IND AS 12 : INCOME TAXES

6 IND AS 12 : INCOME TAXES

(I) Key Terms

(1) Current Tax: This is the tax payable in the current year as per Income Tax.
(2) Deferred Tax: Refers to temporary saving in tax / temporary payment of
additional tax which arises due to temporary differences between carrying
value and tax base.
(3) Income Tax Expense = Current Tax Expense + Deferred Tax Expense
(4) Carrying Value: This is the ledger balance of relevant asset / liability in the
books of accounts after applying all IND AS.
(5) Tax Base: It is the amount which would appear for the relevant asset /
liability in the tax balance sheet as per Income Tax.

(II) Differences

DIFFERENCES (Difference between

Carrying value and Tax Base)

Temporary
(Eg : Depreciation, Other than
43B items) temporary

Eg : Donation to
Deductible Temporary unregistered Trust
Taxable Temporary
Difference Difference

Differences which would No Deferred Tax

Difference which result
result in deductions
in additional taxable
(benefits) from tax
amounts in the future
amounts in the future

Deferred Tax Deferred Tax

Liabilities (DTL) Assets (DTA)

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(III) Recognition of Tax

RECOGNITION OF TAX

Items in P/L Items in O.C.I. Items directly in

(Eg : FVTPL items) (Eg : FVOCI items) Reserve (Equity)

Tax in P/L Tax in O.C.I Tax to be shown directly

in Reserves (Other
Equity) (Eg : Dividend
and DDT) if applicable

(IV) Steps in Deferred Tax Working

Step 1 Step 2 Step 3 Step 4

Calculate Calculate Tax Calculate Deferred Tax =

Carrying Value Base (Based Difference Difference × Tax
(Applying IND on Income Tax Rate (Subject
AS principles) principles) to Certain
exceptions)

 t this stage, we need to identify Deferred Tax Asset or Deferred Tax Liability. As a
A
general rule, if the carrying value of an underlying asset is greater than the
tax base, the deferred tax item would be opposite. i.e., an underlying asset
will create a Deferred Tax Liability.
f the carrying value of an underlying item is less than the tax base, the
I
deferred tax item would also be the same i.e. An underlying asset will create
a deferred tax asset.
Particulars Underlying Asset Underlying Liability
Carrying value > Tax Base D.T.L D.T.A
[Eg : P.P.E] [Eg : 43 B items]
Carrying Value < Tax Base D.T.A D.T.L
[Eg : Preliminary Expenses] [Eg : Loan with Processing Fees]
Carrying Value = Tax Base No Deferred Tax

Offsetting Principles
DTA and DTL be netted off in the Balance Sheet in case the underlying items are allowed
to be off settled while calculating tax. Example: DTA under U.S tax laws cannot be off-
setted against DTL under Indian Tax Laws.
(Refer Q. 1, 2)

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(V) Tax Rates

1. Current Tax: Should be created based on tax rate applicable in the current
year.
2. Deferred Tax: Should be created based on tax rates enacted / substantially
enacted till the
Balance Sheet Date. (Example: Budget).
Example:
Balance Sheet Date : 31/3, Post B/S Date: 30/5
Budget Act Applicable
Rate
1/2 1/3 20%
Old : 30%
1/2 30/6 20%
New : 20%
1/5 15/5 30%

In the last case, no enactment / substantial enactment was done till the Balance
Sheet Date and hence Old Rate is taken.
3. In case different natures of income are taxable at different tax rates, then we
should take the tax rate based on the entity’s intention to utilize the asset.
Example: A capital gain rate of 20% should be applied in case an entity intends
to sell the asset and a tax rate of 30% (depreciation) would be applied in case
the entity intends to use the asset.
4. Changes in Tax Rate
In case the tax rate subsequently changes, then the entity will have to reassess
its tax liabilities based on the revised tax rates and the difference if any would
be adjusted as deferred tax expense / income and taken to the P/L or O.C.I
depending on how the deferred tax on the underlying item is accounted.

(Refer Q. 3)

(VI) Exception: Creation of Deferred Tax Asset

Deferred Tax Liability should always be created irrespective of future profit position
(prudence). However, DTA can be created only if the entity anticipates sufficient
benefits in the future which signify that the DTA will be utilized. This can be evaluated
by checking the following 3 points in the order of preference:

 heck if there are sufficient taxable temporary differences whose

C
(I) reversal pattern matches the reversal pattern of the deductible
temporary differences (i.e. DTL and DTA reverse at the same time)

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Check whether it is probable that sufficient taxable profits would

(II)
be earned in the future.

Check if there are any tax planning opportunities / strategies

(III)
available

Example: Change in the method of accounting in order to record higher

profits in the earlier years to utilize losses that may lapse.
The maximum DTA that can be recorded by an entity is restricted to the
total of (i + ii + iii) × Tax Rate

(Refer Q. 4, 5, 6, 7, 8, 9, 10, 11, 21)

(IV) DEFERRED TAX ON BUSINESS COMBINATION

DEFERRED TAX ADJUSTMENTS

ON CARRY
ON NET ASSSETS FORWARD LOSSES

(1) Create DTA on

acquisition date only
Carrying value > Tax Base Carry value < Tax Base
if it is probable that
(Fair value) (Old Carrying (Fair value) (Old carrying
sufficient benefits
value) value)
would be earned.
(2) If the sufficient
benefit condition
benefit condition
gets satisfied during
the measurement
period, create DTA
DTL DTA with a corresponding
adjustment to Goodwill,
else adjust the P/L.

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 IND AS 12 : INCOME TAXES

Note 1
In case tax base of acquiree is available, we take that, else the book values (old
carrying values) can be assumed to be the tax base.

Note 2
DTA / DTL will be calculated based on the tax rates applicable to the acquiree
(subsidiary)

Note 3
Deferred Tax on Goodwill
Generally, goodwill is not tax deductible and hence we will not need to create
deferred tax. IND AS 12 additionally provides an exception in the creation of deferred
tax liability on goodwill as it will give rise to a circular reference. For example: in
question 12, if Deferred Tax is calculated on goodwill of 22.5, it will be recorded
as a part of the acquisition entry, which inturn will change the goodwill and hence
we might need to again calculate deferred tax and the calculations will happen in a
circular manner.

Note 4
In case of Business Combination, differences between Individual Net Assets are
assumed to be temporary unless given otherwise.

(Refer Q. 12, 13, 14, 15)

Exception to DTL

Conditions:
1. Dividend Distribution in Entity’s Control
2. No dividend expected in Foreseeable Future

Subsidary Associate

DTL NOT CREATED DTL TO BE CREATED

(If both conditions Satisfied) (Condition 1 will not be satisfied)

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(VII) Exception on DTL Creation (Goodwill & Dividends from Subsidary)

Investment in subsidiary: IN CFS, we apply the full consolidation method and hence we
consolidate Post Acquisition Profits as and when they are earned. These profits get reflected
through an increase in Net Assets. Therefore, the carrying value of the subsidiary in books
of accounts will increase due to undistributed profits in the Post Acquisition Period.
Income Tax will record these investments at cost only. However, when dividend is
distributed the profits would be taxable.
Therefore, the difference between carrying value and Tax Base reverses at the time
of dividend - Reversal of difference can be controlled by the Parent and if no dividend is
expected to be distributed in the foreseeable future, the reversal will not happen. Hence
in such cases, IND AS 12 exempts an entity from creating a deferred tax liability.
Investment in associate: However, in case of an investment in associate, investment is
accounted as per the equity method i.e. Cost + Share in Undistributed Profits. Income
tax continues to record these investments at cost but will levy tax at the time of dividend.
Hence even in this case, the reversal of differences will happen at the time of dividend.
However, the investor cannot control the timing of dividend in case of an
associate and hence DTL should be created.

(Refer Q. 17, 18, 19)

(VIII) Deferred Tax and Share Based Payments

Under the specific guidance given as per IND AS 12, the following steps needs to
be followed:

Carrying value (IND AS) has to be taken as NIL. As per IND

AS 102, the EBE and the corresponding SBP reserve are
created based on the fair value on the grant date. However,
as per Income Tax, the deduction will be obtained on the
date of exercise based on the intrinsic value (i.e. actual
market price-exercise price) on the date of exercise. This 01
would be difference from the fair value on the grant date
and hence IND AS 12 requires us to ignore the SBP reserve
and (which is based on fair value on grant date) and take
the carrying value at NIL.

Tax Base
The deduction under Income Tax will be based on intrinsic
value on the date of exercise. However, the accounting for
deferred tax needs to be done based on the years before
exercise. Hence, the intrinsic value for the purpose of tax 02
base calculation should be based on the actual intrinsic
value based on the end of each year. Further, the tax base
should be recorded pro rata based on the vesting period
served till date ÷ total vesting period.

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The difference created will be a deduction temporary

difference as a deduction for these expenses will be obtained
in the future when the Employee exercise and hence we will
pay a lower tax in the future years. Therefore, this creates a
03
D.T.A (no need to check for DTA / DTI rules)
In this case as ICAI specifically treats this as a DTA (similar
to carry forward losses)

(Refer Q. 20)

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