IND AS 12: INCOME TAXES 203

INDIAN ACCOUNTING STANDARD 12

INCOME TAXES

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 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)
204 ACCOUNTS

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%
(c) Depreciation amount -SLM 1.621 1,621 1,621 1,621
(d) Accounting profit 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& 2 ` 234 in
year2) is made.
The provision of differential should have been made by the entity following there 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 based. This
method is known as balance sheet approach.
 IND AS 12: INCOME TAXES 205

This Accounting standard though titled as ‘income taxes’ primarily deals with deferred tax
though guidance is provided on current tax.

Differences

Temporary Other than Temporary

Differences differences

Taxable Temporary Deductible Temporary

Cannot be
Difference (Results in Deference (Results in
reversed
DTL) DTA)

• 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

Tax Accounting

Transactions and Events Transactions and Events

recognised Outside Profit recognised in profit in
and Loss Loss

Related Tax effects Related Tax Effect Related tax effects

recognised in other recognised in Statement also recognised in
comprehensive Income of Changes in Equity profit or Loss
 206 ACCOUNTS

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 profit (loss) for a period, computed as per the income tax
act, upon which income taxes are payable (recoverable).
(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 amount 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 amounts of an assets
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 amount 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
 IND AS 12: INCOME TAXES 207

PART A: TAX EXPENSE (TAX INCOME)

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

PART B: CURRENT TAX

Current tax

Current tax is the amount of income taxes payable (recoverable) in respect of the taxable
profit (tax loss) for a period.

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 crystallizes only on preparation and finalization
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.
♦ Further, wherever tax loss of a reporting period could be carried backwards, the
entity is eligible as per tax laws to a benefit. The entity recognises this benefit
as an asset in the period in which the tax loss occurs because it is probable that
the benefit will flow to the entity and the benefit can be reliably measured.
 208 ACCOUNTS

Example
An entity has An entity has paid a tax in the previous year on a profit of
` 5, 00,000 and suffered a loss in the current year of ` 6, 00,000. Such loss
` 6, 00,000 can be adjusted against the loss to the extent of ` 5, 00,000 and
the entity will create tax asset to that extent. It is called carry backward of
losses.

♦ Thus, the benefit relating to a tax loss that can be carried back to recover
current tax of a previous period shall be recognised as an asset.

PART C: DEFERRED TAX, ITS RECOGNITION,

MEASUREMENT AND PRESENTAITON

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
Step 4: Classify temporary differences into either:
♦ Taxable temporary difference
♦ Deductible temporary difference

Temporary Differences

Deferred Tax Assets Deferred Tax Liabilities

In respect of In respect of In respect of In respect

Deductible carry forward Carry forward of Taxable
Temporary of unused tax of Unused tax Temporary
Differences losses Credit losses Differences

Hitherto, In India entities have been determining deferred tax based on Accounting standard
(AS) 22, accounting for Taxes on Income, as notified in companies (Accounting Standards)
Rules, 2006. The concept there is of timing difference; and permanent difference’. Based
 IND AS 12: INCOME TAXES 209

upon the nature of difference, deferred tax liabilities or assets are recognised. The Ind
AS 12 is based on the concept of temporary difference. As per Ind AS 12, there are only
temporary differences, no permanent differences and timing differences are a component
of temporary differences. The concept of temporary differences’ is core of this Ind AS
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
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)

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
reversed, therefore the term ‘temporary difference ‘is used. The cumulative impact is
zero’.

Example
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 depreciate the asset on SLM basis. The tax rate
is 30%. The tax depreciation is as assumed in the computation below.

The following computations are perfromed.

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
210 ACCOUNTS

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 @ 30% 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

Based on the above discussions, a matrix as under may be drawn:

For Assets For Liabilities

If carrying amount > tax base TaxableTemporary Difference Deductible Temporary
Deferred Tax Liability Difference
Deferred Tax Asset
If carrying amount < tax base Deductible Temporary Taxable Temporary
Difference Difference
Deferred Tax Asset Deferred Tax Liability
If carrying amount = tax base No temporary difference No temporary difference

Further examples of Taxable temporary differences:

• Transactions that affect profit or loss

Example
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
 IND AS 12: INCOME TAXES 211

Example
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.

Example
Depreciation of an asset is accelerated for tax purpose.

Example
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.

Example
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
Depreciation of an asset is not deductible for tax purposes and no deduction will be
available for tax purposes when the asset is sold of scrapped.

Example
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

Example
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 of prior periods.
212 ACCOUNTS

Example
The liability component of a compound financial instrument (for example a convertible
bond) is measured at 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
Financial assets are carried at fair value which exceeds cost but no equivalent adjustment
is made for tax purposes.

Example
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.

• Business combinations and consolidation

Example
The carrying amount of an asset is increased to fair value in a business combination and
no equivalent adjustment is made for tax purposes.

Example
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.

Example
Unrealized losses resulting from intragroup transactions are eliminated by inclusion in
the carrying amount of inventory of property, plant and equipment.

Example
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.

Example
Investment in foreign subsidiaries, branches or associates or interests in foreign joint
ventures are affected by changes in foreign exchange rate.
 IND AS 12: INCOME TAXES 213

Example
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 different currency.

Further examples of deductible temporary differences:

Transactions that affect profit of loss

Example
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.)

Example
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.

Example
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.)

Example
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.

Example
Preliminary expenses (or organization 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.
214 ACCOUNTS

Example
Income is deferred in the balance sheet but has already been included in taxable profit
in current or prior periods.

Example
A government grants which is included in the balance sheet as deferred income will not
be taxable in future periods.

• Fair value adjustments and revaluation

Example
Financial assets are carried at fair which is less than cost, but no equivalent adjustment
is made for tax purposes.

• Business combinations and consolidation

Example
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.

Example
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.

Example
Investments in foreign subsidiaries branches or associates or interests in foreign joint
ventures are affected by changes in foreign exchange rates.

Example
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.
 IND AS 12: INCOME TAXES 215

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.

(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 forward 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 recognises 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).
216 ACCOUNTS

  QUESTION 1

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 profit 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.

  QUESTION NO 2

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
` 10,000 and the tax rate was 25% On February 28, 20X1, the finance bill is introduced in
the legislation that changes the tax rate to 30%. The finance bill is enacted as Act on May
21, 20X2. Discuss the treatment of deferred tax in case tax reporting date of A Limited’s
financial statement is December 31, 20X1 and these are approved for issued on May 31,
20X2.

  QUESTION NO 3

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.

  QUESTION NO 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%. (Depreciation rate for tax purposes is 25%. 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.

  QUESTION NO 5

A Ltd. Acquired B Ltd. the following assets and liabilities are acquired in a business
combination.
 IND AS 12: INCOME TAXES 217

` 000’s

Fair value Carrying amount Temporary

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 __

Calculate Deferred Tax Asset.

  QUESTION NO 6

XYZ Ltd. proposes to issue 1000 shares to its 200 employees under ESOP. (Vesting condition:
continuous employment for 3 years). 10% labour turnover is observed and value of option is
` 40. Calculate Deferred Tax Asset. What is if the entity gets a deduction of ` 19,00,000
(say as per tax law share based payment is measured differently) instead of ` 17,49,600 ?

  QUESTION NO 7

B Limited is a newly incorporated entity. Its first financial period ends on March 31, 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 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 March 31, 20X1.
218 ACCOUNTS

  QUESTION NO 8

A company ABC Limited prepares its accounts annually on 31st March. On 1ST April 2001 it
purchases a machine at a cost of Rs. 1,50,000. The machine has a useful life of three years
and an expected scrap value of Zero. Although it is eligible for a 100% first year depreciation
allowance for the tax purposes, the straight line method is considered appropriate for
accounting purposes. ABC Limited has profits before depreciation and taxes of Rs. 2,00,000
each year and the corporate tax rate is 40per cent each year.

  QUESTION NO 9

In above illustration, the corporate tax rate has been assumed to be same in each of the
three years. If the rate of tax is assumed 40%, 35% and 38% respectively, compute the
amount of deferred tax liability?

  QUESTION NO 10

A company ABC Limited prepares its accounts annually on 31st March. The company has
incurred a loss of Rs.1,00,000 in the year 2001 and made profits of Rs.50,000 and 60,000 in
year 2002 and 2003 respectively. It is assumed that under the tax laws, loss can be carried
forward for 8 years and tax rate is 40% and at the end of year 2001. It was virtually
certain, supported by convincing evidence, that the company would have sufficient taxable
income in the future years against which unabsorbed depreciation and carry forward of
losses can be set off. It is also assumed that there is no difference between taxable
income and accounting income except that set off of loss is allowed in years 2002 and 2003
for tax purpose.

  QUESTION NO 11

Liverpool Limited has three financial statement elements for year ended 31.03.2001, the
book value and tax basis value is given below:-

Book value tax value

Equipment 2,00,000 1,20,000
Prepaid insurance 75,000 Nil
Warranty liability 50,000 Nil

Calculate the deferred tax asset/liability. Tax rate is 40%.

 IND AS 12: INCOME TAXES 219

EXTRA QUESTIONS ON IND AS 12

  QUESTION 12

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?

  QUESTION 13

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.
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.

  QUESTION 14

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
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.
 220 ACCOUNTS

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 ` 1 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.

  QUESTION 15

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.

  QUESTION 16

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.
 IND AS 12: INCOME TAXES 221

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.

  QUESTION 17

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

  QUESTION 18

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
222 ACCOUNTS

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%.

  QUESTION 19

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.

  QUESTION 20

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.

  QUESTION 21

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:
 IND AS 12: INCOME TAXES 223

(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.
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 31st March, 2018 as per Ind AS.
Assume the rate of corporate income tax is 20%.

  QUESTION 22

(RTP MAY 2019…..Q2….ALREADY DISCUSSED IN RTP VIDEO)

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:
224 ACCOUNTS

 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%.

  QUESTION 23

(RTP NOV 2019….Q19….ALREADY DISCUSSED IN RTP VIDEO)

An entity is finalising its financial statements for the year ended 31st 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:
 IND AS 12: INCOME TAXES 225

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.

  QUESTION 24

(TAX BENEFITS ON INDEXATION OF ASSETS TO BE SOLD IN NEAR FUTURE)

(1) Cost of acquired land 1,00,000
(2) Index rate per annum 10% p.a.
(3) Land will be held for 2 years
(4) Tax rate 30%
Calculate deferred tax due to indexation of asset. What will be your answer if the given
Asset will be held for long term purpose and sale is not expected in near future.

  QUESTION 25

(DTL ON GOODWILL IN BUSINESS COMBINATION IF TAX BASE IS NIL)

A limited acquired B limited for 1,00,000. The net assets of B limited are to be assumed
65,000. Assume Tax base of goodwill is zero. Tax rate 30%. Show the entry at the time of
business combination including deferred tax on goodwill.

  QUESTION 26

(RECONCILIATION STATEMENT)
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. Show reconciliation statement.
226 ACCOUNTS

  QUESTION 271

(RECONCILIATION IN DIFFERENT TAX JURISDICTION)

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.
 IND AS 12: INCOME TAXES 227

SELF READING EXAMPLES GIVEN IN STUDY MATERIAL

  EXAMPLE 1

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.

  EXAMPLE 2

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.

Particulars Year (` )
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 - -
228 ACCOUNTS

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.