Tega Industries Limited
Indian Accounting Standards (Ind AS) - Training
Ind AS 12 – Income taxes
Scope and key terms
Objective
▪ Prescribe accounting treatment for current income taxes and future tax
consequences i.e. deferred taxes.
▪ Deferred tax effects on business combinations and unused tax losses or
credit.
▪ Presentation and disclosure requirements
Scope
▪ Apply to all income taxes (domestic & foreign) based on “taxable profit”
▪ Includes withholding tax (payable by subsidiary on distribution by parent)
▪ Excludes other taxes (VAT/business taxes) and method of accounting for
government grants.
Slide 3
Approach for Deferred Tax – 9 step
9. Disclosure
7. Recognise
Deferred
tax
5. Determine
tax rates
3. Calculate
temporary
differences
1. Determine 8. Presentation
the book and
bases offsetting
6. Consider
recoverability
of DTAs
4. Identify
exceptions
2. Determine
the tax
base
Slide 4
Income Taxes - Basic
Tax Expenses
1. Current Tax Payable 2. Deferred Taxes
Deferred tax shall be
recognised on all the
temporary differences, apart
from limited exceptions
Balance sheet approach
Slide 5
Ind AS 12 – Income taxes
Balance sheet liability method to calculate deferred tax
Carrying amount of asset / liability X
Tax Base of asset/liability X
Temporary difference X
@ applicable tax rate X%
Deferred tax asset / liability X
Slide 6
Ind AS 12 – Income taxes
Tax base
Tax base
Carrying amount – future taxable amount + future deductible amount
of asset
Tax base
of liability Carrying amount – future deductible amount + future taxable amount
Slide 7
Tax Base of an Asset
Tax base
Carrying amount – future taxable amount + future deductible amount
of asset
Examples:
1. A machine cost Rs. 100. For tax purposes, depreciation of Rs. 30 has already been deducted in the
current period and book depreciation is Rs. 20. Revenue generated by using the machine is taxable
The tax base of the machine is Rs. 70 (80-80+70)
2. Interest receivable has a carrying amount of Rs. 100. The related interest revenue will be taxed on
a cash basis.
The tax base of the interest receivable is nil. (100-100+0)
Slide 8
Tax Base of a Liability
Tax base
Carrying amount – future deductible amount + future taxable amount
of liability
Examples:
1. Current liabilities include accrued expenses with a carrying amount of Rs. 100. The related
expense will be deducted for tax purposes on a cash basis
The tax base of the accrued expenses is nil (100-100+0)
2. Current liabilities include interest income received in advance, with a carrying amount of Rs. 100.
The related interest income was taxed on a cash basis.
The tax base of the interest received in advance is nil (100-100+0)
Slide 9
Understanding Temporary difference
Temporary differences are the differences between the carrying amount of an asset or
liability and its tax base.
TAXABLE TEMPORARY DIFFERENCE give rise to future
Temporary taxable amounts
Differences DEDUCTIBLE TEMPORARY DIFFERENCE give rise to
future tax deductible amounts
The following are examples of temporary differences:
a) An item of income or expenditure is included in accounting profit of the period, but
recognised in taxable profit in later periods, eg gratuity accrual.
b) Assets are revalued and no equivalent adjustment is made for tax purposes.
c) The tax base of an asset/liability on initial recognition differs from initial carrying
amount eg. when an entity benefits from non-taxable government grants related to
assets.
d) Identifiable assets & liabilities of business combination recognised at fair value but
no adjustment for the same is made for tax purpose.
e) Goodwill arises in business combination.
f) Difference in carrying amount and tax base of investment in subsidiaries, associates,
JV, branches. Slide 10
Temporary Difference Exceptions (Only three)
Initial recognition of an
asset or liability in a
Investment in
Initial recognition of transaction that is not a
subsidiaries, branches,
goodwill arising in a business combination
associates and joint
business combination and that affects neither
venture
accounting profit nor
taxable profit
Goodwill is a residual amount
and recognition of DTL on
goodwill will increase the
carrying amount of goodwill
that would not add to the
relevance of financial
reporting
Slide 11
Temporary Difference Exceptions (Contd.)
Temporary difference arising on initial recognition of an asset or liability
Does the temporary difference arise on initial No
recognition of an asset or liability?
Yes
Was the asset or liability acquired in a Yes
Recognise deferred tax
business combination?
liability or asset (subject to
other exceptions)
No
Does the transaction giving rise to the asset Yes
or liability affect either accounting profit or
taxable profit at the time of the transaction?
No
Do not recognise deferred tax
Slide 12
Example - Initial recognition exception
A company acquired an intangible asset (a licence) for Rs 100,000 that has a life
of five years. The asset will be solely recovered through use. No tax deductions
can be claimed either as the licence is amortised or when it expires. No tax
deductions are available on disposal. Trading profits from using the licence will
be taxed at 30%.
Whether deferred tax shall be recognised on the temporary difference on
Intangible assets acquired and if yes then what amount?
The tax base of the asset is nil as the cost of the intangible asset is not
deductible for tax purposes either in use or on disposal. Therefore, a
temporary difference of Rs 100,000 arises on which prima facie a deferred
tax liability of Rs 30,000 should be recognised. However, in accordance with
the exception, no deferred tax is recognised on the asset's initial recognition
that arose from a transaction that was not a business combination and did
not affect accounting or taxable profit at the time of the recognition.
Slide 13
Unused tax losses and unused tax credits
Deferred tax asset shall be recognized for :
• the 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 utilized.”
• The criteria for recognizing deferred tax assets arising from the carryforward of unused tax losses
and tax credits are the same as the criteria for recognizing deferred tax assets arising from
deductible temporary differences.
• The term 'probable' is not defined in Ind AS 12; but in Ind AS 105 ‘probable' is defined
as ‘more likely than not‘.
Slide 14
Unused tax losses and unused tax credits
Guidance for entities with history of tax losses and unused tax credits
3. It could be 1. Convincing
argued that the evidence that
probability of sufficient taxable
taxable profits profit will be
decreases over available
time
2. A history of recent losses creates a level of
uncertainty about an entity’s future
profitability that could be difficult to rebut.
Slide 15
Unused tax losses and unused tax credits
Key Considerations
Consistency
with
Impairment
and Going
Concern
Assessments
Alignment
Alternative with
method of business
assessment plans for
– PwC TIAG future
analysis taxable
income
Slide 16
Example – Recovery of deferred tax asset against
deferred tax liabilities
An entity has taxable temporary differences of Rs. 80,000 in respect of fair value adjustments in a
business combination. The reversal of the temporary differences is expected to result in taxable
income of Rs. 20,000 a year in years 1 to 4.
The entity also has a warranty provision of Rs. 40,000, that is expected to be deductible for tax
purposes, as follows: Rs. 30,000 in year 2; and Rs. 10,000 in year 3. In addition, the entity has
unused tax losses of Rs. 60,000.
How would the deferred tax be recognized?
Slide 17
Example – Recovery of deferred tax asset against
deferred tax liabilities continued..
A schedule of the reversal of temporary differences and the utilisation of tax losses carried
forward is shown below:
Year 1 Year 2 Year 3 Year 4
Taxable temporary differences – expected reversal profile
Beginning of year 80,000 60,000 40,000 20,000
Recognised in taxable income (20,000) (20,000) (20,000) (20,000)
End of year 60,000 40,000 20,000 -
Deductible temporary differences – expected reversal profile
(a) Warranty provisions
Beginning of year 40,000 40,000 10,000
Deducted for tax purposes - (30,000) (10,000)
End of year 40,000 10,000 - -
(b) Tax losses
Beginning of year 60,000 40,000 50,000 40,000
Increase (utilisation) in year (20,000) 10,000 (10,000) (20,000)
End of year 40,000 50,000 40,000 20,000
Total deductible temporary differences 80,000 60,000 40,000 20,000
Slide 18
Example – Recovery of deferred tax asset against
deferred tax liabilities continued..
At the end of year 1, the entity recognises a deferred tax asset in respect of at least Rs. 60,000 of
the deductible temporary differences and tax losses at the appropriate tax rate. This is because
there are taxable temporary differences in respect of deferred tax liabilities of the same amount
that are expected to be included in taxable income, and against which the expected reversal of
deductible temporary differences and the tax losses can be utilised.
For similar reasons, a deferred tax asset in respect of at least Rs. 40,000 of deductible
temporary differences and tax losses would be recognised at the end of year 2, and Rs. 20,000
at the end of year 3, where circumstances remained the same at those dates.
However, in order to recognise a deferred tax asset in any of years 1 to 4 with respect to the
Rs. 20,000 of tax losses that remain un-utilised, the entity might need to look for sources of
taxable profit other than reversals of temporary differences.
Slide 19
Income Taxes
Check your understanding - Tax Base of an Assets
Scenarios Tax Base
A machine cost Nu.100. For tax purposes, depreciation of Nu.30 has
already been deducted in the current and prior periods and the
remaining cost will be deductible in future periods, either as
1 depreciation or through a deduction on disposal. Revenue generated Nu. 70
by using the machine is taxable, any gain on disposal of the machine
will be taxable and any loss on disposal will be deductible for tax
purposes.
Interest receivable has a carrying amount of Nu.100. The related Nil
2
interest revenue will be taxed on a cash basis.
Trade receivables have a carrying amount of Nu.100. The related Nu. 100
3
revenue has already been included in taxable profit (tax loss).
Inventory of Nu. 100 in the balance sheet will be recovered in the Nu. 100
4
next period through transfer to cost of sales.
A loan receivable has a carrying amount of Nu. 100. The repayment Nu. 100
5
of the loan will have no tax consequences.
Slide 20
Check your understanding - Tax Base of a Liability
Scenarios Tax Base
Current liabilities include accrued expenses with a carrying amount
1 of Nu.100. The related expense will be deducted for tax purposes on Nil
a cash basis.
Current liabilities include accrued expenses with a carrying amount
2 of Nu.100. The related expense has already been deducted for tax Nu. 100
purposes.
Current liabilities include accrued fines and penalties with a
3 carrying amount of Nu.100. Fines and penalties are not deductible Nu. 100
for tax purposes.
A loan payable has a carrying amount of Nu.100. The repayment of Nu. 100
4
the loan will have no tax consequences.
Slide 21
Check your understanding– Temporary difference
Temporary
Scenarios
difference
A machine has cost Nu. 200 and now has a net book value of Nu. (60)
1 150. For tax purposes, the cumulative depreciation (i.e. total tax
DTL
allowances to date) is Nu. 110.
An entity recognises a liability of Nu. 100 for product warranty
2 costs. For tax purposes, the warranty costs are deductible only 100
when claims are made. DTA
An entity has taken out a foreign currency loan of $ 100 that is
recorded at Nu. 6,250. At the reporting date, the carrying amount
(500)
3 of the loan is Nu. 5,750. The unrealised exchange gain of Nu. 500
is included in profit or loss, but will be taxable when the gain is DTL
realised on repayment of the loan.
Provision for doubtful debts made in accounting books for Nu. 200
200
4 but same will be allowed for tax purpose only when debts will be
written off. DTA
Slide 22
Temporary differences - Where to give effect
Deferred Tax effect: Account for deferred tax consequences of
transaction in same way that it account for transaction
themselves.
Situation Where deferred tax is recorded
General rule Income statement
Adjustment to FV on acquisition Adjust goodwill
Transaction or event recognised in Equity/OCI
equity/ OCI
Slide 23
Exercise I – Identification of Tax base
Statement of financial position
Assets 2018 Tax implication
Cash and cash equivalents 230 No tax implication
Trade receivable 1,900 Includes provision for bad
debts amounting to Nu. 400,
which are allowed under tax
on actual bad debts basis
Other receivable 1,000 No tax implication
Investments 2,500 Cost of investments is Nu.
2,000, Nu. 500 is the fair
value gain
Property, plant and equipment 2,280 WDV as per income tax is
2,070
Total assets 7,910
Slide 24
Exercise I - Identification of Tax base continued
Statement of financial position
Liabilities 2018 Tax implication
Trade payables 250 No tax implication
Interest payable 230 No tax implication
Income taxes payable 400 No tax implication
Provision for gratuity 1,260 Allowed under tax on
payment basis
Total liabilities 3,180
Shareholders’ equity
Share capital 1,500 No tax implication
Retained earnings 3,230 No tax implication
Total shareholders’ equity 4,730
Total liabilities and shareholders’ 7,910
equity
Slide 25
Solution - Identification of Tax base
Statement of financial position
Assets Book base Tax Base Temporary
difference
Cash and cash equivalents 230 230 -
Trade receivable 1,900 2300 400
Other receivable 1,000 1,000 -
Investments 2,500 2,000 500
Property, plant and equipment 2,280 2,070 210
Total assets 7,910
Liabilities
Trade payables 250 250 -
Interest payable 230 230 -
Income taxes payable 400 400 -
Provision for gratuity 1,260 - 1,260
Total liabilities 3,180
Slide 26
Solution - Identification of Tax base continued
Statement of financial position
Particulars Book base Tax Base Temporary
difference
Shareholders’ equity
Share capital 1,500 1,500 -
Retained earnings 3,230 3,230 -
Total shareholders’ equity 4,730
Total liabilities and 7,910
shareholders’ equity
Slide 27
Exercise II - Tax reconciliation
Statement of comprehensive income
2018
Sales 80,425
Cost of sales (66,000)
Gross profit 14,425
Depreciation (4,800)
Administrative and selling expenses (910)
Interest expense (400)
Dividend income 460
Profit before taxation 8,775
Current tax 3,570
Deferred tax 420
Total tax expense 3,990
Profit for the year 4,785
Other comprehensive income (1,200)
Total comprehensive income 3,585
Slide 28
Exercise II - Tax reconciliation - continued
Current tax expense
2018
Accounting profit 8,775
Add
Depreciation for accounting purposes 4,800
Charitable donations 500
Fine for environmental pollution 700
Product development costs 250
Healthcare benefits 2,000
17,025
Deduct
Depreciation for tax purposes (8,100)
Taxable profit 8,925
Current tax expense at 40% 3,570
Slide 29
Solution - Tax reconciliation
Income tax reconciliation
2018
Accounting profit 8,775
Tax at the applicable tax rate of 40% 3,510
Tax effect of expenses that are not deductible in determining taxable profit:
Charitable donations 200
Fine for environmental pollution 280
Tax expense 3,990
Tax expense as per books 3,990
Difference -
Slide 30
Uncertain Tax Positions
• An entity’s tax position might be uncertain for example , where the tax treatment of an item of
expense or structured transaction may be challenged by the tax authorities.
• Uncertainties in income taxes are not addressed specifically in Ind AS 12.
• Ind AS 37 excludes income taxes from its scope
• When management considers uncertain tax position individually, it should first consider whether
each position taken in the return is probable of being sustained on examination by the tax
authority.
• The liability is measured using either expected value (weighted average probability) approach or a
single best estimate of the most likely outcome. The current tax liability includes the total liability
for uncertain tax position
Slide 31
Uncertain Tax Positions
• Example:
Entity K has included deductions in a tax return that might be challenged by the tax authorities.
Entity K and its tax consultants estimate the probability of additional tax payable as follows:
Potential tax Individual Cumulative Probability weighted
payable probability probability calculation
800 15% 15% 120
600 30% 45% 180
400 20% 65% 80
200 20% 85% 40
0 15% 100% 0
Total 420
• Most likely outcome INR 600.
• Probability weighted outcome INR 420.
Slide 32
Ind AS 12 – Income taxes
Consolidation - outside basis
So far we have been thinking But, what about
about accounts at this level consolidated
accounts?
Parent
Joint
Subsidiary Associate
Venture
Slide 33
Ind AS 12 – Income taxes
Consolidation - outside basis vs inside basis
Deferred tax
Parent
Subsidiary Joint Associate
Venture
Slide 34
Ind AS 12 – Income taxes
Consolidation - outside basis example
• On 31 Dec 2015 JCN acquired a 30% stake in a Chinese laptop manufacturer
for INR 1000M and accounted for it as an associate.
• In 2016, the associate generated a profit of INR 60M.
• JCN expects to realize its investment through sale. Capital gains tax of 10%
would be levied on sale.
How would you have accounted for the deferred tax on share of
profit of the associate under Indian GAAP?
Solution
Do Nothing !
Slide 35
Ind AS 12 – Income taxes
Consolidation - outside basis example
• On 31 Dec 2015 JCN acquired a 30% stake in a Chinese laptop manufacturer
for INR 1000M and accounted for it as an associate.
• In 2016, the associate generated a profit of INR 60M.
• JCN expects to realize its investment through sale. Capital gains tax of 10%
would be levied on sale.
How will you account for the deferred tax on share of profit of the
associate under Ind AS?
Solution: In consolidation, JCN accounts for its share in profit of the associate
as INR 18 million and recognises a deferred tax liability of Rs. 1.8 million on
unremitted profits of INR 18 million at rate of 10%.
DTL not to be recognised if:
• JCN can control the timing of the reversal of temporary difference i.e. declaration of
dividend ; AND
• It is probable that the temporary difference will not reverse in the foreseeable future
Generally, this may be possible in case of dividends from subsidiaries.
Slide 36
Special Considerations
The measurement shall reflect the tax consequences
1 Example : An item of property, plant and equipment has a carrying amount of Rs. 100
and a tax base of Rs. 60. A tax rate of 20% would apply if the item were sold and a tax rate
of 30% would apply to other income.
Discounting
2 • Deferred tax assets and liabilities
• Current tax assets and liabilities
The carrying amount shall be reviewed at the end of each reporting period
3
Reduce / Increase the carrying amount of a deferred tax asset /liability
Items recognized outside profit or loss
4 Current tax and deferred tax shall be recognized outside profit or loss if the tax relates to
items that are recognized outside profit or loss. In other comprehensive income or directly
in equity
Offset tax assets and deferred tax liabilities
5 • The entity has a legally enforceable right to set off and
• Relate to income taxes levied by the same taxation authority.
Slide 37
Any questions?
Slide 38
Thank You
This publication does not constitute professional advice. The information in
this publication has been obtained or derived from sources believed by Price
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