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IN THE NAME OF ALLAH
THE MOST BENEFICIENT
THE MOST BENEVOLENT
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IAS-12 Income Taxes
“Analysis of Financial Reports of Nishat Mills Limited”
Submitted to
Prof. Azfar Ali
By
Hassan Abbas (L3f08bcom2312)
Hafiz Islam Aslam (L3f08bcom2325)
Muhammad Saad (L3f09bcom2599)
Muhammad Suleman (L3f08bcom2324)
Adil Bin Naeem (L3f08bcom2314)
Fall, 2011
Faculty of Commerce
University of Central Punjab
Lahore, Pakistan
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Preface
This report is based on the International Accounting Standard no. 12 “Income Taxes”. The
objective of this report is to gives detailed view and explanation for the Standard and the
necessary disclosures required by this standard. The report will covers all the aspects related to
Income Taxes under IAS-12 from historical perspective to the adjustments and treatments in the
financial statements of the companies. As the reference to make this standard more clear and
understandable for the readers the financial reports of “Nishat Mills Limited”, Pakistan have
been used to review how they follows the IAS 12 and how this standard is actually used by other
organization in accounting and disclosure of their financial statements. We hope this reports will
helpful for the readers to better understand this standard and application of this standard on the
actual financial statements of the organizations.
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Acknowledgements
We are thankful to Almighty Allah for the countless blessing and help, which enabled us to give
our presentation and to complete this report work.
We wish to extend our sincere appreciation to our course instructor Prof. Azfar Ali, we are
thankful to her for her extremely valuable advises and help.
Hassan Abbas
Muhammad Saad
Hafiz Islam Aslam
Muhammad Suleman
Adil Bin Naeem
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Table of Contents
1.0- Introduction to IFRS Foundation and the IASB……………………………….7
1.1- Standard-settings…………………………………………………………....7
1.1.1- The IASB (International Accounting Standards Board)……………...7
1.1.2- The IFRS Interpretations Committee………………………………..….7
1.2- Structure of IFRSs………………………………………………………….8
1.3- List of Standard……………………………………………………………..8
1.3.1- International Financial Reporting Standards………………………….8
1.3.2- International Accounting Standards…………………………………….9
2.0- History of International Accounting Standard 12…………………………….11
3.0- Introduction to IAS-12 “Income Taxes”……………………………………….11
3.1- Objective of IAS 12……………………………………………………….11
3.2- Scope of IAS 12…………………………………………………………...11
3.3- Key Concepts of IAS 12…………………………………………………..11
4.0- Measurement of Deferred Tax Assets and Liabilities………………………...14
4.1- Tax Consequences of Dividends………………………………………….14
5.0- Guidelines for Recognition……………………………………………………...14
5.1- Recognition of Deferred Tax Assets………………………………………14
5.2- Recognition of Deferred Tax Liabilities…………………………………..15
5.3- Recognition of Current tax liabilities and Current Tax Assets……………15
5.4- Recognition of Tax Expense or Income…………………………………..15
6.0- Disclosure Requirements………………………………………………………..16
6.1- Major Disclosure………………………………………………………….16
6.2- Other Disclosure…………………………………………………………..16
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7.0- Presentation Requirements……………………………………………………..17
8.0- Review of Financial Statements (Nishat Mills Limited)………………………18
Balance sheet as on June 30 2011………………………………………………...18
Profit and Loss Account………………………………………………………….20
Statement of Comprehensive Income…………………………………………….20
Cash Flow Statement……………………………………………………………..21
Significant Accounting Policies (Related to IAS 12)…………………………….22
Notes to the Account (Related to IAS 12)………………………………………..23
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1.0- Introduction to IFRS Foundation and the IASB:
The IFRS Foundation is an independent, not-for-profit private sector organization
working in the public interest. Its principal objectives are:
To develop a single set of high quality, understandable, enforceable and globally
accepted international financial reporting standards (IFRSs) through its standard-
setting body, the IASB;
To promote the use and rigorous application of those standards;
To take account of the financial reporting needs of emerging economies and small
and medium-sized entities (SMEs); and
To bring about convergence of national accounting standards and IFRSs to high
quality solutions.
1.1- Standard-settings:
Standard Setting Involves following two bodies.
1.1.1- The IASB (International Accounting Standards Board) :
The IASB is the independent standard-setting body of the IFRS Foundation.
Its members are responsible for the development and publication of IFRSs, including
the IFRS for SMEs and for approving Interpretations of IFRSs as developed by the
IFRS Interpretations Committee (formerly called the IFRIC). The IASB engages
closely with stakeholders around the world, including investors, analysts, regulators,
business leaders, accounting standard-setters and the accountancy profession.
1.1.2- The IFRS Interpretations Committee
The IFRS Interpretations Committee (formerly called the IFRIC) is the
interpretative body of the IASB. The mandate of the Interpretations Committee is to
review on a timely basis widespread accounting issues that have arisen within the
context of current IFRSs and to provide authoritative guidance (IFRICs) on those
issues. In developing interpretations, the Interpretations Committee works closely
with similar national committees and follows a transparent, thorough and open due
process.
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1.2- Structure of IFRSs
1.3- List of Standard
1.3.1- International Financial Reporting Standards:
IFRS 1 First-time Adoption of International Financial Reporting
Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Assets
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
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IFRS 12 Disclosure of Interests in Other Entities
IFRS 13 Fair Value Measurement
1.3.2- International Accounting Standards:
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 3 Consolidated Financial Statements – Originally issued 1976,
effective 1 Jan 1977. Superseded in 1989 by IAS 27 and IAS 28
IAS 4 Depreciation Accounting – Withdrawn in 1999, replaced by IAS
16, 22, and 38, all of which were issued or revised in 1998
IAS 5 Information to Be Disclosed in Financial Statements – Originally
issued October 1976, effective 1 January 1997. Superseded by IAS 1 in
1997
IAS 6 Accounting Responses to Changing Prices – Superseded by IAS 15,
which was withdrawn December 2003
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 9 Accounting for Research and Development Activities – Superseded
by IAS 38 effective 1.7.99
IAS 10 Events after the Reporting Period
IAS 11 Construction Contracts
IAS 12 Income Taxes
IAS 13 Presentation of Current Assets and Current Liabilities –
Superseded by IAS 1
IAS 14 Segment Reporting
IAS 15 Information Reflecting the Effects of Changing Prices –
Withdrawn December, 2003
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee Benefits
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IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 22 Business Combinations – Superseded by IFRS 3 effective 31
March 2004
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 25 Accounting for Investments – Superseded by IAS 39 and IAS 40
effective 2001
IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 27 Consolidated and Separate Financial Statements – Superseded by
IFRS 10, IFRS 12 and IAS 27 (rev. 2011) effective 2013
IAS 28 Investments in Associates – Superseded by IAS 28 (rev. 2011) and
IFRS 12 effective 2013
IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 30 Disclosures in the Financial Statements of Banks and Similar
Financial Institutions – Superseded by IFRS 7 effective 2007
IAS 31 Interests in Joint Ventures – Superseded by IFRS 11 and IFRS 12
effective 2013
IAS 32 Financial Instruments: Presentation – Disclosure provisions
superseded by IFRS 7 effective 2007
IAS 33 Earnings Per Share
IAS 34 Interim Financial Reporting
IAS 35 Discontinuing Operations – Superseded by IFRS 5 effective 2005
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement –
Superseded by IFRS 9 effective 2013
IAS 40 Investment Property
IAS 41 Agriculture
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2.0- History of International Accounting Standard 12:
The roots of IAS 12 move back to 1978 when its first draft was made and in 1979 the
IAS 12 “Accounting for Taxes on Income” was implemented. After that some changes were
made in IAS 12 in 1989 and it was reformatted in 1994. In October, 1996 IAS 12 “Income
Taxes” was proposed and the effective date of IAS 12 was I January, 1998. After that limited
revisions were made in the standard in 2000, 2009 and 2010. In 2010 IAS was amended in
“Deferred Tax: Recovery of Underlying Assets”, these amendments are in effect from 1 January,
2012.
3.0- Introduction to IAS-12 “Income Taxes”:
The IAS 12 deals with each and every aspect of accounting treatment, adjustments and
disclosure requirements related to the income tax calculations and presentation in the financial
statements.
3.1- Objective of IAS 12:
The objective of this standard is to prescribe the accounting treatment of income
taxes and how this treatment effects the financial statement and their presentation.
3.2- Scope of IAS 12:
This standard is applicable for the accounting for income taxes which includes all
domestic and foreign taxes that are applied on the taxable profits of the companies. It also
provides guidelines for the calculation of taxable income, and how calculation of taxable
income of organization differs from that of income calculated by tax department.
3.3- Key Concepts of IAS 12:
Following are some key concepts used in the IAS 12:
1. Current Year Tax
2. Prior Year Tax
3. Temporary Differences
4. Taxable Temporary Differences
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5. Deductable Temporary Differences
6. Deferred Tax Asset
7. Deferred Tax Liability
8. Current Tax Asset
9. Current Tax Liability
Temporary Difference:
It is the difference between the carrying amount of an asset or liability and its
tax base. Examples,
Interest revenue received in arrears and is included in accounting profit
on a time apportionment basis but is included in taxable profit on a
cash basis
Revenue from sales is included in accounting profit at delivery and in
tax profit when cash is received.
Depreciation of an asset is accelerated for tax purposes
Development cost is amortized for accounting purposes but deducted
in the year of payment for tax purposes
Taxable Temporary Difference:
A temporary difference that will result in taxable amounts in the future when
the carrying amount of the asset is recovered or the liability is settled.
Deductible Temporary Difference:
A temporary difference that will result in amounts that are tax deductible in
the future when the carrying amount of the asset is recovered or the liability is
settled.
Deferred Tax Asset:
A deferred tax asset is created by overpaying taxes during a given time
period. This usually occurs as a result of timing differences based on how the
company depreciates its assets. This deferred tax asset reduces the company's tax
liability in the future.
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Deferred Tax Liability:
An account on a company's balance sheet that is a result of temporary
differences between the company's accounting and tax carrying values, the
anticipated and enacted income tax rate, and estimated taxes payable for the current
year. This liability may or may not be realized during any given year, which makes
the deferred status appropriate.
Current Tax Liability:
The total amount of tax that an entity is legally obligated to pay to a Taxation
authority as the result of the occurrence of a taxable event.
Tax Base of Asset:
It is the amount that will be deductible for tax purposes against any taxable
economic benefits that will flow to any enterprise 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 Liability:
It is the carrying amount, less any amount that will be deductible for tax
purposes in respect of that liability in future periods. In case of revenue which 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.
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4.0- Measurement of Deferred Tax Assets and Liabilities:
Current tax liabilities for the current and prior periods should be measured at the amount
expected to be paid to the taxation authorities, using the tax rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax assets and liabilities should 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 tax rates that
have been enacted or substantively enacted by the balance sheet date.
Deferred tax assets and liabilities should not be discounted.
4.1- Tax Consequences of Dividends:
In some jurisdictions, income taxes are payable at a higher or lower rate if part or
all of the net profit or retained earnings is paid out as a dividend. In other jurisdictions,
income taxes may be refundable if part or all of the net profit or retained earnings is paid
out as a dividend. Possible future dividend distributions or tax refunds should not be
anticipated in measuring deferred tax assets and liabilities.
5.0- Guidelines for Recognition:
IAS 12 describes different rules and guidelines for the recognition of different types of
taxes, different guidelines for recognition are as follows:
5.1- Recognition of Deferred Tax Assets:
A deferred tax asset should be recognized for deductible temporary differences,
unused tax losses and unused tax credits to the extent that it is probable that taxable profit
will be available against which the deductible temporary differences can be utilized,
unless the deferred tax asset arises from:
The initial recognition of an asset or liability in a transaction which is not
a business transaction and at the time of the transaction, affects neither
accounting profit nor taxable profit.
Deferred tax assets for deductible temporary differences arising from investments
in subsidiaries, associates, branches and joint ventures should be recognized to the extent
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that it is probable that the temporary difference will reverse in the foreseeable future and
that taxable profit will be available against which the temporary difference will be
utilized.
The carrying amount of deferred tax assets should be reviewed at the end of each
reporting period and reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow the benefit of part or the entire deferred tax asset
to be utilized.
5.2- Recognition of Deferred Tax Liabilities:
The general principle in IAS 12 is that deferred tax liabilities should be
recognized for all taxable temporary differences. There are three exceptions to the
requirement to recognize a deferred tax liability, as follows:
liabilities arising from initial recognition of goodwill for which
amortization is not deductible for tax purposes;
The initial recognition of an asset or liability in a transaction which is not
a business transaction and at the time of the transaction, affects neither
accounting profit nor taxable profit.
5.3- Recognition of Current tax liabilities and Current Tax Assets:
Current tax for the current and prior periods should be recognized as a liability to
the extent that it has not yet been settled, and as an asset to the extent that the amounts
already paid exceed the amount due. Current tax assets and liabilities should be measured
at the amount expected to be paid to (recovered from) taxation authorities, using the
rates/laws that have been enacted or substantively enacted by the balance sheet date.
5.4- Recognition of Tax Expense or Income:
Current and deferred tax should be recognized as income or expense and included
in profit or loss for the period, except to the extent that the tax arises from:
A transaction or event that is recognized directly in equity; or
A business combination accounted for as an acquisition.
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If the tax relates to items that are credited or charged directly to equity, the tax
should also be charged or credited directly to equity.
6.0- Disclosure Requirements:
IAS 12 requires disclosure of tax expense (tax income) relating to ordinary activities on
the face of the statement of comprehensive income.
IAS 12 requires that if an entity presents a statement of income, in addition to a statement
of comprehensive income, tax expense (income) from ordinary activities should be presented in
the statement of income.
6.1- Major Disclosure:
IAS 12 requires that tax expense and income should be disclosed separately. The
major components of tax expense and income are:
Current tax expense (income)
Any adjustments of taxes of prior periods
Amount of deferred tax expense (income) relating to the origination and
reversal of temporary differences
Amount of deferred tax expense (income) relating to changes in tax rates
or the imposition of new taxes
Amount of the benefit arising from a previously unrecognized tax loss, tax
credit or temporary difference of a prior period
Write down, or reversal of a previous write down, of a deferred tax asset
Amount of tax expense (income) relating to changes in accounting policies
and corrections of errors
6.2- Other Disclosure:
Aggregate current and deferred tax relating to items reported directly in
equity
Tax relating to each component of other comprehensive income
Explanation of the relationship between tax expense (income) and the tax
that would be expected by applying the current tax rate to accounting
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profit or loss (this can be presented as a reconciliation of amounts of tax or
a reconciliation of the rate of tax)
Changes in tax rates
Amounts and other details of deductible temporary differences, unused tax
losses, and unused tax credits
Temporary differences associated with investments in subsidiaries,
associates, branches, and joint ventures
For each type of temporary difference and unused tax loss and credit, the
amount of deferred tax assets or liabilities recognized in the statement of
financial position and the amount of deferred tax income or expense
recognized in the income statement
Tax relating to discontinued operations
Details of deferred tax assets
7.0- Presentation Requirements:
Current tax assets and current tax liabilities should be offset on the balance sheet only if
the entity has the legal right and the intention to settle on a net basis.
Deferred tax assets and deferred tax liabilities should be offset on the balance sheet only
if the entity has the legal right to settle on a net basis and they are levied by the same taxing
authority on the same entity or different entities that intend to realize the asset and settle the
liability at the same time.
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8.0- Review of Financial Statements (Nishat Mills Limited):
Financial Statements of “Nishat Mills Limited” have been selected for review purpose
that how they have followed the IAS 12 and at what places IAS 12 has been used and mentioned.
Encircled are the points where IAS 12 is used:
Balance sheet as on June 30 2011
2011 2010
Note (Rupees in Thousands)
Equity and Liabilities
Share Capital and RESERVES
Authorized share capital
1,100,000,000 (2010: 1,100,000,000) ordinaryShares of Rupees 10 each 11,000,000 11,000,000
Issued, subscribed and paid-up share capital 3 3,515,999 3,515,999Reserves 4 31,877,960 27,860,314
Total equity 35,393,959 31,376,313
LiabilitiesNon-Current Liabilities
Long term financing 5 2, 6592,328 2,980,694Liabilities against assets subject to finance lease 6 202,628 -Deferred income tax 7 510,640 1,256,892
3,372,596 4,237,586
Current Liabilities
Trade and other payables 8 2,577,020 2,139,321Accrued mark-up 9 358,454 232,247Short term borrowings 10 10,471,685 6,649,447Current portion of non-current liabilities 11 1,283,865 1,128,632Provision for taxation 631,325 418,768
15,322,349 10,568,415
Total Liabilities 18,694,945 14,806,001Contingencies and Commitments 12Total Equity and Liabilities 54,088,904 46,182,314
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2011 2010Note (Rupees in Thousands)
AssetsNon-Current assets
Property, plant and equipment 13 13,303,514 11,841,667Investment properties 14 126,834 132,550Long term investments 15 21,337,889 21,959,543Long term loans 16 849,206 498,803Long term deposits and prepayments 17 29,502 16,823
35,646,945 34,449,386
Current assets
Stores, spare parts and loose tools 18 955,136 688,832Stock in trade 19 9,846,680 6,060,441Trade debts 20 2,481,259 2,041,256Loans and advances 21 756,351 504,046Short term deposits and prepayments 22 47,211 31,912Other receivables 23 1,406,890 724,407Accrued interest 24 34,260 16,906Short term investments 25 1,781,471 1,554,543Cash and bank balances 26 1,132,701 110,585
18,441,959 11,732,928
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Profit and Loss AccountFor the end year 30 June 2011
2011 2010Note (Rupees in Thousands)
Sales 27 48,565,144 31,535,647Cost of sales 28 (40,718,697) (25,555,462)
Gross profit 7,846,447 5,980,185Distribution cost 29 (2,190,496) (1,714,598)Administrative expenses 30 (656,756) (545,166)Other operating expenses 3 (431,220) (289,080)
(3,278,472) (2,548,844)
4,567,975 3,431,341Other operating income 32 2,444,985 981,650
Profit from operations 7,012,960 4,412,991Finance cost 33 (1,601,048) (1,126,922)
Profit before taxation 5,411,912 3,286,069Provision for taxation 34 (568,000) (370,608)
Profit after taxation 4,843,912 2,915,461
Earnings per Share- Basic andDiluted (Rupees) 35 13.78 10.50
Statement of Comprehensive IncomeFor the year ended 30 June 2012
2011 2010(Rupees in Thousands)
Profit after Taxation 4,843,912 2,915,461
Other Comprehensive income
Surplus/ (deficit) arising on re-measurement of availableFor sale investments to fair value (584,488) 6,314,129Reclassification adjustments for gains included in profit or loss (109,030) (52,118)Deferred income tax relating to surplus on availableFor sale investments 746,252 (1,011,649)Other comprehensive income for the year - net of tax 52,734 5,250,362
Total Comprehensive income for the year 4,896,646 8,165,823
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Cash Flow StatementFor the year ended 30 June 2012
2011 2010Note (Rupees in Thousands)
Cash flows from operating activitiesCash generated from operations 36 1,614,622 2,386,569Finance cost paid (1,474,841) (1,096,389)Income tax paid (561,819) (343,036)Exchange gain on forward exchange contract received 706,160 64,725Net increase in long term loans to employees (9,690) (19,570)Net increase in long term deposits and prepayments (13,909) (4,106)
Net cash generated from operating activities 260,523 988,193
Cash flows from investing activities
Capital expenditure on property, plant and equipment (2,848,115) (1,955,542)Proceeds from sale of property, plant and equipment 275,447 145,490Investments made (710,655) (4,249,397)Proceeds from sale of investment 301,282 430,000Long term loan to subsidiary company (345,335) (472,885)Interest received on loan to subsidiary company 106,200 22,331Dividends received 998,675 559,134
Net cash used in investing activities (2,222,501) (5,520,869)
Cash flows from financing activities\
Proceeds from long term financing 1,152,150 1,937,415Repayment of long term financing (1,078,628) (595,813)Repayment of assets subject to finance lease (37,027) -Proceeds from issue of right shares - 4,364,688Short term borrowings - net 3,822,238 (693,153)Dividend paid (874,639) (481,370)
Net cash from financing activities 2,984,094 4,531,767
Net increase / (decrease) in cash and cash equivalents 1,022,116 (909)Cash and cash equivalents at the beginning of the year 110,585 111,494
Cash and cash equivalents at the end of the year 1,132,701 110,585
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Significant Accounting Policies (Related to IAS 12)
Taxation (Page no. 47 of Annual Report 2011)
In making the estimates for income tax currently payable by the Company, the
management takes into account the current income tax law and the decisions of appellate
authorities on certain issues in the past.
2.3 Taxation (Page no. 50 of Annual Report 2011)
Current
Provision for current tax is based on the taxable income for the year determined in
accordance with the prevailing law for taxation of income. The charge for current tax is
calculated using prevailing tax rates or tax rates expected to apply to the profit for the
year if enacted. The charge for current tax also includes adjustments, where considered
necessary, to provision for tax made in previous years arising from assessments framed
during the year for such years.
Deferred
Deferred tax is accounted for using the balance sheet liability method in respect of
all temporary differences arising from differences between the carrying amount of assets
and liabilities in the financial statements and the corresponding tax bases used in the
computation of the taxable profit. Deferred tax liabilities are generally recognized for all
taxable temporary differences and deferred tax assets to the extent that it is probable that
taxable profits will be available against which the deductible temporary differences,
unused tax losses and tax credits can be utilized.
Deferred tax is calculated at the rates that are expected to apply to the period
when the differences reverse based on tax rates that have been enacted or substantively
enacted by the balance sheet date. Deferred tax is charged or credited in the profit and
loss account, except to the extent that it relates to items recognized in other
comprehensive income or directly in equity. In this case the tax is also recognized in
other comprehensive income or directly in equity, respectively.
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Notes to the Account (Related to IAS 12)
Note no. 7-Deferred Income Tax:
This represents deferred income tax liability on surplus on revaluation of unquoted equity
investments available for sale. Provision for deferred tax on other temporary differences was not
considered necessary as the Company is chargeable to tax under section 169 of the Income Tax
Ordinance, 2001.
Note no. 34-Provision for Taxation:
Current (Note 34.1) 568,000 400,608
Prior year adjustment - (30,000)
568,000 370,608
34.1 The Company falls under the ambit of presumptive tax regime under section 169 of
the Income Tax Ordinance, 2001. Provision for income tax is made accordingly.
34.2 Provision for deferred tax is not required as the Company is chargeable to tax under
section 169 of the Income Tax Ordinance, 2001 and no temporary differences are expected to
arise in the foreseeable future except for deferred tax liability as explained in note 7.
34.3 Reconciliation of tax expense and product of accounting profit multiplied by the
applicable tax rate is not required in view of presumptive taxation.
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