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    Soham Upadhyay
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    This document summarizes the key aspects of IND AS 12 on income taxes. It defines current tax and deferred tax, and explains how to calculate income tax expense. Deferred tax arises from temporary differences between the carrying value and tax base of an asset or liability. Deferred tax is recognized either in the profit and loss, other comprehensive income, or directly in equity. The document outlines the steps to calculate deferred tax and addresses tax rates, exceptions for deferred tax assets, and deferred tax adjustments on business combinations.

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    Accounting for taxes

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    IND AS 12_Bhavik Chokshi_FR Shield

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    This document summarizes the key aspects of IND AS 12 on income taxes. It defines current tax and deferred tax, and explains how to calculate income tax expense. Deferred tax arises from temporary differences between the carrying value and tax base of an asset or liability. Deferred tax is recognized either in the profit and loss, other comprehensive income, or directly in equity. The document outlines the steps to calculate deferred tax and addresses tax rates, exceptions for deferred tax assets, and deferred tax adjustments on business combinations.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    268 views7 pages

    IND AS 12 - Bhavik Chokshi - FR Shield

    Uploaded by

    Soham Upadhyay
    This document summarizes the key aspects of IND AS 12 on income taxes. It defines current tax and deferred tax, and explains how to calculate income tax expense. Deferred tax arises from temporary differences between the carrying value and tax base of an asset or liability. Deferred tax is recognized either in the profit and loss, other comprehensive income, or directly in equity. The document outlines the steps to calculate deferred tax and addresses tax rates, exceptions for deferred tax assets, and deferred tax adjustments on business combinations.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 7

    IND AS 12 : INCOME TAXES

    6 IND AS 12 : INCOME TAXES

    (I) Key Terms


    (1) Current Tax: This is the tax payable in the current year as per Income Tax.
    (2) Deferred Tax: Refers to temporary saving in tax / temporary payment of
    additional tax which arises due to temporary differences between carrying
    value and tax base.
    (3) Income Tax Expense = Current Tax Expense + Deferred Tax Expense
    (4) Carrying Value: This is the ledger balance of relevant asset / liability in the
    books of accounts after applying all IND AS.
    (5) Tax Base: It is the amount which would appear for the relevant asset /
    liability in the tax balance sheet as per Income Tax.

    (II) Differences

    DIFFERENCES (Difference between


    Carrying value and Tax Base)

    Temporary
    (Eg : Depreciation, Other than
    43B items) temporary

    Eg : Donation to
    Deductible Temporary unregistered Trust
    Taxable Temporary
    Difference Difference

    Differences which would No Deferred Tax


    Difference which result
    result in deductions
    in additional taxable
    (benefits) from tax
    amounts in the future
    amounts in the future

    Deferred Tax Deferred Tax


    Liabilities (DTL) Assets (DTA)

    18 CA BHAVIK CHOKSHI
    IND AS 12 : INCOME TAXES

    (III) Recognition of Tax

    RECOGNITION OF TAX

    Items in P/L Items in O.C.I. Items directly in


    (Eg : FVTPL items) (Eg : FVOCI items) Reserve (Equity)

    Tax in P/L Tax in O.C.I Tax to be shown directly


    in Reserves (Other
    Equity) (Eg : Dividend
    and DDT) if applicable

    (IV) Steps in Deferred Tax Working

    Step 1 Step 2 Step 3 Step 4

    Calculate Calculate Tax Calculate Deferred Tax =


    Carrying Value Base (Based Difference Difference × Tax
    (Applying IND on Income Tax Rate (Subject
    AS principles) principles) to Certain
    exceptions)

     t this stage, we need to identify Deferred Tax Asset or Deferred Tax Liability. As a
    A
    general rule, if the carrying value of an underlying asset is greater than the
    tax base, the deferred tax item would be opposite. i.e., an underlying asset
    will create a Deferred Tax Liability.
    f the carrying value of an underlying item is less than the tax base, the
    I
    deferred tax item would also be the same i.e. An underlying asset will create
    a deferred tax asset.
    Particulars Underlying Asset Underlying Liability
    Carrying value > Tax Base D.T.L D.T.A
    [Eg : P.P.E] [Eg : 43 B items]
    Carrying Value < Tax Base D.T.A D.T.L
    [Eg : Preliminary Expenses] [Eg : Loan with Processing Fees]
    Carrying Value = Tax Base No Deferred Tax

    Offsetting Principles
    DTA and DTL be netted off in the Balance Sheet in case the underlying items are allowed
    to be off settled while calculating tax. Example: DTA under U.S tax laws cannot be off-
    setted against DTL under Indian Tax Laws.
    (Refer Q. 1, 2)

    CA BHAVIK CHOKSHI 19
    IND AS 12 : INCOME TAXES

    (V) Tax Rates


    1. Current Tax: Should be created based on tax rate applicable in the current
    year.
    2. Deferred Tax: Should be created based on tax rates enacted / substantially
    enacted till the
    Balance Sheet Date. (Example: Budget).
    Example:
    Balance Sheet Date : 31/3, Post B/S Date: 30/5
    Budget Act Applicable
    Rate
    1/2 1/3 20%
    Old : 30%
    1/2 30/6 20%
    New : 20%
    1/5 15/5 30%

    In the last case, no enactment / substantial enactment was done till the Balance
    Sheet Date and hence Old Rate is taken.
    3. In case different natures of income are taxable at different tax rates, then we
    should take the tax rate based on the entity’s intention to utilize the asset.
    Example: A capital gain rate of 20% should be applied in case an entity intends
    to sell the asset and a tax rate of 30% (depreciation) would be applied in case
    the entity intends to use the asset.
    4. Changes in Tax Rate
    In case the tax rate subsequently changes, then the entity will have to reassess
    its tax liabilities based on the revised tax rates and the difference if any would
    be adjusted as deferred tax expense / income and taken to the P/L or O.C.I
    depending on how the deferred tax on the underlying item is accounted.

    (Refer Q. 3)

    (VI) Exception: Creation of Deferred Tax Asset


    Deferred Tax Liability should always be created irrespective of future profit position
    (prudence). However, DTA can be created only if the entity anticipates sufficient
    benefits in the future which signify that the DTA will be utilized. This can be evaluated
    by checking the following 3 points in the order of preference:

     heck if there are sufficient taxable temporary differences whose


    C
    (I) reversal pattern matches the reversal pattern of the deductible
    temporary differences (i.e. DTL and DTA reverse at the same time)

    20 CA BHAVIK CHOKSHI
    IND AS 12 : INCOME TAXES

    Check whether it is probable that sufficient taxable profits would


    (II)
    be earned in the future.

    Check if there are any tax planning opportunities / strategies


    (III)
    available

    Example: Change in the method of accounting in order to record higher


    profits in the earlier years to utilize losses that may lapse.
    The maximum DTA that can be recorded by an entity is restricted to the
    total of (i + ii + iii) × Tax Rate

    (Refer Q. 4, 5, 6, 7, 8, 9, 10, 11, 21)

    (IV) DEFERRED TAX ON BUSINESS COMBINATION

    DEFERRED TAX ADJUSTMENTS

    ON CARRY
    ON NET ASSSETS FORWARD LOSSES

    (1) Create DTA on


    acquisition date only
    Carrying value > Tax Base Carry value < Tax Base
    if it is probable that
    (Fair value) (Old Carrying (Fair value) (Old carrying
    sufficient benefits
    value) value)
    would be earned.
    (2) If the sufficient
    benefit condition
    benefit condition
    gets satisfied during
    the measurement
    period, create DTA
    DTL DTA with a corresponding
    adjustment to Goodwill,
    else adjust the P/L.

    CA BHAVIK CHOKSHI 21
    IND AS 12 : INCOME TAXES

    Note 1
    In case tax base of acquiree is available, we take that, else the book values (old
    carrying values) can be assumed to be the tax base.

    Note 2
    DTA / DTL will be calculated based on the tax rates applicable to the acquiree
    (subsidiary)

    Note 3
    Deferred Tax on Goodwill
    Generally, goodwill is not tax deductible and hence we will not need to create
    deferred tax. IND AS 12 additionally provides an exception in the creation of deferred
    tax liability on goodwill as it will give rise to a circular reference. For example: in
    question 12, if Deferred Tax is calculated on goodwill of 22.5, it will be recorded
    as a part of the acquisition entry, which inturn will change the goodwill and hence
    we might need to again calculate deferred tax and the calculations will happen in a
    circular manner.

    Note 4
    In case of Business Combination, differences between Individual Net Assets are
    assumed to be temporary unless given otherwise.

    (Refer Q. 12, 13, 14, 15)

    Exception to DTL

    Conditions:
    1. Dividend Distribution in Entity’s Control
    2. No dividend expected in Foreseeable Future

    Subsidary Associate

    DTL NOT CREATED DTL TO BE CREATED


    (If both conditions Satisfied) (Condition 1 will not be satisfied)

    22 CA BHAVIK CHOKSHI
    IND AS 12 : INCOME TAXES

    (VII) Exception on DTL Creation (Goodwill & Dividends from Subsidary)


    Investment in subsidiary: IN CFS, we apply the full consolidation method and hence we
    consolidate Post Acquisition Profits as and when they are earned. These profits get reflected
    through an increase in Net Assets. Therefore, the carrying value of the subsidiary in books
    of accounts will increase due to undistributed profits in the Post Acquisition Period.
    Income Tax will record these investments at cost only. However, when dividend is
    distributed the profits would be taxable.
    Therefore, the difference between carrying value and Tax Base reverses at the time
    of dividend - Reversal of difference can be controlled by the Parent and if no dividend is
    expected to be distributed in the foreseeable future, the reversal will not happen. Hence
    in such cases, IND AS 12 exempts an entity from creating a deferred tax liability.
    Investment in associate: However, in case of an investment in associate, investment is
    accounted as per the equity method i.e. Cost + Share in Undistributed Profits. Income
    tax continues to record these investments at cost but will levy tax at the time of dividend.
    Hence even in this case, the reversal of differences will happen at the time of dividend.
    However, the investor cannot control the timing of dividend in case of an
    associate and hence DTL should be created.

    (Refer Q. 17, 18, 19)

    (VIII) Deferred Tax and Share Based Payments


    Under the specific guidance given as per IND AS 12, the following steps needs to
    be followed:

    Carrying value (IND AS) has to be taken as NIL. As per IND


    AS 102, the EBE and the corresponding SBP reserve are
    created based on the fair value on the grant date. However,
    as per Income Tax, the deduction will be obtained on the
    date of exercise based on the intrinsic value (i.e. actual
    market price-exercise price) on the date of exercise. This 01
    would be difference from the fair value on the grant date
    and hence IND AS 12 requires us to ignore the SBP reserve
    and (which is based on fair value on grant date) and take
    the carrying value at NIL.

    Tax Base
    The deduction under Income Tax will be based on intrinsic
    value on the date of exercise. However, the accounting for
    deferred tax needs to be done based on the years before
    exercise. Hence, the intrinsic value for the purpose of tax 02
    base calculation should be based on the actual intrinsic
    value based on the end of each year. Further, the tax base
    should be recorded pro rata based on the vesting period
    served till date ÷ total vesting period.

    CA BHAVIK CHOKSHI 23
    IND AS 12 : INCOME TAXES

    The difference created will be a deduction temporary


    difference as a deduction for these expenses will be obtained
    in the future when the Employee exercise and hence we will
    pay a lower tax in the future years. Therefore, this creates a
    03
    D.T.A (no need to check for DTA / DTI rules)
    In this case as ICAI specifically treats this as a DTA (similar
    to carry forward losses)

    (Refer Q. 20)

    24 CA BHAVIK CHOKSHI

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