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
 AS 22
:
:
Temporary Difference
Timing Difference
Approach
 IAS 12
 AS 22
:
:
Balance Sheet
Profit & Loss Account
Method
 IAS 12
 AS 22
:
:
BS liability method
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 Tax
Balance 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 Liability
Tax 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 Liability
Tax 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








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

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
Pravin Tulsyan
09818495674