All India Chain Workshop on Indian Accounting Standards Converged with IFRS

Income Taxes (IAS 12)

CA Bhupendra Mantri, Jaipur (India)FCA, DISA(ICAI)+919829888810

bmantri@kalanico.com

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Agenda

• IAS 12 terminology• Examples explaining terminology• Recognition & Measurement Principle– Current Tax Asset / Liability– Deferred Tax Asset / Liability

• Application of Principles• Disclosures

Certain terms defined

• Temporary Differences– Difference between carrying amount and tax base

Tax Base– Tax Base of an asset is the amount that will be

deductible for tax purposes against any taxable economic benefits that will flow to the entity when it recovers the carrying amount of the asset.

– 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.

Example clarifying terminology

• Cost of Building – 100 lac. Accumulated Depreciation for tax purposes – Rs.30 lac. Accumulated Depreciation as per books – Rs. 50 lac. Specify tax base and temporary difference

• Interest receivable• Trade receivable• Dividend receivable• Loan receivable

Example clarifying terminology

• Accrued expenses in current liabilities. Expenses allowable for tax purpose on cash basis

• Accrued expenses in current liabilities. Expenses allowed for tax purpose

• Interest revenue received in advance. Taxable on cash basis

• Fines and penalties not deductible for tax purpose• Loan payable

Current Tax Asset / Liability – Recognition & Measurement

• Compare the amount due for the period and amount paid for the period– Recognise asset / liability accordingly

• Measure at the amount to be paid to (recovered from) taxation authorities

• Present current tax based on the item to which it relates is presented

Example on Current Tax

• A Ltd. declared in May 2009 as dividend of Rs.40lac. The profit before tax was Rs.40000 lac during the year ended on 31 March 2009. The tax rate on undistributed profit is 30% and an additional 15% is payable on profits distributed as dividends. Which tax rate should A Ltd. apply on profits for the year ended 31 March 2009?

Example on Current Tax

• A Ltd. has given a loan to its subsidary B Inc. A Ltd. made a trading profit of Rs.20 lac during the yr. The exchange loss recognised on the loan amounts to Rs.10 lac. The loan is regarded by A Ltd. as net investment in subsidiary B Inc. Tax rate is 50%. How much current tax would be recognised and where would it be presented?

Deferred Tax Asset / Liability – Recognition & Measurement

• Recognise DTL for all Taxable Temporary Differences that meet the basic concept

• Recognise DTA for all Deductible Temporary Differences– Probability of availability of sufficient taxable profit– Same criteria for Unabsorbed Loss / Depreciation (ULD)– Reassess recognised and unrecognised DTA at each

reporting date• Measurement Principle• No Discounting

Deferred Tax Table

Asset Liability

CA > Tax Base DTL DTA

Tax Base > CA DTA DTL

Deferred Tax Asset / Liability - Concept

• Recognise deferred tax liability (asset) if recovery or settlement of the carrying amount of an asset or liability makes future tax payments larger (smaller) than they would be if it were to have no tax consequences

• Exception to the above principle– Initial recognition of Goodwill (Only for Deferred Tax Liability)– Temporary Difference arising on initial recognition not due to business

combination and measurement with no effect on tax profit(loss)– Investments in subsidiaries, associates and JVs

• The parent, investor or venturer is able to control the timing of the reversal of the temporary differences; and

• It is probable that the temporary difference will not reverse in the foreseeable future

SIC 25 – Changes in Tax Status of an Entity or its shareholders

• Para 4 of SIC 25“The current and deferred tax consequences of a change in tax status shall be included in profit or loss for the period, unless those consequences relate to transactions and events that result, in the same or different period, in a direct charge or credit to the recognised amount of equity or in amounts recognised in other comprehensive income”.

SIC 21 – Recovery of Revalued Non Depreciable Assets

• Para 5 states“….If the tax law specifies a tax rate applicable to the taxable amount derived from the sale of an asset that differs from the tax rate applicable to the taxable amount derived from using an asset, the former rate is applied in measuring the deferred tax liability or asset related to a non-depreciable asset”

Deferred Tax Principle Explained – Subsidiaries, Associates & JVs

• Recognise DTL on undistributed profits of associates

• Recognise DTL on undistributed profits of joint ventures– The venturer should not have control on dividend

distribution decision• Recognise DTA only if– Probable that the DTD will reverse in future; and– Availability of sufficient taxable profit in future

Disclosures

• Changes in Tax rates to be explained• Amount and expiry date of unrecognised DTD• Amount of TTD for which DTL is not recognised in case of

investments in subs., associates and JVs For each type of temporary difference and for each type of unused tax loss / credits– Amount of DTA & DTL recognised in SOFP– Amt. of DTI / DTE recognised in profit or loss

• In respect of discontinued operation, tax expense relating to:– Gain / loss on discontinuance; and– Profit / Loss for the period

Disclosures

• Business Combination– Amount of change in deferred tax asset of the acquirer due

to business combination– Deferred tax benefits received in business combination that

is recognised after the acquisition date• Amount of DTA and nature of evidence supporting its

recognition– DTD > TTD– The entity has loss in current or preceding period

• Tax consequences of Dividend proposed as well as not proposed