Presented by:-

CA. Manoj Fadnis

Past President ICAI
 Introduction

Current Tax

Deferred
Recognition of Taxation - Recognition
DTL Introduction of DTA

• The Rule • The underlying problem • The Rule

• Discussion • The concept • Discussion
• Tax Bases
• Temporary Difference

Measurement Business Presentation

Issues Combinations & Disclosure
• Rates
• Introduction • Deferred taxation –
• Change in tax rates
• Goodwill presentation
• Deferred tax balance movement
• Intra-group transaction • Deferred taxation
• Summary of approach
disclosure
How to account for the current and future tax
consequences of:
1. The future recovery (settlement) of the carrying
amount of assets (liabilities) that are recognised in an
entity’s balance sheet; and

2. Transactions and other events of the current period

that are recognised in an entity’s financial statements
 Domestic taxes
on taxable
IND AS 12 profits
must be Excludes :
applied in Methods of accounting
accounting for for Govt. Grants
all income And
taxes. Investment tax
credits

Scope

Foreign taxes Withholding

on taxable taxes payable
profits on distributions
 Tax
Accounting
Tax Profit Expense(or
profit
income)

Temporary
Current Tax Tax Base
Difference

Deferred tax Deferred tax

Liabilities Assets
Current Tax
1. To be recognised as liability

2. Asset is recognised on when :

✓ Excess amount already paid exceeds the

amount due for those periods.

✓ It is probable that benefit will flow to the

enterprise and benefit is reliably measured.
Deferred tax - An Introduction
(The underlying problem)

Two separate sets of

A/c profit and taxable accounts
profit differ 1. Based on Ind AS
2. Based on tax rules.

Two perspective to view

the differences
1. Balance sheet method
2. Income statement
method
Difference between carrying amount of an assets or liability
or its tax base.

Tax base of an asset

or liability:- the Its carrying amount
amount attributes to And in the statement of
that asset or liability financial position.
for tax purpose.

If there are no tax consequences for recovery/settlement of asset or

liability then Tax Base is equal to carrying amount and there is no
temporary difference
Tax base of 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 asset.
Tax base of a liability is the carrying amount less any amount
that will be deductible for tax purpose in respect of that liability
in future periods.
It is the carrying amount less any amount of revenue that will not
be taxable in future periods.
Taxable temporary difference also arise when:-
The identifiable assets acquired and liabilities assumed in a
business combination are recognised at their fair values in
accordance with Ind AS 103.
1. Assets are revalued and no equivalent adjustment is
made for tax purposes.
2. Goodwill arises in a business combination
3. When an entity benefits from non-taxable government
grants related to assets.
4. The carrying amount of investments in subsidiaries,
branches and associates or interests in joint
arrangements becomes different from the tax base of the
investment or interest.
 3. Identify the
2. Calculate the
1. Determine the tax temporary difference
temporary difference
base as taxable or
(if any(
deductible

4. Are there any 5. Calculate the 6. Is the movement

exemptions to deferred tax by recognised in SPL or
deferred tax applying the correct OCI, equity or
applicable? tax rate goodwill.
Deferred tax liability shall be recognised for all
taxable temporary differences, except:-

✓ The initial recognition of goodwill

✓ Not a business combination

✓ At the time of the transaction, affects neither

accounting profit nor taxable profit (tax loss).

Note : DTA can be recognised only to the extent it is probable that taxable
profits will be available against which deductible temporary difference can
be utilised.
 DTA shall also be
recognised for carry
forward of tax
losses and tax It should be probable
credits that sufficient
taxable profits will be
available against
The carrying which these losses &
amount of DTA credits can be used.
should be reviewed
at the end of each
reporting period.
 Does the temporary difference arise on NO
the initial recognition of asset?

YES

Was the asset or liability acquired in a YES

business combination?

NO RECOGNISE
DEFERRED TAX
Did the transaction give rise to the asset YES IMPACT (Subject to
or liability affect either the accounting exceptions)
profit or the taxable profit at the time of
transaction?
NO

Do not recognise deferred tax impact.

Example
XYZ Ltd intends to use an asset whose cost (carrying amount) is
Rs.1,500/- throughout its useful life of five years and then scrap it.
The tax rate is 30%.
Depreciation of the asset is deductible for tax purposes up to 1,000 (i.e.
the tax base of the asset on initial recognition is 1,000).

As XYZ Ltd recovers the carrying amount of the asset, the entity will
earn taxable income of 1,500 and pay tax of 450 (1,500 x 30%) but can
recover from depreciation only up to 300 (1,000 x 30%).

A taxable temporary difference exists of the asset that does not affect
accounting profit or taxable profit on initial recognition.

The entity does not recognise the resulting deferred tax liability of
Rs.150/- because it results from the initial recognition of the asset
in a transaction which :
a) is not a business combination, and
b) at the time of the transaction, affects neither accounting profit nor
taxable profit.
Example
XYZ Ltd intends to use an asset whose cost (carrying amount) is
Rs.1,500/- throughout its useful life of five years and then scrap it.
The tax rate is 30%.
Depreciation of the asset is deductible for tax purposes up to 1,000
(i.e. the tax base of the asset on initial recognition is 1,000).

As XYZ Ltd recovers the carrying amount of the asset, the entity will
earn taxable income of 1,500 and pay tax of 450 (1,500 x 30%) but can
recover from depreciation only up to 300 (1,000 x 30%).

A taxable temporary difference exists of the asset that does not affect
accounting profit or taxable profit on initial recognition.

The entity does not recognise the resulting deferred tax liability of
Rs.150/- because it results from the initial recognition of the asset
in a transaction which :
1. is not a business combination, and
2. at the time of the transaction, affects neither accounting profit nor
taxable profit.
Measurement Issues

Rates

• Tax rate – Expected to apply to the period when the asset is

realised or liability is settled.

• When different tax rates apply to different levels of taxable

income, deferred tax assets and liabilities are measured
using the average rates that are expected to apply to the
taxable profit (tax loss) of the periods in which the
temporary differences are expected to reverse.

• Deferred tax assets and liabilities shall not be discounted.

Deferred tax is recognised as tax income or expenses and
included in P&L for the period, except:-

1.A transaction or the event which is recognised, in the

same or different accounting period, directly in equity
or within OCI; or

2.A business combination that is an acquisition.

1. Existing domestic companies may opt for reduced
corporate tax rate of 22%( without surcharge) from pre
amended rate of 30% (without surcharge).

2. Opening deferred tax balances would now be required to

be re-measured at the revised tax rate and restated for
the F.Y. 2019-20.

3. The Company that exercises the option for the lower tax
rate, will need to make necessary adjustments to the
deferred tax asset created on such brought forward losses
and credits which are not available as a deduction in the
new tax regime.
 Subsidiary
75%

Parent

Associate Joint
Arrangement
20% 50%
Temporary difference arises when the carrying amount of interests in
subsidiaries, branches and associates or interests in joint arrangements
(i.e. in the consolidated accounts, the net assets including the carrying
amount of goodwill) becomes different from the tax base (which is often
cost).

Examples
changes in foreign
the existence of a reduction in the
exchange rates
undistributed
when a parent and carrying amount of
profits of
its subsidiary are an investment in an
subsidiaries, associate to its
based in different
branches and recoverable
countries having
associates or joint amount (due to
different
ventures impairment)
currencies
Recognise all deferred tax liabilities associated with
investments in subsidiaries, branches and associates, and
interests in joint ventures,
except to the extent that both of the following
conditions are satisfied:

1) The parent, investor or venturer is able to control the

timing of the reversal of the temporary difference,

2) It is probable that the temporary difference will not

reverse in the foreseeable future
1. An entity may recognise an expense for the
consumption of employee services received as
consideration for share options granted, in accordance
with Ind AS 102, Share-based Payment, and not receive
a tax deduction until the share options are exercised.
2. If the amount of 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.
3. In this situation, the excess of the associated current or
deferred tax should be recognised directly in equity. `
Presentation and Disclosure

Tax asset and Offset if DTA/DTL should be

liabilities to be Legal enforceable distinguished from
presented right and intends to Current tax assets
separately. settle on a net basis. and liabilities

Deferred taxation – Separate disclosure

Major components of tax expenses(income), including;
1. Current tax expense/(income)
2. Adjustment in respect of a prior period
3. Deferred tax expense/(income)
4. Deferred tax expense/(income) arising due to a change in tax rates.
5. Deferred tax consequence of a change in accounting policy or a
correction of a fundamental error.
Particulars Ind AS 12 AS 22
Approach for creating Based on Balance Sheet Based on income
Deferred tax approach approach
Recognition for DTA Only to the extent Recognised or carried
sufficient taxable forward only to the
temporary difference extent of reasonable
or other convincing certainty.
evidence that sufficient Where DTA is against
taxable profits will be the unabsorbed
available. depreciation or carry
forward of losses, DTA
recognised only when
virtual certainty
supported by
convincing evidence
that sufficient future
taxable income will be
available.
Particulars Ind AS 12 AS 22
Recognition of Current and • In profit and Loss Does not deal with the
Deferred Tax • Except to the extent aspect
the tax arises from a
transaction or event
which is recognised
outside profit and loss.
Disclosure of DTA and DTL Income tax relating to Deals with the disclosure
in Balance Sheet each component of other requirements.
comprehensive income
shall be disclosed as
current/non current asset
or liability in accordance
with requirement of Ind AS
1.
DTA/DTL arising out of DTA/DTL on revaluation of AS 22 does not deal with
revaluation of assets. non depreciable assets this aspect.
measured on the basis of
tax consequence rather
than the through use.
Particulars Ind AS 12 AS 22
Virtual Certainty No such concept exists. Explains virtual
certainty supported by
convincing evidence.
Deferred tax in tax Does not specifically Provides special
holiday period deals with these reference to sections of
situations. Income Tax Act, 1961
for treatment of tax
holiday.
Bulletin Number Issue Number Issue

Bulletin 11 Issue 2 Accounting treatment of Tax Holidays

under Ind AS
Bulletin 10 Issue 3 Recognition of deferred tax asset on the
tax deductible goodwill in the
consolidated financial statements
Bulletin 9 Issue 1 Accounting treatment of dividend
distribution tax (DDT) and deferred tax
liability (DTL) on the accumulated
undistributed profits of the subsidiary
company
Bulletin 7 Issue 7 Recognition of deferred tax asset on
land sold as slump sale
Bulletin 8 Issue 8 Recognition of the deferred tax on the
differences that are arising from
adjustment of exchange difference to
the cost of the asset
Bulletin Number Issue Number Issue
Bulletin 16 Issue 2 Accounting treatment of the
interest and penalties related to
income taxes
Bulletin 17 Issue 7 Recognition of deferred tax on
conversion of capital asset into
stock-in-trade
Issue 1:- Recognition of the deferred tax on the differences that
are arising from adjustment of exchange difference to the cost of
the asset
MNC Ltd. is a first-time adopter of Ind AS. It had taken a foreign
currency loan for USD 100 million on March 31, 2013 for construction
of its property, plant and equipment (PPE). The company had availed
the option given under paragraph 46/46A of AS 11, The Effects of
Changes in Foreign Exchange Rates notified under the Companies
(Accounting Standards) Rules, 2006 and accordingly, exchange
gain/loss on such foreign currency loan had been added to or
deducted from the cost of PPE. On the date of transition to Ind AS, the
Company has opted for the exemption given under paragraph D13AA of
Ind AS 101, First-time Adoption of Indian Accounting Standards. As per
section 43A of Income Tax Act, 1961 such exchange differences
capitalised are not allowed deduction under the Income Tax. Whether
deferred tax is to be recognised on such differences that are arising
from adjustment of exchange difference to the cost of the asset or
can it be said that these meet the initial recognition exemption under
paragraph 15(b) of Ind AS 12, Income Taxes, and hence no deferred tax
is required to be created on the same?
* Response:-
1. Deferred taxes is required to be recognised for all taxable
and deductible temporary differences except in specified
situations, e.g. if it arises from initial recognition of an
asset or a liability.
2. However, adjustment to the cost of the asset due to
exchange difference is a subsequent transaction and does
not arise on ‘the initial recognition of an asset or liability’.
3. In other words, capitalisation of the exchange differences
(including the exchange differences prior to the date of
transition) represents subsequent measurement of the
liability which has been adjusted to the cost of the asset.
4. Accordingly, in the given case, initial recognition exemption
will not be available and deferred tax is required to be
recognised on temporary difference arising from capitalised
exchange differences.
(ITFG Clarification Bulletin 8, Issue 8)
Thank You.