal of
temporary differences;
♦ the amount of deferred tax expense (income) relating to changes in tax rates or the
imposition of new taxes;
♦ the amount of the benefit arising from a previously unrecognised tax loss, tax credit or
temporary difference of a prior period that is used to reduce current tax expense;
♦ the amount of the benefit from a previously unrecognised tax loss, tax credit or temporary
difference of a prior period that is used to reduce deferred tax expense;

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♦ deferred tax expense arising from the write-down, or reversal of a previous write-down, of
a deferred tax asset; and
♦ the amount of tax expense (income) relating to those changes in accounting policies and
errors that are included in profit or loss in accordance with Ind AS 8, because they cannot
be accounted for retrospectively.
1.8.2 Disclosure 2: Tax related to items charged directly to equity
(a) Indian Accounting Standards require or permit particular items to be credited or charged directly
to equity.
(b) Examples of such items are:
♦ 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 (see Ind
AS 8, Accounting Policies, Changes in Accounting Estimates and Errors); and
♦ amounts arising on initial recognition of the equity component of a compound financial
instrument (see paragraph 23).
(c) The current and deferred tax relating to these items have to be recognised and accounted for
directly in equity.
(d) This Ind AS requires disclosure of the aggregate current and deferred tax relating to items that
are charged or credited directly to equity.
1.8.3 Disclosure 3: Tax related to items recognised in statement of other
comprehensive income
(a) Indian Accounting Standards require or permit particular items to be recognised in other
comprehensive income.
(b) Examples of such items are:
♦ a change in carrying amount arising from the revaluation of property, plant and equipment
(see Ind AS 16); and
♦ exchange differences arising on the translation of the financial statements of a foreign
operation (see Ind AS 21).
(c) The current and deferred tax relating to these items have to be recognised and accounted for
in the statement of other comprehensive income.

(d) This Ind AS requires disclosure of the amount of income tax relating to each component of
other comprehensive income.

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1.8.4 Disclosure 4: Explanation of the relationship between tax expense

(income) and accounting profit
(a) In ideal situation, if accounting profit is say ` 100 and tax rate is 30%, the tax expense should
be ` 30. But this is seldom the case due to differences in accounting principles and standards
vis–a–vis tax laws.
(b) Therefore, this Standard requires an explanation to be disclosed 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), disclosing also the basis on which the
applicable tax rate(s) is (are) computed; or
♦ a numerical reconciliation between the average effective tax rate (tax expense divided by
the accounting profit) and the applicable tax rate, disclosing also the basis on which the
applicable tax rate is computed.
Example 47
An entity has made an accounting profit of ` 1,00,000. The tax rate is 30%. In computing
the accounting profit, a penalty of ` 10,000 has been considered which is not tax
deductible. There are no other tax impacts. In this case, the taxable profits are
` 1,10,000 (` 1,00,000 + ` 10,000) and tax expense @ 30% is ` 33,000.
The two types of disclosures are as under:
Particulars Amount (` )
Accounting profit 1,00,000
Tax at the applicable tax rate of 30% 30,000
Tax effect of expenses that are not deductible in determining
taxable profits:
Penalties 3,000
Tax expense 33,000
The effective tax rate is as per the national income-tax rate.
Particulars %
Applicable tax rate 30
Tax effect of expenses that are not deductible in determining taxable
profits - Penalties 3
Average effective tax rate 33
The effective tax rate is as per the national income-tax rate.
(c) These disclosures enable users of financial statements to understand whether the relationship
between tax expense (income) and accounting profit is unusual and to understand the
significant factors that could affect that relationship in the future. The relationship between tax

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expense (income) and accounting profit may be affected by such factors as revenue that is
exempt from taxation, expenses that are not deductible in determining taxable profit (tax loss),
the effect of tax losses and the effect of foreign tax rates.
(d) In explaining the relationship between tax expense (income) and accounting profit, an entity
uses an applicable tax rate that provides the most meaningful information to the users of its
financial statements. Often, the most meaningful rate is the domestic rate of tax in the country
in which the entity is domiciled, aggregating the tax rate applied for national taxes with the rates
applied for any local taxes which are computed on a substantially similar level of taxable profit
(tax loss).
(e) However, for an entity operating in several jurisdictions, it may be more meaningful to
aggregate separate reconciliations prepared using the domestic rate in each individual
jurisdiction. The following example illustrates how the selection of the applicable tax rate affects
the presentation of the numerical reconciliation.
Example 48
In 20X2, an entity has accounting profit in its own jurisdiction (country A) of ` 1,500 (20X1: `
2,000) and in country B of ` 1,500 (20X1: ` 500). The tax rate is 30% in country A and 20%
in country B. In country A, expenses of ` 100 (20X1: ` 200) are not deductible for tax
purposes.
The following reconciliation will be prepared:
Particulars Amount (` )
20X2 20X1
Accounting profit 3,000 2,500
Tax at the domestic rate of 30% 900 750
Tax effect of expenses that are not deductible for tax purposes 30 60
Effect of lower tax rates in country B (150) (50)
Tax expense 780 760
Illustration 5
A’s Ltd. profit before tax according to Ind AS for Year 20X1-20X2 is ` 100 thousand and taxable profit for
year 20X1-20X2 is ` 104 thousand. The difference between these amounts arose as follows:
1. On 1st February, 20X2, it acquired a machine for ` 120 thousand. Depreciation is charged on
the machine on a monthly basis for accounting purpose. Under the tax law, the machine will
be depreciated for 6 months. The machine’s useful life is 10 years according to Ind AS as well
as for tax purposes.
2. In the year 20X1-20X2, expenses of ` 8 thousand were incurred for charitable donations.
These are not deductible for tax purposes.

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Prepare necessary entries as at 31st March 20X2, taking current and deferred tax into account. The
tax rate is 25%. Also prepare the tax reconciliation in absolute numbers as well as the tax rate
reconciliation.
Solution
Current tax= Taxable profit x Tax rate = ` 104 thousand x 25% = ` 26 thousand.
Computation of Taxable Profit:
` in thousand
Accounting profit 100
Add: Donation not deductible 8
Less: Excess Depreciation (6-2) (4)
Total Taxable profit 104

` in thousand ` in thousand
Profit & loss A/c Dr. 26
To Current Tax 26

Deferred tax:
Machine’s carrying amount according to Ind AS is ` 118 thousand (` 120 thousand – ` 2 thousand)
Machine’s carrying amount for taxation purpose = ` 114 thousand (` 120 thousand – ` 6 thousand)
Deferred Tax Liability = ` 4 thousand x 25%

` in thousand
Profit & loss A/c Dr. 1
To Deferred Tax Liability 1

Tax reconciliation in absolute numbers:

` in thousand
Profit before tax according to Ind AS 100
Applicable tax rate @ 25%
Tax 25
Expenses not deductible for tax purposes (` 8 thousand x 25%) 2
Tax expense (Current and deferred) 27

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Tax rate reconciliation

Applicable tax rate 25%

Expenses not deductible for tax purposes 2%
Average effective tax rate 27%

*****
1.8.5 Disclosure 5: Change in tax rates
(a) The applicable tax rates may change due to variety of reasons. There could be a change in the
manner of recovery of the asset. The tax laws may have changed. There could be a change in
the structure of the entity.
(b) In case there are changes in the applicable tax rate(s) compared to the previous accounting
period, an explanation has to be provided.
1.8.6 Disclosure 6: Unrecognised deductible temporary differences,
unused tax losses and unused tax credits
(a) The Standard lays down criteria for recognising deferred tax assets on deductible temporary
differences, unused tax losses and unused tax credits. For example, whether a sufficient
taxable temporary difference is available, is there a probability of future profits and are there
any tax planning opportunities.
(b) If the laid down recognition criteria could not be met, no deferred tax asset is recognised on
these deductible temporary differences, unused tax losses and unused tax credits.
(c) The Standard requires the amount (and expiry date, if any) of deductible temporary differences,
unused tax losses, and unused tax credits for which no deferred tax asset is recognised in the
balance sheet, to be disclosed.
1.8.7 Disclosure 7: Temporary differences associated with investments in
subsidiaries etc.
(a) 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 recognised should be disclosed.
(b) It would often be impracticable to compute the amount of unrecognised deferred tax liabilities
arising from investments in subsidiaries, branches and associates and interests in joint
ventures. Therefore, this Standard requires an entity to disclose the aggregate amount of the
underlying temporary differences but does not require disclosure of the deferred tax liabilities.

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(c) Nevertheless, where practicable, entities are encouraged to disclose the amounts of the
unrecognised deferred tax liabilities because financial statement users may find such
information useful.
1.8.8 Disclosure 8: Amount of deferred tax liabilities (assets) or income
(expenses)
(a) As per the criteria laid down in the Standard, deferred tax liabilities have to be recognised for
taxable temporary differences and deferred tax assets have to be recognised for deductible
temporary differences, unused tax losses and unused tax credits.
(b) Where deferred taxes have been recognised, the following should be disclosed 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 recognised in the balance sheet for
each period presented;
• the amount of the deferred tax income or expense recognised in profit or loss, if this is not
apparent from the changes in the amounts recognised in the balance sheet.
1.8.9 Disclosure 9: Discontinued operations
The following should be disclosed in respect of discontinued operations, the tax expense relating to:
(i) the gain or loss on discontinuance; and
(ii) the profit or loss from the ordinary activities of the discontinued operation for the period,
together with the corresponding amounts for each prior period presented.
1.8.10 Disclosure 10: Dividend tax
(a) At times dividends relating to the reporting period are proposed or declared after the reporting
date but before the financial statements are approved for issue. These are disclosed but not
recognised in financial statements.
(b) In such a situation, an entity should disclose the amount of income tax consequences of
dividends to shareholders of the entity that were proposed or declared before the financial
statements were approved for issue, but are not recognised as a liability in the financial
statements.
1.8.11 Disclosures 11: In case of business combination
The following should be disclosed:
• if a business combination in which the entity is the acquirer causes a change in the amount
recognised for its pre-acquisition deferred tax asset, the amount of that change; and

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• if the deferred tax benefits acquired in a business combination are not recognised at the
acquisition date but are recognised after the acquisition date, a description of the event or
change in circumstances that caused the deferred tax benefits to be recognised.
1.8.12 Disclosure 12: Deferred tax asset and evidence thereto where
based on future taxable profits
An entity shall disclose the amount of a deferred tax asset and the nature of the evidence supporting
its recognition, when:
• the utilization of the deferred tax asset is dependent on future taxable profits in excess of the
profits arising from the reversal of existing taxable temporary differences; and
• the entity has suffered a loss in either the current or preceding period in the tax jurisdiction to
which the deferred tax asset relates.
1.8.13 Disclosure 13: Tax consequences of distribution of dividends
(a) As discussed above, in some tax jurisdiction tax rates depend on the fact whether dividend is
distributed or not.
(b) In these circumstances, an entity shall disclose the nature of the potential income tax
consequences that would result from the payment of dividends to its shareholders. In addition,
the entity shall disclose the amounts of the potential income tax consequences practicably
determinable and whether there are any potential income tax consequences not practicably
determinable.
(c) The aforesaid disclosure requirement requires an entity to disclose the nature of the potential
income tax consequences that would result from the payment of dividends to its shareholders.
An entity also discloses the important features of the income tax systems and the factors that
will affect the amount of the potential income tax consequences of dividends.
(d) However, it would sometimes not be practicable to compute the total amount of the of the total
amount may be easily determinable. For example, in a consolidated group, a parent and some
of its subsidiaries may have paid income taxes at a higher rate on undistributed profits and be
aware of the amount that would be refunded on the payment of future dividends to shareholders
from consolidated retained earnings. In this case, that refundable amount is disclosed.
(e) If applicable, the entity also discloses that there are additional potential income tax
consequences not practicably determinable. In the parent’s separate financial statements, if
any, the disclosure of the potential income tax consequences relates to the parent’s retained
earnings.

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(f) An entity required to provide the disclosures referred above is also required to provide
disclosures related to temporary differences associated with investments in subsidiaries,
branches and associates or interests in joint ventures. In such cases, an entity considers this
in determining the information to be disclosed under this requirement. For example, an entity
ay be required to disclose the aggregate amount of temporary differences associated with
investments in subsidiaries for which no deferred tax liabilities have been recognised. If it is
impracticable to compute the amounts of unrecognised deferred tax liabilities, there may be
amounts of potential income tax consequences of dividends not practicably determinable
related to these subsidiaries.
1.8.14 Disclosure 14: Tax related contingencies
An entity discloses any tax-related contingent liabilities and contingent assets in accordance with
Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets. Contingent liabilities and
contingent assets may arise, for example, from unresolved disputes with the taxation authorities.
1.8.15 Disclosure 15: Change in tax rates or tax laws
Where changes in tax rates or tax laws are enacted or announced after the reporting period, an
entity discloses any significant effect of those changes on its current and deferred tax assets and
liabilities (see Ind AS 10, Events after the Reporting Period).
Illustration 6
An entity has a deductible temporary difference of ` 50,000. It has no taxable temporary differences
against which it can be offset. The entity is also not anticipating any future profits. However, it can
implement a tax planning strategy which can generate profits up to ` 60,000. The cost of
implementing this tax planning strategy is ` 12,000. The tax rate is 30%. Compute the deferred tax
asset that should be recognised.
Solution
The entity should recognise a deferred tax asset of ` 14,400 @ 30% of ` 48,000 (` 60,000 –
` 12,000).
The balance deferred tax asset of ` 600 @ 30% on ` 2,000 (` 50,000 – ` 48,000) shall remain
unrecognised.
*****
Illustration 7
A Limited recognises interest income in its books on accrual basis. However, for income tax
purposes the method is ‘cash basis’. On December 31, 20X1, it has interest receivable of ` 0,000
and the tax rate was 25%. On 28th February, 20X2, the finance bill is introduced in the legislation
that changes the tax rate to 30%. The finance bill is enacted as Act on 21st May, 20X2.

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Discuss the treatment of deferred tax in case the reporting date of A Limited’s financial statement is
31st December, 20X1 and these are approved for issued on 31st May, 20X2.
Solution
The difference of ` 10,000 between the carrying value of interest receivable of ` 10,000 and its tax
base of NIL is a taxable temporary difference.
A Limited has to recognise a deferred tax liability of ` 2,500 (` 10,000 x 25%) in its financial
statements for the reporting period ended on December 31, 20X1.
It will not recognise the deferred tax liability @ 30% because as on December 31, 20X1, this tax rate
was neither substantively enacted or enacted on the reporting date. However, if the effect of this
change is material, A Limited should disclose this difference in its financial statements.
*****
Illustration 8
A Ltd prepares financial statements to 31 March each year. The rate of income tax applicable to
A Ltd is 20%. The following information relates to transactions, assets and liabilities of A Ltd during
the year ended 31 March 20X2:
(i) A Ltd has a 40% shareholding in L Ltd. A Ltd purchased this shareholding for ` 45 Cr. The
shareholding gives A Ltd significant influence over L Ltd but not control and therefore A Ltd.
accounts for its interest in L Ltd using the equity method. The equity method carrying value of
A Ltd’s investment in L Ltd was ` 70 Cr on 31 March 20X1 and ` 75 Cr on 31 March 20X2. In
the tax jurisdiction in which A Ltd operates, profits recognised under the equity method are
taxed if and when they are distributed as a dividend or the relevant investment is disposed of.
(ii) A Ltd. measures its head office building using the revaluation model. The building is revalued
every year on 31 March. On 31 March 20X1, carrying value of the building (after revaluation)
was ` 40 Cr and its tax base was ` 22 Cr. During the year ended 31 March 20X2, A Ltd
charged depreciation in its statement of profit or loss of ` 2 Cr and claimed a tax deduction for
tax depreciation of ` 1.25 Cr. On 31 March 20X2, the building was revalued to ` 45 Cr. In the
tax jurisdiction in which A Ltd operates, revaluation of property, plant and equipment does not
affect taxable income at the time of revaluation.
Basis the above information, you are required to compute:
(a) The deferred tax liability of A Ltd at 31 March 20X2
(b) The charge or credit to both profit or loss and other comprehensive income relating to deferred
tax for the year ended 31 March 20X2

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Solution:
(A) Deferred Tax Liability as at 31st March 20X2
Investment in L Ltd:
Carrying Amount = ` 75 Cr
Tax base = ` 45 Cr (Purchase cost)
Temporary Difference = ` 30 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized as a
taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of ` 6 Cr is
recognized:
Head office building
Carrying Amount = ` 45 Cr (Revalued amount on 31st of March 20X2)
Tax base = ` 20.75 Cr (22 Cr – 1.25 Cr)
Temporary Difference = ` 24.25 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized as a
taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of ` 4.85 Cr
is created.
Total Deferred Tax Liability ` 6 Cr + ` 4.85 Cr = ` 10.85 Cr
(B) Charge to Statement of Profit or Loss for the year ended 31st March 20X2:
Investment in L Ltd.
Particulars Carrying amount Tax Base Temporary Difference
Opening Balance (1st April 20X1) ` 70 Cr ` 45 Cr ` 25 Cr
Closing Balance (31st March 20X2) ` 75 Cr ` 45 Cr ` 30 Cr
Net Change ` 5 Cr
Increase in Deferred Tax Liability (20% tax rate) ` 1 Cr
Considering the increase in the value of investment arising through Statement of Profit or Loss,
the accounting for the increase in deferred tax liability is made as under:
Tax expense (Profit or Loss Statement) Dr ` 1 Cr
To Deferred Tax Liability ` 1 Cr
(Being increase in deferred tax liability recognized)

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 INDIAN ACCOUNTING STANDARD 12 10.61

Head Office Building:

The deferred tax liability at 31 March 20X1 is ` 3.6 Cr (20% x {` 40 Cr – ` 22 Cr}).
At 31 March 20X2, prior to revaluation, the carrying amount of the property is ` 38 Cr and its
tax base is ` 20.75 Cr (` 22 Cr – ` 1.25 Cr). The deferred tax liability at this point is `
3.45 Cr (20% x {` 38 Cr – ` 20.75 Cr}).
The reduction in this liability is ` 0.15 Cr (` 3.6 Cr – ` 3.45 Cr). This would be credited to
income tax expense in arriving at profit or loss.
Post revaluation, the carrying value of the building becomes ` 45 Cr and the tax base stays
the same. Therefore, the new deferred tax liability is ` 4.85 Cr (20% x (` 45 Cr – ` 20.75
Cr)). The increase in the deferred tax liability of ` 1.4 Cr (` 4.85 Cr – ` 3.45 Cr) is charged
to other comprehensive income.
*****
Illustration 9
K Ltd prepares consolidated financial statements to 31st March each year. During the year ended
31st March 20X2, K Ltd entered into the following transactions:
(a) On 1st April 20X1, K Ltd purchased an equity investment for ` 2,00,000. The investment was
designated as fair value through other comprehensive income. On 31st March 20X2, the fair
value of the investment was ` 2,40,000. In the tax jurisdiction in which K Ltd operates,
unrealised gains and losses arising on the revaluation of investments of this nature are not
taxable unless the investment is sold. K Ltd has no intention of selling the investment in the
foreseeable future.
(b) On 1st August 20X1, K Ltd sold products to A Ltd, a wholly owned subsidiary operating in the
same tax jurisdiction as K Ltd, for ` 80,000. The goods had cost to K Ltd for ` 64,000. By
31st March 20X2, A Ltd had sold 40% of these goods, selling the remaining during next year.
(c) On 31st October 20X1, K Ltd received ` 2,00,000 from a customer. This payment was in respect
of services to be provided by K Ltd from 1st November 20X1 to 31st July 20X2. K Ltd recognised
revenue of ` 1,20,000 in respect of this transaction in the year ended 31st March 20X2 and will
recognise the remainder in the year ended 31st March 20X3. Under the tax jurisdiction in which
K Ltd operates, ` 2,00,000 received on 31st October 20X1 was included in the taxable profits
of K Ltd for the year ended 31st March 20X2.
Explain and show how the tax consequences (current and deferred) of the three transactions would
be reported in its statement of profit or loss and other comprehensive income for the year ended
31st March 20X2. Assume tax rate to be 25%.

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 10.62 FINANCIAL REPORTING

Solution:
(a) Because the unrealised gain on revaluation of the equity investment is not taxable until sold,
there are no current tax consequences. The tax base of the investment is ` 2,00,000. The
revaluation creates a taxable temporary difference of ` 40,000 (` 2,40,000 – ` 2,00,000).
This creates a deferred tax liability of ` 10,000 (` 40,000 x 25%). The liability would be non-
current. The fact that there is no intention to dispose of the investment does not affect the
accounting treatment. Because the unrealised gain is reported in other comprehensive income,
the related deferred tax expense is also reported in other comprehensive income.
(b) When K Ltd sold the products to A Ltd, K Ltd would have generated a taxable profit of ` 16,000
(` 80,000 – ` 64,000). This would have created a current tax liability for K Ltd and the group
of ` 4,000 (` 16,000 x 25%). This liability would be shown as a current liability and charged
as an expense in arriving at profit or loss for the period.
In the consolidated financial statements the carrying value of the unsold inventory would be
` 38,400 (` 64,000 x 60%). The tax base of the unsold inventory would be ` 48,000
(` 80,000 x 60%). In the consolidated financial statements there would be a deductible
temporary difference of ` 9,600 (` 38,400 – ` 48,000) and a potential deferred tax asset of
` 2,400 (` 9,600 x 25%). This would be recognised as a deferred tax asset since A Ltd is
expected to generate sufficient taxable profits against which to utilise the deductible temporary
difference. The resulting credit would reduce consolidated deferred tax expense in arriving at
profit or loss.
(c) The receipt of revenue in advance on 1st October 20X1 would create a current tax liability of
` 50,000 (` 200,000 x 25%) as at 31st March 20X2. The carrying value of the revenue received
in advance at 31st March 20X2 is ` 80,000 (` 200,000 – ` 120,000). Its tax base is nil. The
deductible temporary difference of ` 80,000 would create a deferred tax asset of ` 20,000 (`
80,000 x 25%). The asset can be recognised because K Ltd has sufficient taxable profits
against which to utilise the deductible temporary difference.
*****

1.9 SIGNIFICANT CHANGES IN IND AS 12 VIS-À-VIS AS 22

S. No. Particulars Ind AS 12 AS 22
1. Approach for creating Ind AS 12 is based on balance AS 22 is based on income
Deferred Tax sheet approach. statement approach.
It requires recognition of tax
consequences of differences It requires recognition of tax
between the carrying amounts consequences of differences
between taxable income and
accounting income. For this

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 INDIAN ACCOUNTING STANDARD 12 10.63

of assets and liabilities and their purpose, differences between

tax base. taxable income and
accounting income are
classified into permanent and
timing differences.
2. Limited Exceptions As per Ind AS 12, subject to As per AS 22, deferred tax
for Recognition of limited exceptions, deferred tax assets are recognised and
Deferred Tax Asset asset is recognised for all carried forward only to the
deductible temporary extent that there is a
differences to the extent that it reasonable certainty that
is probable that taxable profit sufficient future taxable
will be available against which income will be available
the deductible temporary against which such deferred
difference can be utilised. The tax assets can be realised.
criteria for recognising deferred Where deferred tax asset is
tax assets arising from the carry recognised against
forward of unused tax losses unabsorbed depreciation or
and tax credits are the same carry forward of losses under
that for recognising deferred tax tax laws, it is recognised only
assets arising from deductible to the extent that there is
temporary differences. virtual certainty supported by
However, the existence of convincing evidence that
unused tax losses is strong sufficient future taxable
evidence that future taxable income will be available
profit may not be available. against which such deferred
Therefore, when an entity has a tax assets can be realised.
history of recent losses, the
entity recognises a deferred tax
asset arising from unused tax
losses or tax credits only to the
extent that the entity has
sufficient taxable temporary
differences or there is
convincing other evidence that
sufficient taxable profit will be
available against which the
unused tax losses or unused tax
credits can be utilised by the
entity
3. Recognition of As per Ind AS 12, current and AS 22 does not specifically
Current and Deferred deferred tax are recognised as deal with this aspect.
Tax income or an expense and
included in profit or loss for the
period, except to the extent that

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 10.64 FINANCIAL REPORTING

the tax arises from a transaction

or event which is recognised
outside profit or loss, either in
other comprehensive income or
directly in equity, in those cases
tax is also recognised in other
comprehensive income or in
equity, as appropriate.
4. DTA/DTL arising out Ind AS 12 requires that deferred AS 22 does not deal with this
of Revaluation of tax asset/liability arising from aspect.
Assets revaluation of non-depreciable
assets shall be measured on the
basis of tax consequences from
the sale of asset rather than
through use.
5. Changes in Entities Ind AS 12 provides guidance as AS 22 does not deal with this
Tax Status or that of to how an entity should account aspect.
its Shareholders for the tax consequences of a
change in its tax status or that of
its shareholders.
6. Virtual Certainty Since the concept of virtual AS 22 explains virtual
certainty does not exist in certainty supported by
Ind AS 12, this explanation is convincing evidence.
not included.
7. Guidance for Ind AS 12 does not specifically AS 22 specifically provides
Recognition of deal with these situations. guidance regarding
Deferred Tax in a Tax recognition of deferred tax in
Holiday Period the situations of Tax Holiday
under Sections 80-IA and 80-
IB and Tax Holiday under
Sections 10A and 10B of the
Income Tax Act, 1961.
Similarly, AS 22 provides
guidance regarding
recognition of deferred tax
asset in case of loss under the
head ‘capital gains’
8. Guidance on Ind AS 12 gives special AS 11 gives no such guidance.
Uncertainty Over guidance on it.
Income Tax
Treatment

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 INDIAN ACCOUNTING STANDARD 12 10.65

TEST YOUR KNOWLEDGE

Questions
1. An asset which cost ` 150 has a carrying amount of ` 100. Cumulative depreciation for tax
purposes is ` 90 and the tax rate is 25%. Calculate the tax base and the corresponding
deferred tax or liability, if any.
2. On 1st April 20X1, ABC Ltd acquired 100% shares of XYZ Ltd for ` 4,373 crore. By
31st March, 20X5, XYZ Ltd had made profits of ` 5 crore, which remain undistributed. Based
on the tax legislation in India, the tax base investment in XYZ Ltd is its original cost. Assume
the dividend distribution tax rate applicable is 15%. Show deferred tax treatment.
3. ABC Ltd. acquired 50% of the shares in PQR Ltd. on 1st January, 20X1 for ` 1000 crore. By
31st March, 20X5 PQR Ltd. had made profits of ` 50 crore (ABC Ltd.'s share), which remained
undistributed. Based on the tax legislation in India, the tax base of the investment in PQR
Ltd. is its original cost. Assume the dividend distribution tax rate applicable is 15%. Show
deferred tax treatment.
4. A company had purchased an asset at ` 1,00,000. Estimated useful life of the asset is
5 years and depreciation rate is 20% SLM. Depreciation rate for tax purposes is 25% SLM.
The operating profit is ` 1,00,000 for all the 5 years. Tax rate is 30% for the next 5 years.
Calculate the Book Value as per financial and tax purposes and then DTL.
5. A Ltd. acquired B Ltd. The following assets and liabilities are acquired in a business
combination:
` 000’s
Fair Value Carrying amount Temporary Difference
Plant and Equipment 250 260 (10)
Inventory 120 125 (5)
Debtors 200 210 (10)
570 595 (25)
9% Debentures (100) (100)
470 495
Consideration paid 500 500
Goodwill 30 5 (25)

Calculate Deferred Tax Asset.

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 10.66 FINANCIAL REPORTING

6. B Limited is a newly incorporated entity. Its first financial period ends on 31st March, 20X1. As
on the said date, the following temporary differences exist:
(a) Taxable temporary differences relating to accelerated depreciation of ` 9,000. These are
expected to reverse equally over next 3 years.
(b) Deductible temporary differences relating to preliminary expenses of ` 4,000 expected to
reverse equally over next 4 years.
It is expected that B Limited will continue to make losses for next 5 years. Tax rate is 30%.
Losses can be carried forward but not backwards.
Discuss the treatment of deferred tax as on 31 st March, 20X1.
7. X Ltd. prepares consolidated financial statements to 31st March each year. During the year
ended 31st March 2018, the following events affected the tax position of the group:
(i) Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of
` 30,00,000. Y Ltd. is unable to utilise this loss against previous tax liabilities. Income-
tax Act does not allow Y Ltd. to transfer the tax loss to other group companies. However,
it allows Y Ltd. to carry the loss forward and utilise it against company’s future taxable
profits. The directors of X Ltd. do not consider that Y Ltd. will make taxable profits in the
foreseeable future.
(ii) Just before 31st March, 2018, X Ltd. committed itself to closing a division after the year
end, making a number of employees redundant. Therefore, X Ltd. recognised a provision
for closure costs of ` 20,00,000 in its statement of financial position as at 31st March,
2018. Income-tax Act allows tax deductions for closure costs only when the closure
actually takes place. In the year ended 31st March 2019, X Ltd. expects to make taxable
profits which are well in excess of ` 20,00,000. On 31st March, 2018, X Ltd. had taxable
temporary differences from other sources which were greater than ` 20,00,000.
(iii) During the year ended 31st March, 2017, X Ltd. capitalised development costs which
satisfied the criteria in paragraph 57 of Ind AS 38 ‘Intangible Assets’. The total amount
capitalised was ` 16,00,000. The development project began to generate economic
benefits for X Ltd. from 1st January, 2018. The directors of X Ltd. estimated that the
project would generate economic benefits for five years from that date. The development
expenditure was fully deductible against taxable profits for the year ended 31st March,
2018.
(iv) On 1st April, 2017, X Ltd. borrowed ` 1,00,00,000. The cost to X Ltd. of arranging the
borrowing was ` 2,00,000 and this cost qualified for a tax deduction on 1st April, 2017.
The loan was for a three-year period. No interest was payable on the loan but the amount
repayable on 31st March, 2020 will be ` 1,30,43,800. This equates to an effective annual
interest rate of 10%. As per the Income-tax Act, a further tax deduction of ` 30,43,800
will be claimable when the loan is repaid on 31st March, 2020.

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 INDIAN ACCOUNTING STANDARD 12 10.67

Explain and show how each of these events would affect the deferred tax assets / liabilities in
the consolidated balance sheet of X Ltd. group at 31 st March, 2018 as per Ind AS. Assume the
rate of corporate income tax is 20%.
8. PQR Ltd., a manufacturing company, prepares consolidated financial statements to
31st March each year. During the year ended 31st March, 2018, the following events affected
the tax position of the group:
• QPR Ltd., a wholly owned subsidiary of PQR Ltd., incurred a loss adjusted for tax
purposes of ` 30,00,000. QPR Ltd. is unable to utilise this loss against previous tax
liabilities. Income-tax Act does not allow QPR Ltd. to transfer the tax loss to other group
companies. However, it allows QPR Ltd. to carry the loss forward and utilise it against
company’s future taxable profits. The directors of PQR Ltd. do not consider that QPR Ltd.
will make taxable profits in the foreseeable future.
• During the year ended 31st March, 2018, PQR Ltd. capitalised development costs which
satisfied the criteria as per Ind AS 38 ‘Intangible Assets’. The total amount capitalised
was ` 16,00,000. The development project began to generate economic benefits for PQR
Ltd. from 1st January, 2018. The directors of PQR Ltd. estimated that the project would
generate economic benefits for five years from that date. The development expenditure
was fully deductible against taxable profits for the year ended 31st March, 2018.
• On 1st April, 2017, PQR Ltd. borrowed ` 1,00,00,000. The cost to PQR Ltd. of arranging
the borrowing was ` 2,00,000 and this cost qualified for a tax deduction on 1st April 2017.
The loan was for a three-year period. No interest was payable on the loan but the amount
repayable on 31st March 2020 will be ` 1,30,43,800. This equates to an effective annual
interest rate of 10%. As per the Income-tax Act, a further tax deduction of ` 30,43,800
will be claimable when the loan is repaid on 31st March, 2020.
Explain and show how each of these events would affect the deferred tax assets / liabilities in
the consolidated balance sheet of PQR Ltd. group at 31st March, 2018 as per Ind AS. The rate
of corporate income tax is 30%.
9. An entity is finalising its financial statements for the year ended 31 st March, 20X2. Before 31st
March, 20X2, the government announced that the tax rate was to be amended from 40 per cent
to 45 per cent of taxable profit from 30th June, 20X2.
The legislation to amend the tax rate has not yet been approved by the legislature. However,
the government has a significant majority and it is usual, in the tax jurisdiction concerned, to
regard an announcement of a change in the tax rate as having the substantive effect of actual
enactment (i.e. it is substantively enacted).
After performing the income tax calculations at the rate of 40 per cent, the entity has the
following deferred tax asset and deferred tax liability balances:

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 10.68 FINANCIAL REPORTING

Deferred tax asset ` 80,000

Deferred tax liability ` 60,000

Of the deferred tax asset balance, ` 28,000 related to a temporary difference. This deferred
tax asset had previously been recognised in OCI and accumulated in equity as a revaluation
surplus.
The entity reviewed the carrying amount of the asset in accordance with para 56 of
Ind AS 12 and determined that it was probable that sufficient taxable profit to allow utilisation
of the deferred tax asset would be available in the future.
Show the revised amount of Deferred tax asset & Deferred tax liability and present the
necessary journal entries.
10. On 1 January 2020, entity H acquired 100% share capital of entity S for `15,00,000. The book
values and the fair values of the identifiable assets and liabilities of entity S at the date of
acquisition are set out below, together with their tax bases in entity S’s tax jurisdictions. Any
goodwill arising on the acquisition is not deductible for tax purposes. The tax rates in entity
H’s and entity S’s jurisdictions are 30% and 40% respectively.
Acquisitions Book values Tax base Fair values
`’000 `’000 `’000
Land and buildings 600 500 700
Property, plant and equipment 250 200 270
Inventory 100 100 80
Accounts receivable 150 150 150
Cash and cash equivalents 130 130 130
Accounts payable (160) (160) (160)
Retirement benefit obligations (100) - (100)

You are required to calculate the deferred tax arising on acquisition of Entity S. Also calculate
the Goodwill arising on acquisition.
Answers
1. The tax base of the asset is ` 60 (cost of ` 150 less cumulative tax depreciation of ` 90). To
recover the carrying amount of ` 100, the entity must earn taxable income of ` 100, but will
only be able to deduct tax depreciation of ` 60. Consequently, the entity will pay income taxes
of ` 10 (` 40 at 25%) when it recovers the carrying amount of the asset. The difference
between the carrying amount of ` 100 and the tax base of ` 60 is a taxable temporary difference
of ` 40. Therefore, the entity recognises a deferred tax liability of ` 10 (` 40 at 25%)
representing the income taxes that it will pay when it recovers the carrying amount of the asset.

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 INDIAN ACCOUNTING STANDARD 12 10.69

2. A taxable temporary difference of ` 5 therefore exists between the carrying value of the
investment in XYZ at the reporting date of ` 4,378 (` 4,373 + ` 5) and its tax base of ` 4,373.
Since a parent, by definition, controls a subsidiary, it will be able to control the reversal of this
temporary difference, for example - through control of the dividend policy of the subsidiary.
Therefore, deferred tax on such temporary difference is generally not provided unless it is
probable that the temporary will reverse in the foreseeable future
3. A taxable temporary difference of ` 50 therefore exists between the carrying value of the
investment in PQR at the reporting date of ` 1,050 (` 1,000 + ` 50) and its tax base of
` 1,000. As ABC Ltd. does not completely control PQR Ltd. it is not in a position to control the
dividend policy of PQR Ltd. As a result, it cannot control the reversal of this temporary
difference and deferred tax is provided on temporary differences arising on investments in joint
venture (50 x 15%).
4. Calculation of the Book Value as per financial and tax purposes.
Financial Accounting: ` 000’s
Year 1 2 3 4 5
Gross Block 100 100 100 100 100
Accumulated Depreciation 20 40 60 80 100
Carrying Amount 80 60 40 20 0
Tax Accounting: ` 000’s
Year 1 2 3 4 5
Gross Block 100 100 100 100 100
Accumulated Depreciation 25 50 75 100 100
Carrying Amount 75 50 25 0 0

Calculation of DTL: ` 000’s

Year 1 2 3 4 5
Carrying Amount 80 60 40 20 0
Tax Base 75 50 25 0 0
Difference 5 10 15 20 0
Deferred Tax Liability (Difference x 30%) 1.5 3 4.5 6 0

5. In this case there is a Deferred Tax Asset as the Tax base of assets acquired is higher by
25,000. DTA would be ` 7,500 (25,000 x 30%)
Journal entry:
Plant and equipment Dr 250
Inventory Dr 120

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 10.70 FINANCIAL REPORTING

Debtors Dr 200
Goodwill Dr 22.5 (30- 7.5)
DTA Dr 7.5
To 9% Debentures 100
To Bank 500
6. The year-wise anticipated reversal of temporary differences is as under:
Particulars Year Year Year Year
ending on ending on ending on ending on
31st March, 31st March, 31st March, 31st March,
20X2 20X3 20X4 20X5
Reversal of taxable temporary
difference relating to accelerated
depreciation over next 3 years
(` 9,000/3) 3,000 3,000 3,000 Nil
Reversal of deductible temporary
difference relating to preliminary
expenses over next 4 years
(` 4,000/4) 1,000 1,000 1,000 1,000
B Limited will recognise a deferred tax liability of ` 2,700 on taxable temporary difference
relating to accelerated depreciation of ` 9,000 @ 30%.
However, it will limit and recognise a deferred tax asset on reversal of deductible temporary
difference relating to preliminary expenses reversing up to year ending 31st March, 20X4
amounting to ` 900 (` 3,000 @ 30%). No deferred tax asset shall be recognized for the
reversal of deductible temporary difference for the year ending on 31st March, 20X5 as there
are no taxable temporary differences. Further, the outlook is also a loss. However, if there are
tax planning opportunities that could be identified for the year ending on 31st March, 20X5
deferred tax asset on the remainder of ` 1,000 (` 4,000 – ` 3,000) of deductible temporary
difference could be recognised at the 30% tax rate.
7. (i) The tax loss creates a potential deferred tax asset for the group since its carrying value
is nil and its tax base is ` 30,00,000.
However, no deferred tax asset can be recognised because there is no prospect of being
able to reduce tax liabilities in the foreseeable future as no taxable profits are anticipated.
(ii) The provision creates a potential deferred tax asset for the group since its carrying value
is ` 20,00,000 and its tax base is nil.
This deferred tax asset can be recognised because X Ltd. is expected to generate taxable
profits in excess of ` 20,00,000 in the year to 31st March, 2019.
The amount of the deferred tax asset will be ` 4,00,000 (` 20,00,000 x 20%).

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 INDIAN ACCOUNTING STANDARD 12 10.71

This asset will be presented as a deduction from the deferred tax liabilities caused by the
(larger) taxable temporary differences.
(iii) The development costs have a carrying value of ` 15,20,000 (` 16,00,000 –
(` 16,00,000 x 1/5 x 3/12)).
The tax base of the development costs is nil since the relevant tax deduction has already
been claimed.
The deferred tax liability will be ` 3,04,000 (` 15,20,000 x 20%). All deferred tax liabilities
are shown as non-current.
(iv) The carrying value of the loan at 31st March, 2018 is ` 1,07,80,000 (` 1,00,00,000 –
` 2,00,000 + (` 98,00,000 x 10%)).
The tax base of the loan is ` 1,00,00,000.
This creates a deductible temporary difference of ` 7,80,000 (` 1,07,80,000 –
` 1,00,00,000) and a potential deferred tax asset of ` 1,56,000 (` 7,80,000 x 20%).
Due to the availability of taxable profits next year (see part (ii) above), this asset can be
recognised as a deduction from deferred tax liabilities.
8. Impact on consolidated balance sheet of PQR Ltd. group at 31st March, 2018
• The tax loss creates a potential deferred tax asset for the PQR Ltd. group since its carrying
value is nil and its tax base is ` 30,00,000. However, no deferred tax asset can be
recognised because there is no prospect of being able to reduce tax liabilities in the
foreseeable future as no taxable profits are anticipated.
• The development costs have a carrying value of ` 15,20,000 (` 16,00,000 –
(` 16,00,000 x 1/5 x 3/12)). The tax base of the development costs is nil since the relevant
tax deduction has already been claimed. The deferred tax liability will be ` 4,56,000
(` 15,20,000 x 30%). All deferred tax liabilities are shown as non-current.
• The carrying value of the loan at 31st March, 2018 is ` 1,07,80,000 (` 1,00,00,000 –
` 200,000 + (` 98,00,000 x 10%)). The tax base of the loan is 1,00,00,000. This creates
a deductible temporary difference of ` 7,80,000 and a potential deferred tax asset of
` 2,34,000 (` 7,80,000 x 30%).
9. Calculation of Deductible temporary differences:
Deferred tax asset = ` 80,000
Existing tax rate = 40%
Deductible temporary differences = 80,000/40%
= ` 2,00,000
Calculation of Taxable temporary differences:
Deferred tax liability = ` 60,000

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Existing tax rate = 40%

Deductible temporary differences = 60,000 / 40%
= ` 1,50,000
Of the total deferred tax asset balance of ` 80,000, ` 28,000 is recognized in OCI
Hence, Deferred tax asset balance of Profit & Loss is ` 80,000 - ` 28,000 = ` 52,000
Deductible temporary difference recognized in Profit & Loss is ` 1,30,000 (52,000 / 40%)
Deductible temporary difference recognized in OCI is ` 70,000 (28,000 / 40%)
The adjusted balances of the deferred tax accounts under the new tax rate are:
Deferred tax asset `
Previously credited to OCI-equity ` 70,000 x 0.45 31,500
Previously recognised as Income ` 1,30,000 x 0.45 58,500
90,000
Deferred tax liability
Previously recognized as expense ` 1,50,000 x 0.45 67,500
The net adjustment to deferred tax expense is a reduction of ` 2,500. Of this amount,
` 3,500 is recognised in OCl and ` 1,000 is charged to P&L.

The amounts are calculated as follows:

Carrying Carrying Increase (decrease)
amount amount in deferred tax
at 45% at 40% expense
Deferred tax assets
Previously credited to OCI-equity 31,500 28,000 (3,500)
Previously recognised as Income 58,500 52,000 (6,500)
90,000 80,000 (10,000)
Deferred tax liability
Previously recognized as expense 67,500 60,000 7,500
Net adjustment (2,500)

An alternative method of calculation is: `

DTA shown in OCI ` 70,000 x (0.45 - 0.40) 3,500
DTA shown in Profit or Loss ` 1,30,000 x (0.45-0.40) 6,500
DTL shown in Profit or Loss ` 1,50,000 x (0.45 -0.40) 7,500

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 INDIAN ACCOUNTING STANDARD 12 10.73

Journal Entries
` `
Deferred tax asset Dr. 3,500
OCI –revaluation surplus 3,500
Deferred tax asset Dr. 6,500
Deferred tax expense 6,500
Deferred tax expense Dr. 7,500
Deferred tax liability 7,500

Alternatively, a combined journal entry may be passed as follows:

` `
Deferred tax asset Dr. 10,000
Deferred tax expense Dr. 1,000
To OCI –revaluation surplus 3,500
To Deferred tax liability 7,500

10. Calculation of Net assets acquired (excluding the effect of deferred tax liability):
Net assets acquired Tax base Fair values
`’000 `’000
Land and buildings 500 700
Property, plant and equipment 200 270
Inventory 100 80
Accounts receivable 150 150
Cash and cash equivalents 130 130
Total assets 1,080 1,330
Accounts payable (160) (160)
Retirement benefit obligations - (100)
Net assets before deferred tax liability 920 1,070

Calculation of deferred tax arising on acquisition of entity S and goodwill

`’000 `’000
Fair values of S’s identifiable assets and liabilities 1,070
(excluding deferred tax)

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 10.74 FINANCIAL REPORTING

Less: Tax base (920)

Temporary difference arising on acquisition 150
Net deferred tax liability arising on acquisition of entity 60
S (`150,000 @ 40%)
Purchase consideration 1,500
Less: Fair values of entity S’s identifiable assets and 1,070
liabilities (excluding deferred tax)
Deferred tax liability (60) (1,010)
Goodwill arising on acquisition 490

Note: Since, the tax base of the goodwill is nil, taxable temporary difference of `4,90,000 arises
on goodwill. However, no deferred tax is recognised on the goodwill. The deferred tax on other
temporary differences arising on acquisition is provided at 40% and not 30%, because taxes
will be payable or recoverable in entity S’s tax jurisdictions when the temporary differences will
be reversed.

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