IAS 12 : Income Taxes

The Institute of Chartered Accountants of India (Set up by an Act of Parliament)

IAS 12 v AS 22

Concept IAS 12 : Temporary Difference AS 22 : Timing Difference

Approach IAS 12 : Balance Sheet AS 22 : Profit & Loss Account

Method IAS 12 : BS liability method AS 22 : Deferral method

Objective

Where to account the tax consequences

Principle In the same way that it accounts for the transactions and events themselves

Tax consequences of transactions and events recognized In profit or loss account: Outside profit & loss account

Statement of other comprehensive income Equity

Computation of Current Tax

Current tax liabilities (assets) for the current and prior periods

shall be measured at the amount

expected to be paid to (recovered from) the taxation authorities,

using the tax rates and tax laws

that have been enacted or substantively enacted by the end of the reporting period

Deferred Tax

Fundamental Principle An entity should recognize a deferred tax liability (asset)

whenever recovery or settlement of the carrying amount of an asset or liability

would make future tax payments larger (smaller) than they would be

if such recovery or settlement were to have no tax consequences.

Computation of Deferred TaxBalance Sheet Liability Method

(a) Carrying amount of asset / liability

(b) Tax base of asset / liability

(c) Temporary Difference (a-b)

(d) Applicable tax rate: x %

(e) Deferred tax: (c x d)

Computation of Deferred Tax

Step (a)

Compute Carrying Amount

Carrying Amount

Carrying amount of an asset or liability is the value of the asset or liability appearing in the balance sheet

Computation of Deferred Tax

Step (b)

Compute Tax Base

Tax Base

Tax base of an asset or liability is the amount attributable to that asset or liability for tax purposes

Four types: Tax base of an asset

Tax base of a liability

Tax base with no recognized carrying amounts

Tax base not immediately apparent

Tax Base of an Asset

Is the amount

that will be deductible for tax purposes

against any taxable economic benefits that will flow to an entity

when it recovers the carrying amount of the asset

If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount

Tax Base of an Asset

Tax base of an asset = Carrying value – Future taxable amounts + Future deductible amounts

Illustration follows:-

Tax Base of an Asset

Illustration: A machine cost INR 100. For tax purposes, depreciation of INR 30 has already been deducted. Revenue generated by using the machine will be taxable. For accounting purposes, the machine has been depreciated by INR 20.

Applying the formula we have:

Carrying value of asset

- Future taxable amounts

+ Future deductible amounts

= Tax base

80 - 80 + 70 = 70

Tax Base of a Liability

Is its carrying amount,

less any amount that will be deductible for tax purposes

in respect of that liability in future periods

In the case of revenue that is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods

Tax Base of a Liability

Tax base of a liability = Carrying value – Future deductible amounts + Future taxable amounts

Illustration follows:-

Tax Base of a Liability

Illustration:

A loan payable has a carrying value of INR 100 at the balance sheet date. The repayment of the loan will have no tax consequences.

Applying the formula we have:

Carrying value of liability

- Future deductible amounts

+ Future taxable amounts

= Tax base

100 - 0 + 0 = 100

Tax Base of a Liability

Illustration: Foreign currency loan payable has a carrying value of INR 95 after recognizing an exchange gain of INR 5 in the income statement. Exchange gains are taxable only when realized.Applying the formula we have:

Carrying value of liability

- Future deductible amounts

+ Future taxable amounts

= Tax base

95 - 0 + 5 = 100

Tax Base of a Liability

Tax base of revenue received in advance = Carrying value – Amount of revenue that will not be taxable in future periods amounts

Illustration follows:-

Tax Base of a LiabilityTax base of revenue received in advance

Illustration:

Rents received in advance at the balance sheet date amounted to INR 100. The rental income will be taxed in future periods.

Applying the formula we have:

Carrying value of revenue received in

advance

- Amount of revenue that will not be taxable

in future periods

= Tax base

100 - 0 = 100

Tax Base of a LiabilityTax base of revenue received in advance

Illustration:

A government grant of INR 100 is recognized at the balance sheet date as deferred income rather than being deducted against the cost of the asset. No tax is payable on receipt or subsequent amortization. The cost of the asset is fully deductible.

Applying the formula we have:

Carrying value of revenue received in

advance

- Amount of revenue that will not be taxable

in future periods

= Tax base

100 - 100 = 0

Tax base with no Recognized Carrying Amounts

Expenditure expensed out in accounts but is carried forward in the tax balance sheet

Illustration:

IPO expenditure of INR 100 expensed out in accounts in the year of IPO but as per taxation laws allowable equally over 5 years.Applying the formula we have:

Carrying value of expense

- Future taxable amounts

+ Future deductible amounts

= Tax base

0 - 0 + 80 = 80

Tax Base not immediately apparent

Apply fundamental principle

Fundamental Principle

An entity should recognize a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or

liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences.

Computation of Deferred Tax

Step (c)

Compute Temporary Difference

Temporary Differences

Are differences between

the carrying amount of an asset or liability in the statement of financial position

and its tax base.

Formula

Temporary Difference = Carrying amount - Tax Base

Compute Temporary Difference

Exercise :

A machine cost INR 100. For tax purposes, depreciation of INR 30 has already been deducted. Revenue generated by using the machine will be taxable. For accounting purposes, the machine has been depreciated by INR 20.

Applying the formula of ‘Tax Base’ we have:

Carrying value of asset

- Future taxable amounts

+ Future deductible amounts

= Tax base

80 - 80 + 70 = 70

Temporary Difference = 10

Temporary Differences

May be either

Taxable temporary difference (DTL)

Deductible temporary difference (DTA)

Temporary Differences Taxable temporary differences

Which are temporary differences that will result in taxable amounts in determining taxable profit of future periods when the carrying amount of the

asset is recovered or settled.

Deductible temporary differences Which are temporary differences that will result in amounts that are deductible in determining taxable profit of future periods when the carrying amount of the

asset is recovered or settled

Exercises follows:-

Compute Temporary Difference

Exercise : A machine cost INR 100. For tax purposes, depreciation of INR 30 has already been deducted. Revenue generated by using the machine will be taxable. For accounting purposes, the machine has been depreciated by INR 20.Applying the formula of ‘Tax Base’ we have:

Carrying value of asset

- Future taxable amounts

+ Future deductible amounts

= Tax base

80 - 80 + 70 = 70

Taxable Temporary Difference = 10

Compute Temporary Difference / Nature

Exercise: Trade debtors have a carrying value of INR 95 after recognizing a general bad debt provision of INR 5. The original amount of INR 100 has already been included in taxable profits. The provision for bad debts is not tax deductible, but would be so when the provision becomes specific.Applying the formula of 'Tax Base', we have:

Carrying value of asset

- Future taxable amounts

+ Future deductible amounts

= Tax base

95 - 0 + 5 = 100

Deductible Temporary Difference = 5

Temporary Differences - Summary

For assets For liabilities

If Carrying amount

>Tax base

Taxable temporary difference(TTD)

-Deferred tax liability

(DTL)

Deductible temporary difference(DTD)

-Deferred tax asset

(DTA)

If Carrying amount

<Tax base

Deductible temporary difference(DTD)

-Deferred tax asset

(DTA)

Taxable temporary difference(TTD)

-Deferred tax liability

(DTL)

Computation of Deferred Tax

Step (d)

Compute Tax Rate

Measurement – Tax Rate

Deferred tax assets and liabilities shall

shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled based on the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period

General Principle - Measurement

How recovery Use Sale Use and sale

How tax If use – business profits If sale – capital gains In sale – indexation

Principle Consistent with the manner in which the entity’s management expects at the

balance sheet date to recover or settle the carrying amount of assets or liabilities

Measurement – Tax Rate

Change in tax rates:-

The tax rate applicable to an entity may change as a result of changes in relevant legislation. Any impact of the changes will be recognized in accounting periods ending on or after the date of substantive enactments.

Computation of Deferred Tax

Step (e)

Recognize Deferred Tax

Deferred Tax

Deferred tax liabilities

Are the amounts of income taxes payable in future periods in respect of

taxable temporary differences

Deferred Tax

Deferred tax assets

are the amounts of income taxes payable in future periods in respect of

Deductible temporary differences The carry forward of unused tax losses The carry forward of unused tax credits

Deferred Tax - Recognition

Deferred tax liability

should be recognized for all taxable temporary differences.

Deferred Tax - Recognition

Deferred tax asset

should be recognized for all deductible temporary differences To the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized

Probable means more likely than not

Deferred Tax Asset Recognition

Deferred Tax - Reassessment

Reassess at each reporting period

Recognize unrecognized deferred tax assets to the extent it has become probable that future taxable profits will be available

Reduce the carrying amount of deferred tax asset to the extent it is no

longer probable that sufficient taxable profit will be available

Deferred Tax – Change in Amount

Query Can the carrying amount of deferred tax change even though there is no change in the amount of related temporary difference?

Yes, for example:- Change in tax rates Change in tax laws A reassessment of the recoverability of DTA A change in the expected manner of recovery of an asset – (from use to sale or

vice-versa)

Discounting

Should deferred tax assets and liabilities be discounted?

No

Offset Current tax assets and current tax liabilities

if and only if the entity

has a legally enforceable right to set off the recognized amounts; and

Intends

either to settle on a net basis, or

to realize the asset and settle the liability simultaneously

Offset Deferred tax assets and deferred tax liabilities if and only if

the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and

The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entities; or Different taxable entities

which intend either to settle current tax liabilities and assets on a net basis, or

to realize the assets and settle the liabilities simultaneously, In each future period in which significant amounts of deferred tax

liabilities or assets are expected to be settled or recovered.

Disclosures

Balance Sheet

Performance Statement

Notes

Disclosures

Current / Non-current classification Current tax: Current asset – liability Deferred tax: Non-current asset – liability

Classification based on liquidity Current tax: more liquid Deferred tax: less liquid

Question: Do we need to disclose amount of deferred tax to be recovered or settled

after more than 12 months? [IAS 1(61)]

Disclosures

Recognize current & deferred tax in Income (PL) Statement except when tax arises out of transaction recognized in

Other comprehensive income

Directly in equity

Business combination

Disclosures

What if there are graduated rates of income-tax and it is not possible to determine the rate at which a specific component of taxable profit has been taxed?

Adopt

Reasonable pro-rata allocation

Any other method that adopts a more appropriate allocation

Disclosures - Notes

General Analysis of tax expense Discontinued operation Explanation of relationship between tax expense and accounting profit Analysis of deferred tax assets / liabilities Unrecognized temporary differences Tax consequences of dividends Deferred tax asset of loss making entities Business combinations Tax related contingencies Post balance sheet changes in tax rates

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