Examples of temporary differences-

A. Examples of circumstances that give rise to taxable temporary differences-

All taxable temporary differences give rise to a deferred tax liability.

Transactions that affect profit or loss-

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.
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. (note: as explained in B3 below, 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 comprehensive income 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 statement of financial position-

6 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. (note: paragraph 15(b) of the Standard prohibits recognition of the resulting
deferred tax liability unless the asset was acquired in a business combination, see also paragraph 22 of the
Standard.)
7 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. (notes: (1) the taxable temporary difference is the amount of transaction costs already deducted in
 determining the taxable profit of current or prior periods, less the cumulative amount amortised to accounting profit;
and (2) as the initial recognition of the loan affects taxable profit, the exception in paragraph 15(b) of the
Standard does not apply. Therefore, the borrower recognises the deferred tax liability.)
8 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. (notes: (1) the taxable temporary
difference is the amount of unamortised transaction costs; and (2) paragraph 15(b) of the Standard prohibits
recognition of the resulting deferred tax liability.)
9 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 IAS 32 Financial Instruments: Presentation). The discount is
not deductible in determining taxable profit (tax loss).

Fair value adjustments and revaluations-

10 Financial assets or investment property are carried at fair value which exceeds cost but no equivalent adjustment
is made for tax purposes.
11 An entity revalues property, plant and equipment (under the revaluation model treatment in IAS 16 Property, Plant
and Equipment) but no equivalent adjustment is made for tax purposes. (note: paragraph 61A of the Standard
requires the related deferred tax to be recognised in other comprehensive income .)

Business combinations and consolidation-

12 The carrying amount of an asset is increased to fair value in a business combination and no equivalent adjustment
is made for tax purposes. (Note that on initial recognition, the resulting deferred tax liability increases goodwill or
decreases the amount of any bargain purchase gain recognised. See paragraph 66 of the Standard.)
13 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. ( Note that paragraph 15(a) of the Standard prohibits
recognition of the resulting deferred tax liability.)
14 Unrealised losses resulting from intragroup transactions are eliminated by inclusion in the carrying amount of
 inventory or property, plant and equipment.
15 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.
(note: paragraph 39 of the Standard prohibits recognition of the resulting deferred tax liability if the parent,
investor or venturer is able to control the timing of the reversal of the temporary difference and it is probable that
the temporary difference will not reverse in the foreseeable future .)
16 Investments in foreign subsidiaries, branches or associates or interests in foreign joint ventures are affected by
changes in foreign exchange rates. (notes: (1) there may be either a taxable temporary difference or a deductible
temporary difference; and (2) paragraph 39 of the Standard prohibits recognition of the resulting deferred tax
liability if the parent, investor or venturer is able to control the timing of the reversal of the temporary difference
and it is probable that the temporary difference will not reverse in the foreseeable future.)
17 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. (notes: (1) there may be either a taxable temporary difference or a
deductible temporary difference; (2) where there is a taxable temporary difference, the resulting deferred tax
liability is recognised (paragraph 41 of the Standard); and (3) the deferred tax is recognised in profit or loss,
see paragraph 58 of the Standard.)

Hyperinflation-
18 Non-monetary assets are restated in terms of the measuring unit current at the end of the reporting period
(see IAS 29 Financial Reporting in Hyperinflationary Economies) and no equivalent adjustment is made for tax
purposes. (notes: (1) the deferred tax is recognised in profit or loss; and (2) if, in addition to the restatement, the
non- monetary assets are also revalued, the deferred tax relating to the revaluation is recognised in other
comprehensive income and the deferred tax relating to the restatement is recognised in profit or loss.)
B. Examples of circumstances that give rise to deductible temporary differences-
All deductible temporary differences give rise to a deferred tax asset. However, some deferred tax assets
may not satisfy the recognition criteria in paragraph 24 of the Standard.
Transactions that affect profit or loss-
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 product warranty costs
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.
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. (note: as
explained in A2 above, 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 Research costs (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 statement of financial position but has already been included in taxable profit in current or
prior periods.
7 A government grant which is included in the statement of financial position as deferred income will not be taxable
in future periods. (note: paragraph 24 of the Standard prohibits the recognition of the resulting deferred tax
asset, see also paragraph 33 of the Standard.)

Fair value adjustments and revaluations-

8 Financial assets or investment property are carried at fair value which is less than cost, but no equivalent
adjustment is made for tax purposes.

Business combinations and consolidation-

9 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. (Note that the resulting deferred tax asset decreases goodwill or
increases the amount of any bargain purchase gain recognised. See paragraph 66 of the Standard.)
10 [Deleted]
11 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.
12 Investments in foreign subsidiaries, branches or associates or interests in foreign joint ventures are affected by
changes in foreign exchange rates. (notes: (1) there may be a taxable temporary difference or a deductible
temporary difference; and (2) paragraph 44 of the Standard requires recognition of the resulting deferred tax
asset to the extent, and only to the extent, that it is probable that: (a) the temporary difference will reverse in the
foreseeable future; and (b) taxable profit will be available against which the temporary difference can be utilised).
13 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. (notes: (1) there may be either a taxable temporary difference or a
deductible temporary difference; (2) where there is a deductible temporary difference, the resulting deferred tax
asset is recognised to the extent that it is probable that sufficient taxable profit will be available (paragraph 41 of
the Standard); and (3) the deferred tax is recognised in profit or loss, see paragraph 58 of the Standard.)
C. Examples of circumstances where the carrying amount of an asset or liability is equal
to its tax base-
1 Accrued expenses have already been deducted in determining an entity’s current tax liability for the current or
earlier periods.
2 A loan payable is measured at the amount originally received and this amount is the same as the amount repayable
on final maturity of the loan.
3 Accrued expenses will never be deductible for tax purposes.
4 Accrued income will never be taxable.

Illustrative computations and presentation-

Extracts from statements of financial position and statements of comprehensive income are provided to
show the effects on these financial statements of the transactions described below. These extracts do not
necessarily conform with all the disclosure and presentation requirements of other Standards.

All the examples below assume that the entities concerned have no transaction other than those described.

Example 1 – Depreciable assets

An entity buys equipment for 10,000 and depreciates it on a straight-line basis over its expected useful life
of five years. For tax purposes, the equipment is depreciated at 25% a year on a straight-line basis. Tax
losses may be carried back against taxable profit of the previous five years. In year 0, the entity’s taxable
profit was 5,000. The tax rate is 40%.

The entity will recover the carrying amount of the equipment by using it to manufacture goods for
resale. Therefore, the entity’s current tax computation is as follows:

Year
1 2 3 4 5
Taxable income 2,000 2,000 2,000 2,000 2,000
Depreciation for tax purposes 2,500 2,500 2,500 2,500 0
Taxable profit (tax loss) (500) (500) (500) (500) 2,000

Current tax expense (income) at 40% (200) (200) (200) (200) 800

The entity recognises a current tax asset at the end of years 1 to 4 because it recovers the benefit of the
tax loss against the taxable profit of year 0.
The temporary differences associated with the equipment and the resulting deferred tax asset and liability
and deferred tax expense and income are as follows:

Year
1 2 3 4 5
Carrying amount 8,000 6,000 4,000 2,000 0
Tax base 7,500 5,000 2,500 0 0
Taxable temporary difference 500 1,000 1,500 2,000 0

Opening deferred tax liability 0 200 400 600 800

Deferred tax expense (income) 200 200 200 200 (800)
Closing deferred tax liability 200 400 600 800 0

The entity recognises the deferred tax liability in years 1 to 4 because the reversal of the taxable temporary
difference will create taxable income in subsequent years. The entity’s statement of comprehensive income
includes the following:

Year
1 2 3 4 5
Income 2,000 2,000 2,000 2,000 2,000
Depreciation 2,000 2,000 2,000 2,000 2,000
Profit before tax 0 0 0 0 0
 Year
1 2 3 4 5
Current tax expense (income) (200) (200) (200) (200) 800
Deferred tax expense (income) 200 200 200 200 (800)
Total tax expense (income) 0 0 0 0 0
Profit for the period 0 0 0 0 0

Example 2 – Deferred tax assets and liabilities

The example deals with an entity over the two-year period, X5 and X6. In X5 the enacted income tax rate
was 40% of taxable profit. In X6 the enacted income tax rate was 35% of taxable profit.

Charitable donations are recognised as an expense when they are paid and are not deductible for tax
purposes.

In X5, the entity was notified by the relevant authorities that they intend to pursue an action against the
entity with respect to sulphur emissions. Although as at December X6 the action had not yet come to court
the entity recognised a liability of 700 in X5 being its best estimate of the fine arising from the
action. Fines are not deductible for tax purposes.

In X2, the entity incurred 1,250 of costs in relation to the development of a new product. These costs were
deducted for tax purposes in X2. For accounting purposes, the entity capitalised this expenditure and
amortised it on the straight-line basis over five years. At 31/12/X4, the unamortised balance of these
product development costs was 500.
In X5, the entity entered into an agreement with its existing employees to provide healthcare benefits to
retirees. The entity recognises as an expense the cost of this plan as employees provide service. No
payments to retirees were made for such benefits in X5 or X6. Healthcare costs are deductible for tax
purposes when payments are made to retirees. The entity has determined that it is probable that taxable
profit will be available against which any resulting deferred tax asset can be utilised.

Buildings are depreciated for accounting purposes at 5% a year on a straight-line basis and at 10% a year
on a straight-line basis for tax purposes. Motor vehicles are depreciated for accounting purposes at 20% a
year on a straight-line basis and at 25% a year on a straight-line basis for tax purposes. A full year’s
depreciation is charged for accounting purposes in the year that an asset is acquired.

At 1/1/X6, the building was revalued to 65,000 and the entity estimated that the remaining useful life of the
building was 20 years from the date of the revaluation. The revaluation did not affect taxable profit in X6
and the taxation authorities did not adjust the tax base of the building to reflect the revaluation. In X6, the
entity transferred 1,033 from revaluation surplus to retained earnings. This represents the difference of
1,590 between the actual depreciation on the building (3,250) and equivalent depreciation based on the
cost of the building (1,660, which is the book value at 1/1/X6 of 33,200 divided by the remaining useful life of
20 years), less the related deferred tax of 557 (see paragraph 64 of the Standard).

Current tax expense

X5 X6
Accounting profit 8,775 8,740
Add
Depreciation for accounting purposes 4,800 8,250
Charitable donations 500 350
Current tax expense
X5 X6

Fine for environmental pollution 700 –

Product development costs 250 250
Healthcare benefits 2,000 1,000
17,025 18,590
Deduct
Depreciation for tax purposes (8,100) (11,850)
Taxable profit 8,925 6,740

Current tax expense at 40% 3,570

Current tax expense at 35% 2,359

Carrying amounts of property, plant and equipment
Building Motor vehicles Total
Balance at 31/12/X4 50,000 10,000 60,000
Additions X5 6,000 – 6,000
Balance at 31/12/X5 56,000 10,000 66,000
Elimination of accumulated depreciation on revaluation at 1/1/X6 (22,800) – (22,800)
Revaluation at 1/1/X6 31,800 – 31,800
Carrying amounts of property, plant and equipment
Building Motor vehicles Total
Balance at 1/1/X6 65,000 10,000 75,000
Additions X6 – 15,000 15,000
65,000 25,000 90,000

Accumulated depreciation 5% 20%

Balance at 31/12/X4 20,000 4,000 24,000
Depreciation X5 2,800 2,000 4,800
Balance at 31/12/X5 22,800 6,000 28,800
Revaluation at 1/1/X6 (22,800) – (22,800)
Balance at 1/1/X6 – 6,000 6,000
Depreciation X6 3,250 5,000 8,250
Balance at 31/12/X6 3,250 11,000 14,250

Carrying amount
31/12/X4 30,000 6,000 36,000

31/12/X5 33,200 4,000 37,200

31/12/X6 61,750 14,000 75,750

Tax base of property, plant and equipment
Building Motor vehicles Total
Cost
Balance at 31/12/X4 50,000 10,000 60,000
Additions X5 6,000 – 6,000
Balance at 31/12/X5 56,000 10,000 66,000
Additions X6 – 15,000 15,000
Balance at 31/12/X6 56,000 25,000 81,000

Accumulated depreciation 10% 25%

Balance at 31/12/X4 40,000 5,000 45,000
Depreciation X5 5,600 2,500 8,100
Balance at 31/12/X5 45,600 7,500 53,100
Depreciation X6 5,600 6,250 11,850
Balance 31/12/X6 51,200 13,750 64,950

Tax base
31/12/X4 10,000 5,000 15,000

31/12/X5 10,400 2,500 12,900

31/12/X6 4,800 11,250 16,050

Tax base of property, plant and equipment
Building Motor vehicles Total

Deferred tax assets, liabilities and expense at 31/12/X4

Carrying amount Tax base Temporary differences

Accounts receivable 500 500 –

Inventory 2,000 2,000 –
Product development costs 500 – 500
Investments 33,000 33,000 –
Property, plant & equipment 36,000 15,000 21,000
TOTAL ASSETS 72,000 50,500 21,500

Current income taxes payable 3,000 3,000 –

Accounts payable 500 500 –
Fines payable – – –
Liability for healthcare benefits – – –
Long-term debt 20,000 20,000 –
Deferred income taxes 8,600 8,600 –
TOTAL LIABILITIES 32,100 32,100
Deferred tax assets, liabilities and expense at 31/12/X4
Carrying amount Tax base Temporary differences

Share capital 5,000 5,000 –

Revaluation surplus – – –
Retained earnings 34,900 13,400
TOTAL LIABILITIES/EQUITY 72,000 50,500

TEMPORARY DIFFERENCES 21,500

Deferred tax liability 21,500 at 40% 8,600

Deferred tax asset – – –

Net deferred tax liability 8,600

Deferred tax assets, liabilities and expense at 31/12/X5
Carrying amount Tax base Temporary differences

Accounts receivable 500 500 –

Inventory 2,000 2,000 –
Product development costs 250 – 250
Deferred tax assets, liabilities and expense at 31/12/X5
Carrying amount Tax base Temporary differences

Investments 33,000 33,000 –

Property, plant & equipment 37,200 12,900 24,300
TOTAL ASSETS 72,950 48,400 24,550

Current income taxes payable 3,570 3,570 –

Accounts payable 500 500 –
Fines payable 700 700 –
Liability for healthcare benefits 2,000 – (2,000)
Long-term debt 12,475 12,475 –
Deferred income taxes 9,020 9,020
TOTAL LIABILITIES 28,265 26,265 (2,000)

Share capital 5,000 5,000 –

Revaluation surplus – – –
Retained earnings 39,685 17,135
TOTAL LIABILITIES/EQUITY 72,950 48,400
Deferred tax assets, liabilities and expense at 31/12/X5
Carrying amount Tax base Temporary differences

TEMPORARY DIFFERENCES 22,550

Deferred tax liability 24,550 at 40% 9,820

Deferred tax asset 2,000 at 40% (800)
Net deferred tax liability 9,020
Less: Opening deferred tax liability (8,600)

Deferred tax expense (income) related to the origination and reversal of temporary
differences 420
Deferred tax assets, liabilities and expense at 31/12/X6
Carrying amount Tax base Temporary differences

Accounts receivable 500 500 –

Inventory 2,000 2,000 –
Product development costs – – –
Investments 33,000 33,000 –
Property, plant & equipment 75,750 16,050 59,700
TOTAL ASSETS 111,250 51,550 59,700
Deferred tax assets, liabilities and expense at 31/12/X6
Carrying amount Tax base Temporary differences
Current income taxes payable 2,359 2,359 –
Accounts payable 500 500 –
Fines payable 700 700
Liability for healthcare benefits 3,000 – (3,000)
Long-term debt 12,805 12,805 –
Deferred income taxes 19,845 19,845 –
TOTAL LIABILITIES 39,209 36,209 (3,000)
Share capital 5,000 5,000 –
Revaluation surplus 19,637 – –
Retained earnings 47,404 10,341
TOTAL LIABILITIES/EQUITY 111,250 51,550

TEMPORARY DIFFERENCES 56,700

Deferred tax liability 59,700 at 35% 20,895

Deferred tax asset 3,000 at 35% (1,050)
Net deferred tax liability 19,845
Less: Opening deferred tax liability (9,020)
Adjustment to opening deferred tax liability resulting from reduction in tax rate 22,550 at 5% 1,127
Deferred tax assets, liabilities and expense at 31/12/X6
Carrying amount Tax base Temporary differences
Deferred tax attributable to revaluation surplus 31,800 at 35% (11,130)

Deferred tax expense (income) related to the origination and reversal of temporary
differences 822

Illustrative disclosure-
The amounts to be disclosed in accordance with the Standard are as follows:

Major components of tax expense (income) (paragraph 79)

X5 X6
Current tax expense 3,570 2,359
Deferred tax expense relating to the origination and reversal of temporary differences: 420 822
Deferred tax expense (income) resulting from reduction in tax rate – (1,127)
Tax expense 3,990 2,054

Income tax relating to the components of other comprehensive income (paragraph 81(ab))

Deferred tax relating to revaluation of building – (11,130)

In addition, deferred tax of 557 was transferred in X6 from retained earnings to revaluation surplus. This
relates to the difference between the actual depreciation on the building and equivalent depreciation based
on the cost of the building.

Explanation of the relationship between tax expense and accounting profit (paragraph 81(c))

The Standard permits two alternative methods of explaining the relationship between tax expense (income)
and accounting profit. Both of these formats are illustrated below.

(i) 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
X5 X6
Accounting profit 8,775 8,740

Tax at the applicable tax rate of 35% (X5: 40%) 3,510 3,059
Tax effect of expenses that are not deductible in determining taxable profit:
Charitable donations 200 122
Fines for environmental pollution 280 –
Reduction in opening deferred taxes resulting from reduction in tax rate – (1,127)
Tax expense 3,990 2,054

The applicable tax rate is the aggregate of the national income tax rate of 30% (X5: 35%) and the local
income tax rate of 5%.

(ii) a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis
 on which the applicable tax rate is computed
X5% X6%
Applicable tax rate 40.0 35.0
Tax effect of expenses that are not deductible for tax purposes:
Charitable donations 2.3 1.4
Fines for environmental pollution 3.2 –
Effect on opening deferred taxes of reduction in tax rate – (12.9)
Average effective tax rate (tax expense divided by profit before tax) 45.5 23.5

The applicable tax rate is the aggregate of the national income tax rate of 30% (X5: 35%) and the local
income tax rate of 5%.

An explanation of changes in the applicable tax rate(s) compared to the previous accounting period
(paragraph 81(d))

In X6, the government enacted a change in the national income tax rate from 35% to 30%.

In respect of each type of temporary difference, and in respect of each type of unused tax losses and
unused tax credits:

(i) the amount of the deferred tax assets and liabilities recognised in the statement of financial position for each period
presented;

(ii) the amount of the deferred tax income or expense recognised in profit or loss for each period presented, if this is not
apparent from the changes in the amounts recognised in the statement of financial position (paragraph 81(g)).
 X5 X6
Accelerated depreciation for tax purposes 9,720 10,322
Liabilities for healthcare benefits that are deducted for tax purposes only when paid (800) (1,050)
Product development costs deducted from taxable profit in earlier years 100 –
Revaluation, net of related depreciation – 10,573
Deferred tax liability 9,020 19,845

(note: the amount of the deferred tax income or expense recognised in profit or loss for the current year is
apparent from the changes in the amounts recognised in the statement of financial position)

Example 3 – Business combinations-

On 1 January X5 entity A acquired 100 per cent of the shares of entity B at a cost of 600. At the
acquisition date, the tax base in A’s tax jurisdiction of A’s investment in B is 600. Reductions in the carrying
amount of goodwill are not deductible for tax purposes, and the cost of the goodwill would also not be
deductible if B were to dispose of its underlying business. The tax rate in A’s tax jurisdiction is 30 per cent
and the tax rate in B’s tax jurisdiction is 40 per cent.

The fair value of the identifiable assets acquired and liabilities assumed (excluding deferred tax assets and
liabilities) by A is set out in the following table, together with their tax bases in B’s tax jurisdiction and the
resulting temporary differences.

Amount recognised at acquisition Tax base Temporary differences

Property, plant and equipment 270 155 115
 Amount recognised at acquisition Tax base Temporary differences
Accounts receivable 210 210 –
Inventory 174 124 50
Retirement benefit obligations (30) – (30)
Accounts payable (120) (120) –
Identifiable assets acquired and liabilities assumed, excluding deferred tax 504 369 135

The deferred tax asset arising from the retirement benefit obligations is offset against the deferred tax
liabilities arising from the property, plant and equipment and inventory (see paragraph 74 of the
Standard).

No deduction is available in B’s tax jurisdiction for the cost of the goodwill. Therefore, the tax base of the
goodwill in B’s jurisdiction is nil. However, in accordance with paragraph 15(a) of the Standard, A
recognises no deferred tax liability for the taxable temporary difference associated with the goodwill in B’s
tax jurisdiction.

The carrying amount, in A’s consolidated financial statements, of its investment in B is made up as follows:

Fair value of identifiable assets acquired and liabilities assumed, excluding deferred tax 504
Deferred tax liability (135 at 40%) (54)
Fair value of identifiable assets acquired and liabilities assumed 450
Goodwill 150
Carrying amount 600
Because, at the acquisition date, the tax base in A’s tax jurisdiction, of A’s investment in B is 600, no
temporary difference is associated in A’s tax jurisdiction with the investment.

During X5, B’s equity (incorporating the fair value adjustments made as a result of the business
combination) changed as follows:

At 1 January X5 450
Retained profit for X5 (net profit of 150, less dividend payable of 80) 70
At 31 December X5 520

A recognises a liability for any withholding tax or other taxes that it will incur on the accrued dividend
receivable of 80.

At 31 December X5, the carrying amount of A’s underlying investment in B, excluding the accrued dividend
receivable, is as follows:

Net assets of B 520

Goodwill 150
Carrying amount 670

The temporary difference associated with A’s underlying investment is 70. This amount is equal to the
cumulative retained profit since the acquisition date.
If A has determined that it will not sell the investment in the foreseeable future and that B will not
distribute its retained profits in the foreseeable future, no deferred tax liability is recognised in relation to
A’s investment in B (see paragraphs 39 and 40 of the Standard). Note that this exception would apply for
an investment in an associate only if there is an agreement requiring that the profits of the associate will
not be distributed in the foreseeable future (see paragraph 42 of the Standard). A discloses the amount of
the temporary difference for which no deferred tax is recognised, ie 70 (see paragraph 81(f) of the
Standard).

If A expects to sell the investment in B, or that B will distribute its retained profits in the foreseeable future,
A recognises a deferred tax liability to the extent that the temporary difference is expected to reverse. The
tax rate reflects the manner in which A expects to recover the carrying amount of its investment
(see paragraph 51 of the Standard). A recognises the deferred tax in other comprehensive income to the
extent that the deferred tax results from foreign exchange translation differences that have been
recognised in other comprehensive income (paragraph 61A of the Standard). A discloses separately:

(a) the amount of deferred tax that has been recognised in other comprehensive income (paragraph 81(ab) of the
Standard); and

(b) the amount of any remaining temporary difference which is not expected to reverse in the foreseeable future and for
which, therefore, no deferred tax is recognised (see paragraph 81(f) of the Standard).

Example 4 – Compound financial instruments-

An entity receives a non-interest-bearing convertible loan of 1,000 on 31 December X4 repayable at par on
1 January X8. In accordance with IAS 32 Financial Instruments: Presentation the entity classifies the
instrument’s liability component as a liability and the equity component as equity. The entity assigns an
initial carrying amount of 751 to the liability component of the convertible loan and 249 to the equity
component. Subsequently, the entity recognises imputed discount as interest expense at an annual rate of
10% on the carrying amount of the liability component at the beginning of the year. The tax authorities do
not allow the entity to claim any deduction for the imputed discount on the liability component of the
convertible loan. The tax rate is 40%.

The temporary differences associated with the liability component and the resulting deferred tax liability
and deferred tax expense and income are as follows:

Year
X4 X5 X6 X7
Carrying amount of liability component 751 826 909 1,000
Tax base 1,000 1,000 1,000 1,000
Taxable temporary difference 249 174 91 –

Opening deferred tax liability at 40% 0 100 70 37

Deferred tax charged to equity 100 – – –
Deferred tax expense (income) – (30) (33) (37)
Closing deferred tax liability at 40% 100 70 37 –

As explained in paragraph 23 of the Standard, at 31 December X4, the entity recognises the resulting
deferred tax liability by adjusting the initial carrying amount of the equity component of the convertible
liability. Therefore, the amounts recognised at that date are as follows:

Liability component 751

Deferred tax liability 100
Equity component (249 less 100) 149
1,000

Subsequent changes in the deferred tax liability are recognised in profit or loss as tax income
(see paragraph 23 of the Standard). Therefore, the entity’s profit or loss includes the following:

Year
X4 X5 X6 X7
Interest expense (imputed discount) – 75 83 91
Deferred tax expense (income) – (30) (33) (37)
– 45 50 54

Example 5 – Share-based payment transactions-

In accordance with IFRS 2 Share-based Payment, an entity has recognised an expense for the
consumption of employee services received as consideration for share options granted. A tax deduction
will not arise until the options are exercised, and the deduction is based on the options’ intrinsic value at
exercise date.

As explained in paragraph 68B of the Standard, the difference between the tax base of the employee
services received to date (being the amount the taxation authorities will permit as a deduction in future
periods in respect of those services), and the carrying amount of nil, is a deductible temporary difference
that results in a deferred tax asset. Paragraph 68B requires that, if the amount the taxation authorities
will permit as a deduction in future periods is not known at the end of the period, it should be estimated,
based on information available at the end of the period. If the amount that the taxation authorities will
permit as a deduction in future periods 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. Therefore, in this example, the estimated future tax deduction (and hence the measurement
of the deferred tax asset) should be based on the options’ intrinsic value at the end of the period.

As explained in paragraph 68C of the Standard, if 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, paragraph 68C requires that the excess of the associated current or deferred tax should be
recognised directly in equity.

The entity’s tax rate is 40 per cent. The options were granted at the start of year 1, vested at the end of
year 3 and were exercised at the end of year 5. Details of the expense recognised for employee services
received and consumed in each accounting period, the number of options outstanding at each year-end, and
the intrinsic value of the options at each year-end, are as follows:

Employee services expense Number of options at year-end Intrinsic value per option
Year 1 188,000 50,000 5
Year 2 185,000 45,000 8
Year 3 190,000 40,000 13
Year 4 0 40,000 17
Year 5 0 40,000 20
The entity recognises a deferred tax asset and deferred tax income in years 1–4 and current tax income in
year 5 as follows. In years 4 and 5, some of the deferred and current tax income is recognised directly in
equity, because the estimated (and actual) tax deduction exceeds the cumulative remuneration expense.

Year 1
Deferred tax asset and deferred tax income:
(50,000 × 5 × 1/3(a) × 0.40) = 33,333

(a) The tax base of the employee services received is based on the intrinsic value of the options, and those options were
granted for three years’ services. Because only one year’s services have been received to date, it is necessary to
multiply the option’s intrinsic value by one-third to arrive at the tax base of the employee services received in year 1.

The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of
83,333 (50,000 × 5 × 1/3) is less than the cumulative remuneration expense of 188,000.

Year 2
Deferred tax asset at year-end:
(45,000 × 8 × 2/3 × 0.40) = 96,000
Less deferred tax asset at start of year (33,333)
Deferred tax income for year 62,667*
* This amount consists of the following:
Deferred tax income for the temporary difference between the tax base of the employee services received during the year and their carrying amount of nil:
(45,000 × 8 × 1/3 × 0.40) 48,000
Tax income resulting from an adjustment to the tax base of employee services received in previous years:
Year 2

(a) increase in intrinsic value: (45,000 × 3 × 1/3 × 0.40) 18,000

(b) decrease in number of options: (5,000 × 5 × 1/3 × 0.40) (3,333)
Deferred tax income for year 62,667

The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of
240,000 (45,000 × 8 × 2/3) is less than the cumulative remuneration expense of 373,000 (188,000 + 185,000).

Year 3
Deferred tax asset at year-end:
(40,000 × 13 × 0.40) = 208,000
Less deferred tax asset at start of year (96,000)
Deferred tax income for year 112,000

The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of
520,000 (40,000 × 13) is less than the cumulative remuneration expense of 563,000 (188,000 + 185,000 +
190,000).

Year 4
Deferred tax asset at year-end:
(40,000 × 17 × 0.40) = 272,000
Year 4
Less deferred tax asset at start of year (208,000)
Deferred tax income for year 64,000

The deferred tax income is recognised partly in profit or loss and partly directly in equity as follows:
Estimated future tax deduction (40,000 × 17) = 680,000
Cumulative remuneration expense 563,000
Excess tax deduction 117,000
Deferred tax income for year 64,000
Excess recognised directly in equity (117,000 × 0.40) = 46,800

Recognised in profit or loss 17,200

Year 5
Deferred tax expense (reversal of deferred tax asset) 272,000
Amount recognised directly in equity (reversal of cumulative deferred tax income recognised directly in equity) 46,800
Amount recognised in profit or loss 225,200
Current tax income based on intrinsic value of options at exercise date (40,000 × 20 × 0.40) = 320,000
Amount recognised in profit or loss (563,000 × 0.40) = 225,200

Amount recognised directly in equity 94,800

Summary
 Statement of comprehensive income Statement of financial position
Employee services expense Current tax expense (income) Deferred tax expense (income) Total taxexpense (income) Equity Deferred tax asse
Year 1 188,000 0 (33,333) (33,333) 0 33,333
Year 2 185,000 0 (62,667) (62,667) 0 96,000
Year 3 190,000 0 (112,000) (112,000) 0 208,000
Year 4 0 0 (17,200) (17,200) (46,800) 272,000
Year 5 0 (225,200) 225,200 0 46,800 0
(94,800)
Totals 563,000 (225,200) 0 (225,200) (94,800) 0

Example 6 – Replacement awards in a business combination-

On 1 January 20X1 Entity A acquired 100 per cent of Entity B. Entity A pays cash consideration of CU400
to the former owners of Entity B.

At the acquisition date Entity B had outstanding employee share options with a market-based measure of
CU100. The share options were fully vested. As part of the business combination Entity B’s outstanding
share options are replaced by share options of Entity A (replacement awards) with a market-based measure
of CU100 and an intrinsic value of CU80. The replacement awards are fully vested. In accordance
with paragraphs B56–B62 of IFRS 3 Business Combinations (as revised in 2008), the replacement awards
are part of the consideration transferred for Entity B. A tax deduction for the replacement awards will not
arise until the options are exercised. The tax deduction will be based on the share options’ intrinsic value at
that date. Entity A’s tax rate is 40 per cent. Entity A recognises a deferred tax asset of CU32 (CU80
intrinsic value × 40%) on the replacement awards at the acquisition date.

Entity A measures the identifiable net assets obtained in the business combination (excluding deferred tax
assets and liabilities) at CU450. The tax base of the identifiable net assets obtained is CU300. Entity A
recognises a deferred tax liability of CU60 ((CU450 – CU300) × 40%) on the identifiable net assets at the
acquisition date.

Goodwill is calculated as follows:

CU
Cash consideration 400
Market-based measure of replacement awards 100
Total consideration transferred 500
Identifiable net assets, excluding deferred tax assets and liabilities (450)
Deferred tax asset 32
Deferred tax liability 60
Goodwill 78

Reductions in the carrying amount of goodwill are not deductible for tax purposes. In accordance
with paragraph 15(a) of the Standard, Entity A recognises no deferred tax liability for the taxable
temporary difference associated with the goodwill recognised in the business combination.

The accounting entry for the business combination is as follows:

 CU CU
Dr Goodwill 78
Dr Identifiable net assets 450
Dr Deferred tax asset 32
Cr Cash 400
Cr Equity (replacement awards) 100
Cr Deferred tax liability 60

On 31 December 20X1 the intrinsic value of the replacement awards is CU120. Entity A recognises a
deferred tax asset of CU48 (CU120 × 40%). Entity A recognises deferred tax income of CU16 (CU48 – CU32)
from the increase in the intrinsic value of the replacement awards. The accounting entry is as follows:

CU CU
Dr Deferred tax asset 16
Cr Deferred tax income 16

If the replacement awards had not been tax-deductible under current tax law, Entity A would not have
recognised a deferred tax asset on the acquisition date. Entity A would have accounted for any subsequent
events that result in a tax deduction related to the replacement award in the deferred tax income or
expense of the period in which the subsequent event occurred.

Paragraphs B56–B62 of IFRS 3 provide guidance on determining which portion of a replacement award is
part of the consideration transferred in a business combination and which portion is attributable to future
service and thus a post-combination remuneration expense. Deferred tax assets and liabilities on
replacement awards that are post-combination expenses are accounted for in accordance with the general
principles as illustrated in Example 5.

Example 7—Debt instruments measured at fair value-

Debt instruments

At 31 December 20X1, Entity Z holds a portfolio of three debt instruments:

Debt Instrument Cost (CU) Fair value (CU) Contractual interest rate
A 2,000,000 1,942,857 2.00%
B 750,000 778,571 9.00%
C 2,000,000 1,961,905 3.00%

Entity Z acquired all the debt instruments on issuance for their nominal value. The terms of the debt
instruments require the issuer to pay the nominal value of the debt instruments on their maturity on
31 December 20X2.

Interest is paid at the end of each year at the contractually fixed rate, which equalled the market interest
rate when the debt instruments were acquired. At the end of 20X1, the market interest rate is 5 per cent,
which has caused the fair value of Debt Instruments A and C to fall below their cost and the fair value of
Debt Instrument B to rise above its cost. It is probable that Entity Z will receive all the contractual cash
flows if it continues to hold the debt instruments.
At the end of 20X1, Entity Z expects that it will recover the carrying amounts of Debt Instruments A and B
through use, ie by continuing to hold them and collecting contractual cash flows, and Debt Instrument C by
sale at the beginning of 20X2 for its fair value on 31 December 20X1. It is assumed that no other tax
planning opportunity is available to Entity Z that would enable it to sell Debt Instrument B to generate a
capital gain against which it could offset the capital loss arising from selling Debt Instrument C.

The debt instruments are measured at fair value through other comprehensive income in accordance
with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement1).

Tax law

The tax base of the debt instruments is cost, which tax law allows to be offset either on maturity when
principal is paid or against the sale proceeds when the debt instruments are sold. Tax law specifies that
gains (losses) on the debt instruments are taxable (deductible) only when realised.

Tax law distinguishes ordinary gains and losses from capital gains and losses. Ordinary losses can be offset
against both ordinary gains and capital gains. Capital losses can only be offset against capital gains.
Capital losses can be carried forward for 5 years and ordinary losses can be carried forward for 20 years.

Ordinary gains are taxed at 30 per cent and capital gains are taxed at 10 per cent.

Tax law classifies interest income from the debt instruments as ‘ordinary’ and gains and losses arising on
the sale of the debt instruments as ‘capital’. Losses that arise if the issuer of the debt instrument fails to
pay the principal on maturity are classified as ordinary by tax law.
General

On 31 December 20X1, Entity Z has, from other sources, taxable temporary differences of CU50,000 and
deductible temporary differences of CU430,000, which will reverse in ordinary taxable profit (or ordinary tax
loss) in 20X2.

At the end of 20X1, it is probable that Entity Z will report to the tax authorities an ordinary tax loss of
CU200,000 for the year 20X2. This tax loss includes all taxable economic benefits and tax deductions for
which temporary differences exist on 31 December 20X1 and that are classified as ordinary by tax law.
These amounts contribute equally to the loss for the period according to tax law.

Entity Z has no capital gains against which it can utilise capital losses arising in the years 20X1–20X2.

Except for the information given in the previous paragraphs, there is no further information that is relevant
to Entity Z’s accounting for deferred taxes in the period 20X1–20X2.

Temporary differences

At the end of 20X1, Entity Z identifies the following temporary differences:

Carrying amount (CU) Tax base (CU) Taxable temporary differences (CU) Deductible temporary differences (CU)
Debt Instrument A 1,942,857 2,000,000 57,143
Debt Instrument B 778,571 750,000 28,571
Debt Instrument C 1,961,905 2,000,000 38,095
 Carrying amount (CU) Tax base (CU) Taxable temporary differences (CU) Deductible temporary differences (CU)
Other sources Not specified 50,000 430,000

The difference between the carrying amount of an asset or liability and its tax base gives rise to a
deductible (taxable) temporary difference (see paragraphs 20 and 26(d) of the Standard). This is because
deductible (taxable) temporary differences are differences between the carrying amount of an asset or
liability in the statement of financial position and its tax base, which will result in amounts that are
deductible (taxable) in determining taxable profit (tax loss) of future periods when the carrying amount of
the asset or liability is recovered or settled (see paragraph 5 of the Standard).

Utilisation of deductible temporary differences

With some exceptions, deferred tax assets arising from deductible temporary differences are recognised to
the extent that sufficient future taxable profit will be available against which the deductible temporary
differences are utilised (see paragraph 24 of the Standard).

Paragraphs 28–29 of IAS 12 identify the sources of taxable profits against which an entity can utilise
deductible temporary differences. They include:

(a) future reversal of existing taxable temporary differences;

(b) taxable profit in future periods; and

(c) tax planning opportunities.

The deductible temporary difference that arises from Debt Instrument C is assessed separately for
utilisation. This is because tax law classifies the loss resulting from recovering the carrying amount of Debt
Instrument C by sale as capital and allows capital losses to be offset only against capital gains (see
paragraph 27A of the Standard).

The separate assessment results in not recognising a deferred tax asset for the deductible temporary
difference that arises from Debt Instrument C because Entity Z has no source of taxable profit available
that tax law classifies as capital.

In contrast, the deductible temporary difference that arises from Debt Instrument A and other sources are
assessed for utilisation in combination with one another. This is because their related tax deductions would
be classified as ordinary by tax law.

The tax deductions represented by the deductible temporary differences related to Debt Instrument A are
classified as ordinary because the tax law classifies the effect on taxable profit (tax loss) from deducting
the tax base on maturity as ordinary.

In assessing the utilisation of deductible temporary differences on 31 December 20X1, the following two
steps are performed by Entity Z.

Step 1: Utilisation of deductible temporary differences because of the reversal of taxable temporary differences (see
paragraph 28 of the Standard)

Entity Z first assesses the availability of taxable temporary differences as follows:

(CU)
Expected reversal of deductible temporary differences in 20X2
From Debt Instrument A 57,143
 From other sources 430,000
Total reversal of deductible temporary differences 487,143
Expected reversal of taxable temporary differences in 20X2
From Debt Instrument B (28,571)
From other sources (50,000)
Total reversal of taxable temporary differences (78,571)
Utilisation because of the reversal of taxable temporary differences (Step 1) 78,571
Remaining deductible temporary differences to be assessed for utilisation in Step 2 (487,143 - 78,571) 408,572

In Step 1, Entity Z can recognise a deferred tax asset in relation to a deductible temporary difference of
CU78,571.

Step 2: Utilisation of deductible temporary differences because of future taxable profit (see paragraph 29(a) of the
Standard)

In this step, Entity Z assesses the availability of future taxable profit as follows:

(CU)
Probable future tax profit (loss) in 20X2 (upon which income taxes are payable (recoverable)) (200,000)
Add back: reversal of deductible temporary differences expected to reverse in 20X2 487,143
Less: reversal of taxable temporary differences (utilised in Step 1) (78,571)
Probable taxable profit excluding tax deductions for assessing utilisation of deductible temporary differences in 20X2 208,572
Remaining deductible temporary differences to be assessed for utilisation from Step 1 408,572
Utilisation because of future taxable profit (Step 2) 208,572

Utilisation because of the reversal of taxable temporary differences (Step 1) 78,571

Total utilisation of deductible temporary differences 287,143

The tax loss of CU200,000 includes the taxable economic benefit of CU2 million from the collection of the
principal of Debt Instrument A and the equivalent tax deduction, because it is probable that Entity Z will
recover the debt instrument for more than its carrying amount (see paragraph 29A of the Standard).

The utilisation of deductible temporary differences is not, however, assessed against probable future
taxable profit for a period upon which income taxes are payable (see paragraph 5 of the Standard). Instead,
the utilisation of deductible temporary differences is assessed against probable future taxable profit that
excludes tax deductions resulting from the reversal of deductible temporary differences (see
paragraph 29(a) of the Standard). Assessing the utilisation of deductible temporary differences against
probable future taxable profits without excluding those deductions would lead to double counting the
deductible temporary differences in that assessment.

In Step 2, Entity Z determines that it can recognise a deferred tax asset in relation to a future taxable
profit, excluding tax deductions resulting from the reversal of deductible temporary differences, of
CU208,572. Consequently, the total utilisation of deductible temporary differences amounts to CU287,143
(CU78,571 (Step 1) + CU208,572 (Step 2)).

Measurement of deferred tax assets and deferred tax liabilities

Entity Z presents the following deferred tax assets and deferred tax liabilities in its financial statements on
31 December 20X1:

(CU)
Total taxable temporary differences 78,571
Total utilisation of deductible temporary differences 287,143
Deferred tax liabilities (78,571 at 30%) 23,571
Deferred tax assets (287,143 at 30%) 86,143

The deferred tax assets and the deferred tax liabilities are measured using the tax rate for ordinary gains of
30 per cent, in accordance with the expected manner of recovery (settlement) of the underlying assets
(liabilities) (see paragraph 51 of the Standard).

Allocation of changes in deferred tax assets between profit or loss and other comprehensive income

Changes in deferred tax that arise from items that are recognised in profit or loss are recognised in profit or
loss (see paragraph 58 of the Standard). Changes in deferred tax that arise from items that are recognised
in other comprehensive income are recognised in other comprehensive income (see paragraph 61A of the
Standard).

Entity Z did not recognise deferred tax assets for all of its deductible temporary differences at
31 December 20X1, and according to tax law all the tax deductions represented by the deductible
temporary differences contribute equally to the tax loss for the period. Consequently, the assessment of the
utilisation of deductible temporary differences does not specify whether the taxable profits are utilised for
deferred tax items that are recognised in profit or loss (ie the deductible temporary differences from other
sources) or whether instead the taxable profits are utilised for deferred tax items that are recognised in
other comprehensive income (ie the deductible temporary differences related to debt instruments
classified as fair value through other comprehensive income).

For such situations, paragraph 63 of the Standard requires the changes in deferred taxes to be allocated to
profit or loss and other comprehensive income on a reasonable pro rata basis or by another method that
achieves a more appropriate allocation in the circumstances.

Example 8—Leases-

Lease

An entity (Lessee) enters into a five-year lease of a building. The annual lease payments are CU100 payable
at the end of each year. Before the commencement date of the lease, Lessee makes a lease payment of
CU15 (advance lease payment) and pays initial direct costs of CU5. The interest rate implicit in the lease
cannot be readily determined. Lessee’s incremental borrowing rate is 5% per year.

At the commencement date, applying IFRS 16 Leases, Lessee recognises a lease liability of CU435
(measured at the present value of the five lease payments of CU100, discounted at the interest rate of 5%
per year). Lessee measures the right-of-use asset (lease asset) at CU455, comprising the initial
measurement of the lease liability (CU435), the advance lease payment (CU15) and the initial direct costs
(CU5).

Tax law
The tax law allows tax deductions for lease payments (including those made before the commencement
date) and initial direct costs when an entity makes those payments. Economic benefits that will flow to
Lessee when it recovers the carrying amount of the lease asset will be taxable.

A tax rate of 20% is expected to apply to the period(s) when Lessee will recover the carrying amount of the
lease asset and will settle the lease liability.

After considering the applicable tax law, Lessee concludes that the tax deductions it will receive for lease
payments relate to the repayment of the lease liability.2

Deferred tax on the advance lease payment and initial direct costs

Lessee recognises the advance lease payment (CU15) and initial direct costs (CU5) as components of the
lease asset’s cost. The tax base of these components is nil because Lessee already received tax
deductions for the advance lease payment and initial direct costs when it made those payments. The
difference between the tax base (nil) and the carrying amount of each component results in taxable
temporary differences of CU15 (related to the advance lease payment) and CU5 (related to the initial direct
costs).

The exemption from recognising a deferred tax liability in paragraph 15 does not apply because the
temporary differences arise from transactions that, at the time of the transactions, affect Lessee’s taxable
profit (that is, the tax deductions Lessee received when it made the advance lease payment and paid initial
direct costs reduced its taxable profit). Accordingly, Lessee recognises a deferred tax liability of CU3 (CU15
× 20%) and CU1 (CU5 × 20%) for the taxable temporary differences related to the advance lease payment
and initial direct costs, respectively.
Deferred tax on the lease liability and related component of the lease asset’s cost

At the commencement date, the tax base of the lease liability is nil because Lessee will receive tax
deductions equal to the carrying amount of the lease liability (CU435). The tax base of the related
component of the lease asset’s cost is also nil because Lessee will receive no tax deductions from
recovering the carrying amount of that component of the lease asset’s cost (CU435).

The differences between the carrying amounts of the lease liability and the related component of the lease
asset’s cost (CU435) and their tax bases of nil result in the following temporary differences at the
commencement date:

(a) a taxable temporary difference of CU435 associated with the lease asset; and

(b) a deductible temporary difference of CU435 associated with the lease liability.

The exemption from recognising a deferred tax asset and liability in paragraphs 15 and 24 does not apply
because the transaction gives rise to equal taxable and deductible temporary differences. Lessee
concludes that it is probable that taxable profit will be available against which the deductible temporary
difference can be utilised. Accordingly, Lessee recognises a deferred tax asset and a deferred tax liability,
each of CU87 (CU435 × 20%), for the deductible and taxable temporary differences.

Summary of recognised deferred tax

The table below summarises the deferred tax that Lessee recognises on initial recognition of the lease
(including the advance lease payment and initial direct costs):
 Carrying amount Tax base Deductible / (taxable) temporary difference Deferred tax asset /(liability)
Lease asset
– advance lease payment 15 — (15) (3)
– initial direct costs 5 — (5) (1)
– the amount of the initial measurement of the lease liability 435 — (435) (87)

Lease liability 435 — 435 87

Applying paragraph 22(b) of IAS 12, Lessee recognises deferred tax assets and liabilities as illustrated in
this example and recognises the resulting deferred tax income or expense in profit or loss.