CHAPTER 13

INCOME TAXES (IAS – 12)

Objective
The objective of this Standard is to prescribe the accounting treatment for income
taxes. The principal issue in accounting for income taxes is how to account for the
current and future tax consequences of:
(a) The future recovery (settlement) of the carrying amount of assets (liabilities)
that are recognized in an entity's balance sheet; and
(b) Transactions and other events of the current period that are recognized in an
entity's financial statements
Basic Principle
It is inherent in the recognition of an asset or liability that the reporting entity expects
to recover or settle the carrying amount of that asset or liability. If it is probable that
recovery or settlement of that carrying amount will make future tax payments larger
(smaller) than they would be if such recovery or settlement were to have no tax
consequences, this Standard requires an entity to recognize a deferred tax liability
(deferred tax asset), with certain limited exceptions.
Scope
This Standard shall be applied in accounting for income taxes.
1. Income taxes include all domestic and foreign taxes, which are based on
taxable profits. Income taxes also include taxes, such as withholding taxes,
which are payable by a subsidiary, associate or joint venture on distributions
to the reporting entity.
2. This Standard does not deal with the methods of accounting for government
grants (IAS 20) or investment tax credits. However, this Standard does deal
with the accounting for temporary differences that may arise from such
grants or investment tax credits.
Definitions
Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance
with the rules established by the taxation authorities, upon which income taxes are
payable (recoverable).
Tax expense (tax income) is the aggregate amount included in the determination of
profit or loss for the period in respect of current tax and deferred tax.
Current tax is the amount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period.
Deferred tax liabilities are the amounts of income taxes payable in future periods in
respect of taxable temporary differences.
Deferred tax assets are the amounts of income taxes recoverable in future periods in
respect of:
(a) Deductible temporary differences;
(b) The carry forward of unused tax losses; and
(c) The carry forward of unused tax credits.
Temporary differences are differences between the carrying amount of an asset or
liability in the balance sheet and its tax base. Temporary differences may be either:
(a) taxable temporary differences, which are temporary differences that will
result in taxable amounts in determining taxable profit (tax loss) of future
periods when the carrying amount of the asset or liability is recovered or
settled; or
(b) deductible temporary differences, which are temporary differences that will
result in amounts that are deductible in determining taxable profit (tax loss) of

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 future periods when the carrying amount of the asset or liability is recovered
or settled.
The tax base of an asset or liability is the amount attributed to that asset or liability
for tax purposes.
Tax base
Tax base of an asset
The 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 = (Carrying value –
Future taxable benefits + Future deductible amounts)].
Examples
Determine the tax base of the following: -
 A machine cost Rs. 1,000. For tax purposes depreciation of Rs. 500 has already
been deducted in the current and prior years and the remaining cost will be
deductible in future periods, either as depreciation or through a deduction on
disposal.
 A machine cost Rs. 1,000. The tax depreciation of Rs. 500 has already been
used for determination of tax but accounting depreciation of Rs. 300 has been
charged on the asset.
 Interest receivable has a carrying value of Rs. 100,000. The related interest
revenue will be taxed on cash receipt basis.
 Trade receivables have a carrying value of Rs. 100,000. The related revenue
has already been included in the taxable profit (loss) for the year.
 Dividend receivable from a subsidiary has a carrying value of Rs. 200,000. The
dividends are not taxable.
 A loan receivable has a carrying value of Rs. 50,000. The repayment of loan will
have no tax consequences.
The tax base of a liability
The 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. [Tax base =
Carrying amount – future deductible amount]
In the 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. [Tax base = Carrying amount – revenue not taxable in
future]
Examples
 Current liabilities include expenses with a carrying value of Rs.100. The related
expenses will be deducted for tax purposes on a cash basis.
 Current liabilities include interest revenue in advance, with a carrying amount
of 100. The related interest revenue was taxed on a cash basis.
 Current liabilities include accrued expenses with a carrying amount of Rs. 500.
The related expense has already been deducted for tax purposes.
 Current liabilities include accrued fines and penalties with a carrying amount of
Rs.100. Fines and penalties are not deductible for tax purposes.
 A loan repayment has carrying amount of Rs. 100. The repayment of loan will
have no tax consequences.
Tax base of assets/liabilities having carrying value NIL
Some items have a tax base but are not recognized as assets and liabilities in the
balance sheet. For example, research costs are recognized as an expense in
determining accounting profit in the period in which they are incurred but may not

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be permitted as a deduction in determining taxable profit (tax loss) until a later
period. The difference between the tax base of the research costs, being the
amount the taxation authorities will permit as a deduction in future periods, and the
carrying. Where amount of nil is a deductible temporary difference that results in a
deferred tax asset
Tax base in group financial statements
In consolidated financial statements, temporary differences are determined by
comparing the carrying amounts of assets and liabilities in the consolidated financial
statements with the appropriate tax base. The tax base is determined by reference
to a consolidated tax return in those jurisdictions in which such a return is filed. In
other jurisdictions, the tax base is determined by reference to the tax returns of each
entity in the group.
Recognition of Current Tax Liabilities and Current Tax Assets
 Current tax for current and prior periods shall, to the extent unpaid, be
recognized as a liability. If the amount already paid in respect of current and
prior periods exceeds the amount due for those periods, the excess shall be
recognized as an asset.
 The benefit relating to a tax loss that can be carried back to recover current
tax of' a previous period shall be recognized as an asset
Recognition of Deferred Tax Liabilities and Deferred Tax Assets
Taxable Temporary Differences
A deferred tax liability shall be recognized for all taxable temporary differences,
except to the extent that the deferred tax liability arises from:
(a) The initial recognition of goodwill; or
(b) The initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss).
However, for taxable temporary differences associated with investments in
subsidiaries, branches and associates, and interests in joint ventures, a deferred tax
liability shall be recognized in accordance with this IAS.
Example
An asset which cost 150 has a carrying amount of 100. Cumulative depreciation for
tax purposes is 90 and the tax rate is 25%?
Some temporary differences arise when income or expense is included in
accounting profit in one period but are included in taxable profit in a different
period. Such temporary differences are often described as timing differences. The
following are the examples:
(a) Interest revenue is included in accounting profit on a time proportion basis
but may, in some jurisdictions, included in taxable profit when cash is
collected;
(b) Depreciation used in determining taxable profit (tax loss) may differ from that
used in determining accounting profit. A taxable temporary difference arises,
and results in a deferred tax liability, when tax depreciation is accelerated;
and
(c) Development costs may be capitalized and amortized over future periods in
determining accounting profit but deducted in determining taxable profit in
the period in which they are incurred. The temporary difference is the
difference between the carrying amount of the development costs and their
tax base of nil.

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Temporary differences also arise when:
(a) The cost of a business combination is allocated by recognizing the identifiable
assets acquired and liabilities assumed at their fair values, but no equivalent
adjustment is made for tax purposes;
(b) Assets are revalued and no equivalent adjustment is made for tax purposes
(c) Goodwill arises in a business combination
(d) the tax base of an asset or liability on initial recognition differs from its initial
carrying amount, for example when an entity benefits from non-taxable
government grants related to assets; or
(e) the carrying amount of investments in subsidiaries, branches and associates
or interests in joint ventures becomes different from the tax base of the
investment or interest.
Business Combinations
The cost of a business combination is allocated by recognizing the identifiable assets
acquired and liabilities assumed at their fair values at the acquisition date.
Temporary differences arise when the tax bases of the identifiable assets acquired
and liabilities assumed are not affected by the business combination or are affected
differently. For example, when the carrying amount of an asset is increased to fair
value but the tax base of the asset remains at cost to the previous owner, a taxable
temporary difference arises which results in a deferred tax liability. The resulting
deferred tax liability affects goodwill.
Assets Carried at Fair Value
IFRSs permit or require certain assets to be carried at fair value or to be revalued for
example, IAS 16, IAS 38, IAS 39 and IAS 40. In those jurisdictions, where the
revaluation or restatement of an asset does not affect taxable profit in the period of
the revaluation or restatement and, consequently, the tax base of the asset is not
adjusted. The difference between the carrying amount of a revalued asset and its
tax base is a temporary difference and gives rise to a deferred tax liability or asset.
Goodwill
 Many taxation authorities do not allow reductions in the carrying amount of
goodwill as a deductible expense in determining taxable profit. Moreover, in
such jurisdictions, the cost of goodwill is often not deductible when a
subsidiary disposes of its underlying business. In such jurisdictions, goodwill has
a tax base of nil. Any difference between the carrying amount of goodwill
and its tax base of nil is a taxable temporary difference. However, this
Standard does not permit the recognition of the resulting deferred tax liability
because goodwill is measured as a residual and the recognition of the
deferred tax liability would increase the carrying amount of goodwill.
 Subsequent reductions in a deferred tax liability that is un-recognized
because it arises from the initial recognition of goodwill are also regarded as
arising from the initial recognition of goodwill and are therefore not
recognized under.
 Deferred tax liabilities for taxable temporary differences relating to goodwill
are, however, recognized to the extent they do not arise from the initial
recognition of goodwill. For example, if goodwill acquired in a business
combination has a cost of 100 that is deductible for tax purposes at a rate of
20 per cent per year starting in the year of acquisition, the tax base of the
goodwill is 100 on initial recognition and 80 at the end of the year of
acquisition. If the carrying amount of goodwill at the end of the year of
acquisition remains unchanged at 100, a taxable temporary difference of 20
arises at the end of that year. Because that taxable temporary difference

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 does not relate to the initial recognition of the goodwill, the resulting deferred
tax liability is recognized.
Initial Recognition of an Asset or Liability
A temporary difference may arise on initial recognition of an asset or liability, for
example if part or all of the cost of an asset will not be deductible for tax purposes.
The method of accounting for such a temporary difference depends on the nature
of the transaction which led to the initial recognition of the asset:
(a) in a business combination, an entity recognizes any deferred tax liability or
asset and this affects the amount of goodwill or the amount of any excess
over the cost of the combination of the acquirer’s interest in the net fair value
of the acquiree’s identifiable assets, liabilities and contingent
liabilities;
(b) if the transaction affects either accounting profit or taxable profit, an entity
recognizes any deferred tax liability or asset and recognizes the resulting
deferred tax expense or income in the income statement;
(c) if the transaction is not a business combination, and affects neither
accounting profit nor taxable profit, an entity would, in the absence of the
exemption, recognize the resulting deferred tax liability or asset and adjust
the carrying amount of the asset or liability by the same amount. Such
adjustments would make the financial statements less transparent. Therefore,
this Standard does not permit an entity to recognize the resulting deferred
tax liability or asset, either on initial recognition or subsequently.
Furthermore, an entity does not recognize subsequent changes in the un-
recognized deferred tax liability or asset as the asset is depreciated.
(d) In accordance with IAS 32 Financial Instruments: the issuer of a compound
financial instrument (for example, a convertible bond) classifies the
instrument’s liability component as a liability and the equity component
as equity. In some jurisdictions, the tax base of the liability component on
initial recognition is equal to the initial carrying amount of the sum of the
liability and equity components. The resulting taxable temporary difference
arises from the initial recognition of the equity component separately from the
liability component. Therefore, the exception set out above does not apply.
Consequently, an entity recognizes the resulting deferred tax liability. The
deferred tax is charged directly to the carrying amount of the equity
component. Subsequent changes in the deferred tax liability are recognized
in the income statement as deferred tax expense (income).
Example
An entity intends to use an asset which cost 1,000 throughout its useful life of five
years and then dispose of it for a residual value of nil. The tax rate is 40%.
Depreciation of the asset is not deductible for tax purposes. On disposal, any
capital gain would not be taxable and any capital loss would not be deductible.
Deductible Temporary Differences
A deferred tax asset shall 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, unless the deferred tax asset arises
from the initial recognition of an asset or liability in a transaction that:
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor taxable
profit (tax loss).
However, for deductible temporary differences associated with investments in
subsidiaries, branches and associates, and interests in joint ventures, a deferred tax

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asset shall be recognized in accordance with this IAS.
Example
An entity recognizes a liability of 100 for accrued product warranty costs. For tax
purposes, the product warranty costs will not be deductible until the entity pays
claims.
The following are examples of deductible temporary differences, which result in
deferred tax assets:
(a) Retirement benefit costs may be deducted in determining accounting profit
as service is provided by the employee, but deducted in determining taxable
profit either when contributions are paid to a fund by the entity or when
retirement benefits are paid by the entity;
(b) Research costs are recognized as an expense in determining accounting
profit in the period in which they are incurred but may not be permitted as a
deduction in determining taxable profit (tax loss) until a later period.;
(c) The cost of a business combination is allocated by recognizing the identifiable
assets acquired and liabilities assumed at their fair values at the acquisition
date. When a liability assumed is recognized at the acquisition date but the
related costs are not deducted in determining taxable profits until a later
period, a deductible temporary difference arises which results in a deferred
tax asset. A deferred tax asset also arises when the fair value of an identifiable
asset acquired is less than its tax base. In both cases, the resulting deferred
tax asset affects goodwill; and certain assets may be carried at fair value, or
may be revalued, without an equivalent adjustment being made for tax
purposes.
Un-used Tax Losses and Unused Tax Credits
A deferred tax asset shall be recognized for the carry forward of unused tax losses
and unused tax credits to the extent that it is probable that future taxable profit will
be available against which the unused tax losses and unused tax credits can be
utilized.
An entity considers the following criteria in assessing the probability that taxable
profit will be available against which the unused tax losses or unused tax credits can
be utilized:
(a) whether the entity has sufficient taxable temporary differences relating to the
same taxation authority and the same taxable entity, which will result in
taxable amounts against which the unused tax losses or unused tax credits
can be utilized before they expire;
(b) Whether it is probable that the entity will have taxable profits before the
unused tax losses or unused tax credits expire;
(c) whether the unused tax losses result from identifiable causes which are
unlikely to recur; and
(d) Whether tax planning opportunities (see paragraph 30) are available to the
entity that will create taxable profit in the period in which the unused tax
losses or unused tax credits can be utilized.
Tax planning opportunities are actions that the entity would take in order to
create or increase taxable income in a particular period before the expiry of
a tax loss or tax credit carry forward. For example, in some jurisdictions,
taxable profit may be created or increased by:
(a) electing to have interest income taxed on either a received or
receivable basis;
(b) deferring the claim for certain deductions from taxable profit;

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 (c) selling, and perhaps leasing back, assets that have appreciated but
for which the tax base has not been adjusted to reflect such
appreciation; and
(d) selling an asset that generates non-taxable income (such as, in some
jurisdictions, a government bond) in order to purchase another
investment that generates taxable income.
Where tax planning opportunities advance taxable profit from a later period
to an earlier period, the utilization of a tax loss or tax credit carry forward still
depends on the existence of future taxable profit from sources other than
future originating temporary differences.
To the extent that it is not probable that taxable profit will be available against
which the unused tax losses or unused tax credits can be utilized, the deferred tax
asset is not recognized.
Goodwill
If the carrying amount of goodwill arising in a business combination is less than its tax
base, the difference gives rise to a deferred tax asset. The deferred tax asset arising
from the initial recognition of goodwill shall be recognized as part of the accounting
for a business combination to the extent that it is probable that taxable profit will be
available against which the deductible temporary difference could be utilized.
Re-assessment of Unrecognized Deferred Tax Assets
At each balance sheet date, an entity re-assesses un-recognized deferred tax
assets. The entity recognizes a previously unrecognized deferred tax asset to the
extent that it has become probable that future taxable profit will allow the deferred
tax asset to be recovered.
Investments in Subsidiaries, Branches and Associates and Interests in Joint Ventures
Temporary differences arise when the carrying amount of investments in subsidiaries,
branches and associates or interests in joint ventures (namely the parent or investor’s
share of the net assets of the subsidiary, branch, associate or investee, including the
carrying amount of goodwill) becomes different from the tax base (which is often
cost) of the investment or interest. Such differences may arise in a number of
different circumstances, for example:
(a) the existence of undistributed profits of subsidiaries, branches, associates and
joint ventures;
(b) changes in foreign exchange rates when a parent and its subsidiary are
based in different countries; and
(c) a reduction in the carrying amount of an investment in an associate to its
recoverable amount.
In consolidated financial statements, the temporary difference may be different
from the temporary difference associated with that investment in the parent’s
separate financial statements if the parent carries the investment in its separate
financial statements at cost or revalued amount.
An entity shall recognize a deferred tax liability for all taxable temporary differences
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:
(a) the parent, investor or venturer is able to control the timing of the reversal of
the temporary difference; and
(b) it is probable that the temporary difference will not reverse in the foreseeable
future.
An entity shall recognize a deferred tax asset for all deductible temporary
differences arising from investments in subsidiaries, branches and associates, and
interests in joint ventures, to the extent that, and only to the extent that, it is probable

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that:
o the temporary difference will reverse in the foreseeable future; and
o Taxable profit will be available against which the temporary difference can
be utilized.
Measurement
 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 balance sheet date.
 Deferred tax assets and liabilities 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 tax rates (and tax laws) that have been enacted or
substantively enacted by the balance sheet date.
 The measurement of deferred tax liabilities and deferred tax assets shall reflect
the tax consequences that would follow from the manner in which the entity
expects, at the balance sheet date, to recover or settle the carrying amount of
its assets and liabilities.
Deferred tax assets and liabilities shall not be discounted.
 The Standard does not require or permit the discounting of deferred tax assets
and liabilities.
 Temporary differences are determined by reference to the carrying amount
of an asset or liability. This applies even where that carrying amount is itself
determined on a discounted basis.
Recognition of Current and Deferred Tax
Income Statement
Current and deferred tax shall 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) a transaction or event which is recognized, in the same or a different period,
directly in equity; or
b) a business combination
The carrying amount of deferred tax assets and liabilities may change even though
there is no change in the amount of the related temporary differences. This can
result, for example, from:
(a) a change in tax rates or tax laws;
(b) a re-assessment of the recoverability of deferred tax assets; or
(c) a change in the expected manner of recovery of an asset.
The resulting deferred tax is recognized in the income statement, except to the
extent that it relates to items previously charged or credited to equity.
Items recognized outside profit or loss
Current tax and deferred tax shall be charged or credited to outside profit and loss
account if the tax relates to items that are credited or charged, in the same or a
different period, outside profit and loss account.
Deferred Tax Arising from a Business Combination
 In accordance with IFRS 3 Business Combinations, an entity recognizes any
resulting deferred tax assets (to the extent that they meet the recognition
criteria) or deferred tax liabilities as identifiable assets and liabilities at the
acquisition date. Consequently, those deferred tax assets and liabilities affect
goodwill or the amount of any excess of the acquirer’s interest in the net fair
value of the acquiree’s identifiable assets, liabilities and contingent liabilities
over the cost of the combination. However, an entity does not recognize
deferred tax liabilities arising from the initial recognition of goodwill.

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 As a result of a business combination, an acquirer may consider it probable
that it will recover its own deferred tax asset that was not recognized before
the business combination. For example, the acquirer may be able to utilize
the benefit of its unused tax losses against the future taxable profit of the
acquirer. In such cases, the acquirer recognizes a deferred tax asset, but
does not include it as part of the accounting for the business combination,
and therefore does not take it into account in determining the goodwill or the
amount of any excess of the acquirer’s interest in the net fair value of the
acquiree’s identifiable assets, liabilities and contingent liabilities over the cost
of the combination.
 If the potential benefit of the acquiree’s income tax loss carry-forwards or
other deferred tax assets did not satisfy the criteria in IFRS 3 for separate
recognition when a business combination is initially accounted for but is
subsequently realized, the acquirer shall recognize the resulting deferred tax
as follows: -
(a) acquired deferred tax asset recognized within the measurement
period and relates new information obtained for the conditions existing
at the date of acquisition shall be applied to reduce the carrying
amount of goodwill if goodwill is zero then charged to income
statement.
(b) all other deferred tax assets realized shall be recognized in profit and
loss account.
Presentation
Tax Assets and Tax Liabilities
An entity shall offset current tax assets and current tax liabilities if, and only if, the
entity:
a) has a legally enforceable right to set off the recognized amounts; and
b) intends either to settle on a net basis, or to realize the asset and settle the
liability simultaneously.
An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
a) the entity has a legally enforceable right to set off current tax assets against
current tax liabilities; and
b) the deferred tax assets and the deferred tax liabilities relate to income taxes
levied by the same taxation authority on either:
a. the same taxable entity; or
b. 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.
Tax Expense
Tax Expense (Income) Related to Profit or Loss from Ordinary Activities
The tax expense (income) related to profit or loss from ordinary activities shall be
presented on the face of the income statement.
Disclosure
The major components of tax expense (income) shall be disclosed separately:
Components of tax expense (income) may include:
(a) current tax expense (income);
(b) any adjustments recognized in the period for current tax of prior periods;
(c) the amount of deferred tax expense (income) relating to the origination and
reversal of temporary differences;
(d) the amount of deferred tax expense (income) relating to changes in tax rates

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 or the imposition of new taxes;
(e) the amount of the benefit arising from a previously unrecognized tax loss, tax
credit or temporary difference of a prior period that is used to reduce current
tax expense;
(f) the amount of the benefit from a previously unrecognized tax loss, tax credit
or temporary difference of a prior period that is used to reduce deferred tax
expense;
(g) deferred tax expense arising from the write-down, or reversal of a previous
write-down, of a deferred tax asset; and
(h) the amount of tax expense (income) relating to those changes in accounting
policies and errors that are included in profit or loss in accordance with IAS 8,
because they cannot be accounted for retrospectively.
SIC Interpretation 25 - Income Taxes—Changes in the
Tax Status of an Entity or its Shareholders
Issue
1 A change in the tax status of an entity or of its shareholders may have
consequences for an entity by increasing or decreasing its tax liabilities or
assets. This may, for example, occur upon the public listing of an entity’s
equity instruments or upon the restructuring of an entity’s equity. It may also
occur upon a controlling shareholder’s move to a foreign country. As a result
of such an event, an entity may be taxed differently; it may for example gain
or lose tax incentives or become subject to a different rate of tax in the future.
2 A change in the tax status of an entity or its shareholders may have an
immediate effect on the entity’s current tax liabilities or assets. The change
may also increase or decrease the deferred tax liabilities and assets
recognized by the entity, depending on the effect the change in tax status
has on the tax consequences that will arise from recovering or settling the
carrying amount of the entity’s assets and liabilities.
3 The issue is how an entity should account for the tax consequences of a
change in its tax status or that of its shareholders.
Consensus
4 A change in the tax status of an entity or its shareholders does not give rise to
increases or decreases in amounts recognized outside profit or loss. 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 a different period, in a
direct credit or charge to the recognized amount of equity or in amounts
recognized in other comprehensive income. Those tax consequences that
relate to changes in the recognized amount of equity, in the same or a
different period (not included in profit or loss), shall be charged or credited
directly to equity. Those tax consequences that relate to amounts recognized
in other comprehensive income shall be recognized in other comprehensive
income.
IFRIC 23 — Uncertainty over Income Tax Treatments
Issue
IFRIC 23 clarifies the accounting for uncertainties in income taxes.
Scope
The interpretation is to be applied to the determination of taxable profit (tax loss),
tax bases, unused tax losses, unused tax credits and tax rates, when there is
uncertainty over income tax treatments under IAS 12.

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Consensus
Whether tax treatments should be considered collectively
An entity is required to use judgement to determine whether each tax treatment
should be considered independently or whether some tax treatments should be
considered together. The decision should be based on which approach provides
better predictions of the resolution of the uncertainty.
Assumptions for taxation authorities' examinations
An entity is to assume that a taxation authority with the right to examine any
amounts reported to it will examine those amounts and will have full knowledge of
all relevant information when doing so.
Determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax
credits and tax rates
An entity has to consider whether it is probable that the relevant authority will
accept each tax treatment, or group of tax treatments, that it used or plans to use in
its income tax filing.
 If the entity concludes that it is probable that a particular tax treatment is
accepted, the entity has to determine taxable profit (tax loss), tax bases,
unused tax losses, unused tax credits or tax rates consistently with the tax
treatment included in its income tax filings.
 If the entity concludes that it is not probable that a particular tax treatment is
accepted, the entity has to use the most likely amount or the expected value
of the tax treatment when determining taxable profit (tax loss), tax bases,
unused tax losses, unused tax credits and tax rates. The decision should be
based on which method provides better predictions of the resolution of the
uncertainty.
Effect of changes in facts and circumstances
An entity has to reassess its judgements and estimates if facts and circumstances
change.
Effective date
IFRIC 23 is effective for annual reporting periods beginning on or after 1 January
2019. Earlier application is permitted.
Transition
The requirements are applied by recognizing the cumulative effect of initially
applying them in retained earnings, or in other appropriate components of equity,
at the start of the reporting period in which an entity first applies them, without
adjusting comparative information. Full retrospective application is permitted, if an
entity can do so without using hindsight.

E-1
XYZ is a listed company engaged in the business of manufacturing of leather goods.
The applicable rate for the Co. is 40% in year 19X5 and 35% in 19X6.
The relevant information for calculation of deferred tax is as under: -
1. Charitable donations are recognized as expenses when they incurred and
are not deductible for tax purposes. (19X5 500, 19X6 350)
2. In 19X5 the entity was notified by the relevant tax authorities that they intend
to pursue action against the entity with respect to sulphur emissions. Although
as at December 19X6 the action had not yet come to court the entity
recognized a liability of 700 in 19X5 being its best estimate of the fine arising
from the action. Fines and penalties are not deductible for tax purposes.
(19X5 700)

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3. In 19X2 the entity incurred 1,250 of costs in relation to the development of
new product. These costs were deducted for tax purposes in 19X2. For
accounting purposes, the entity capitalized this expenditure and amortized it
on the straight-line basis over five years. At 31st December 19X4, the un-
amortized balance of these product development costs was 500.
4. In 19X5 the entity entered into an agreement with its existing employees to
provide health care benefits to retirees. The entity recognizes as an expense
the cost of this plan as employees provide service. No payments to retirees
were made for such benefits in 19X5 and X6. Healthcare costs are deductible
for tax purposes when payments are made to retirees. The entity estimated
that it is probable that taxable profit will be available against which any
resulting deferred tax asset can be utilized. (19X5 2,000 19X6 1,000)
5. Buildings are depreciated for accounting purposes at 5% a year on a straight-
line basis and at 10% a year on a straight-line basis for tax purposes. Motor
vehicles are depreciated for accounting purposes at 20% a year on straight-
line basis and a 25% a year on a straight-line basis for tax purposes. A full
year’s depreciation is charged for accounting purposes in the year that an
asset is acquired.
6. There was an addition to Buildings of 6,000 during the year 19X5 and in
vehicles of 15,000 during the year 19X6.
7. The cost of buildings is 50,000 and vehicles 10,000 at the end of 19X4 and
accumulated depreciation balance on Buildings at the end of 19X4 is 20,000
and on vehicles is 4,000. The tax allowance on the assets already taken is
Building 40,000 and vehicles 5,000.
8. At 1st January 19X6, the building was revalued to 65,000 and the entity
estimated that the remaining useful life of the building was 20 years from the
date of the revaluation. The revaluation did not affect taxable profit in 19X6
and the taxation authorities did not adjust the tax base of the building to
reflect the revaluation. In 19X6 the entity transferred 1,033 from the
revaluation reserve to retained earnings. This represents the difference of
1,590 between the actual depreciation on building (3,250) and equivalent
depreciation based on the cost of the building (1,660 which is the book value
at 1st January 19X6 of 33,200 divided by the remaining useful life of 20 years)
less the related deferred tax of 557.
9. The accounting profit for 19X5 is 8,775 and for 19X6 is 8,740.
The summarized balance sheets for 19X4, 19X5 and 19X6 are as under: -

19X4 19X5 19X6

Carrying Carrying Carrying
amount amount amount
Accounts receivable 500 500 500
Inventory 2,000 2,000 2,000
Product development costs 500 250 -
Investments 33,000 33,000 33,000
Property, plant & equipment 36,000 37,200 75,750
TOTAL ASSETS 72,000 72,950 111,250

Current income taxes payable 3,000 3,570 2,359

Accounts payable 500 500 500
Fines payable - 700 700
Liability for healthcare benefits - 2,000 3,000

Page 12 of 25
Long-term debt 2,000 12,475 12,805
Deferred income taxes 8,600 9,020 19,845
TOTAL LIABILITIES 32,100 28,265 39,209

Share capital 5,000 5,000 5,000

Revaluation surplus - - 19,637
Retained earnings 34,900 39,685 47,404
TOTAL LIABILITIES / EQUITY 72,000 72,950 111,250

Required:
i) Provide the working for Deferred Tax for all the three years
ii) Provide current tax appearing in the balance sheets for 19X5 and 19X6.
iii) Major components of tax expense for 19X5 and 19X6.
iv) The disclosure of calculation of deferred tax liability/asset in the notes to the
accounts.
v) Reconciliation of application of tax rate on Accounting profit and tax expense
for the year for 19X5 and 19X6 and;
vi) Effective tax rate for the years 19X5 and 19X6
E-2
On 1 January 20X5 entity A acquired 100 per cent of the shares of entity B at a cost
of 600. At the acquisition date, the tax base in A’s tax jurisdiction of A’s investment in
B is 600. Reductions in the carrying amount of goodwill are not deductible for tax
purposes, and the cost of the goodwill would also not be deductible if B were to
dispose of its underlying business. The tax rate in A’s tax jurisdiction is 30 per cent
and the tax rate in B’s tax jurisdiction is 40 per cent.
The fair value of the identifiable assets acquired and liabilities assumed (excluding
deferred tax assets and liabilities) by A is set out in the following table, together with
their tax bases in B’s tax jurisdiction.

Cost of Tax base

acquisition
Property, plant and 270 155
equipment
Accounts receivable 210 210
Inventory 174 124
Accounts payable (120) (120)
Retirement benefit (30)
obligations
504 369
The profit for the year ended 20X5 is 150 out of which there is a dividend payable of
80.
Required: -
Calculate the deferred tax liability/asset at the acquisition date and any movement
thereafter.
E-3
An entity receives a non-interest-bearing convertible loan of 1,000 on 31 December
X4 repayable at par on 1 January X8. In accordance with IAS 32 Financial
Instruments: Disclosure and Presentation the entity classifies the instrument’s liability
component as a liability and the equity component as equity. The entity assigns an
initial carrying amount of 751 to the liability component of the convertible loan and
249 to the equity component. Subsequently, the entity recognizes imputed discount
Page 13 of 25
as interest expense at an annual rate of 10% on the carrying amount of the liability
component at the beginning of the year. The tax authorities do not allow the entity
to claim any deduction for the imputed discount on the liability component of the
convertible loan. The tax rate is 40%.
Required: -
Prepare the working for temporary differences associated with the liability
component and the resulting deferred tax liability and deferred tax expense and
income?
E-4
Following is Balance Sheet of XYZ Company as at December 31, 2001 before
incorporation of any taxation.

Rs. in Rs. in
(000) (000)
Share capital 200,000 Fixed Assets – Net 225,000
Accumulated profit
Retained earnings 70,000 Current Assets
Trade receivable 35,500
Loan payable 15,000 Less: provision of 1,500 34,000
doubtful debts
Income in advance 2,000
Creditors and accrued 15,500 Deferred cost 20,000
Liabilities
Deferred tax-opening 2,500
Sundry Receivable 15,000
Cash & bank balance 11,000
305,000 305,000
Other information is as follows (All figures are in thousands)
a) The current year accounting profit is Rs. 50,000 before tax and brought
forward tax losses are Rs. 20,000. The opening deferred tax liability was
wrongly calculated in the previous year.
b) Tax WDV is Rs. 200,000.
c) The accounting depreciation is Rs. 15,000 while tax allowance is Rs. 20,000
and no addition or disposal of non-current assets during the year.
d) Accrued liabilities include Fine & Penalty Rs. 2,000 of which provision for the
year is Rs. 1,500. The fine and penalties are not allowable expenses under tax
laws.
e) Sundry Receivable include interest receivable Rs. 2,000 for the year. The
related interest revenue will be taxed on cash basis.
f) The provision for doubtful debts is not allowable expense, only the bad debts
written off can be claimed as expense from taxable profits.
g) Current liabilities include accrued expenses Rs. 3,000 for the year. The related
expense will be deducted for tax purpose on a cash basis.
h) The income in advance is taxed on receipt basis in the current year.
i) The decrease in provision for doubtful debts during the year is Rs.500.
j) The deferred cost represents the development expense. The original expense
was Rs. 35,000 to be amortized over seven years. The whole amount as an
expense under tax laws in the year of incurrence.
k) Tax rate of the Company is assumed at 30%.
Required:
a) Calculate the current tax and deferred tax expense/income and related

Page 14 of 25
 asset/liability.
b) Redraft the balance sheet after incorporating current and deferred tax
E-5
Identify the tax base of the following: -
 A machine cost Rs. 5,000. For tax purposes depreciation of Rs. 5000 has already
been deducted in the current and prior years.
 A machine cost Rs. 1,000. The tax depreciation of Rs. 700 has already been
used for determination of tax but accounting depreciation of Rs. 600 has been
charged on the asset.
 Interest receivable has a carrying value of Rs. 100,000. The related interest
revenue has been taxed on accrual basis.
 Trade receivables have a carrying value of Rs. 100,000. This amount is arrived at
after deducting provision for doubtful debts of Rs. 5,000. The related revenue
has already been included in the taxable profit (loss) for the year.
 The research expense having carrying value of nil already charged in the profit
and loss account can be deducted from taxable profit up to Rs. 5,000.
 Current liabilities include expenses with a carrying value of Rs.100. The related
expenses have been deducted for tax purposes on accrual basis.
 Current liabilities include interest revenue in advance, with a carrying amount
of 100. The related interest revenue was taxed on cash basis.
 Warranties with a carrying amount of Rs.100 are not allowable unless paid.
E-6
The taxable differences at the end of the year 2006 amounting to Rs. 5,000,000
which will reverse in the following years as under: -
Rs. Tax rate
2007 2,500,000 35%
2008 1,500,000 38%
2009 1,000,000 40%

Required: -Determine deferred tax liability at the end of year 2006?

E-7
A company purchased an asset costing Rs. 300,000 on June 30, 2005. The residual
value of the asset is Rs. 20,000 and useful life is 10 years. The company follows the
straight line depreciation method for charging depreciation from the date of
purchase (proportionate depreciation policy). While under tax laws a 50% tax
allowance is available in the year of purchase and 25% on reducing balance basis
thereafter. The tax rate is 30%.
Required: -
a) Calculate the deferred tax (asset/liability) at December 31, 2007.
b) Prepare ledger account of deferred tax for all the relevant years.
E-8
An asset has a carrying amount of 100 and a tax base of 60. A tax rate of 20%
would apply if the assets were sold and a tax rate of 30% would apply to other
income.
What will be deferred tax implications in both circumstances?
E-9
(i) Panel is leasing plant under a finance lease over a five-year period. The asset
was recorded at the present value of the minimum lease payments of Rs.12
million at the inception of the lease which was 1 November 2004. The asset is
depreciated on a straight line basis over the five years and has no residual
value. The annual lease payments are Rs.3 million payables in arrears on 31

Page 15 of 25
 October and the effective interest rate is 8% per annum. The directors have
not leased an asset under a finance lease before and are unsure as to its
treatment for deferred taxation. The company can claim a tax deduction for
the annual rental payment as the finance lease does not qualify for tax relief.
(ii) A wholly owned overseas subsidiary, Pins, a limited liability company, sold
goods costing Rs.7 million to Panel on 1 September 2005, and these goods
had not been sold by Panel before the year end. Panel had paid Rs.9 million
for these goods. The directors do not understand how this transaction should
be dealt with in the financial statements of the subsidiary and the group for
taxation purposes. Pins pays tax locally at 30%.
(iii) Nails, a limited liability company, is a wholly owned subsidiary of Panel, and is
a cash generating unit in its own right. The value of the property, plant and
equipment of Nails at 31 October 2005 was Rs.6 million and purchased
goodwill was Rs.1 million before any impairment loss. The company had no
other assets or liabilities. An impairment loss of Rs.1·8 million had occurred at
31 October 2005. The tax base of the property, plant and equipment of Nails
was Rs.4 million as at 31 October 2005. The directors wish to know how the
impairment loss will affect the deferred tax provision for the year. Impairment
losses are not an allowable expense for taxation purposes.
Assume a tax rate of 30%.
Required:
(b) Discuss, with suitable computations, how the situations (i) to (iii) above will
impact on the accounting for deferred tax under IAS12 ‘Income Taxes’ in the
group financial statements of Panel.
E-10
Cohort is a private limited company and has two 100% owned subsidiaries, Legion
and Air, both themselves private limited companies. Cohort acquired Air on January
01, 20x2 for Rs.5 million when the fair value of the net assets was Rs.4 million, and the
tax base of the net assets was Rs.3.5 million. The acquisition of Air and Legion was
part of business combination strategy whereby Cohort would build up the value of
the group over a three-year period and then list its existing share capital on the stock
exchange.
a) The following details relate to the acquisition of Air, which manufactures
electronic goods.
i) Part of the purchase price has been allocated to intangible assets
because it relates to the acquisition of a database of key customers
from Air. The recognition and measurement criteria for an intangible
asset under IFRS 3 do not appear to have been met but the directors
feel that the intangible asset of Rs.0.5 million will be allowed for tax
purposes and have computed the tax provision accordingly. However,
the tax authorities could possibly challenge this opinion.
ii) Air has sold goods worth Rs.3 million to Cohort since acquisition and
made a profit of Rs.1 million on the transaction. The inventory of these
goods recorded in Cohort’s balance sheet at the year end of May 31,
20X 2 was Rs.1.8 million,
iii) The balance on the retained earnings of Air at acquisition was Rs.2
million. The directors are of Cohort have decided that, during the three
years to the date that they intend to list the shares of the company,
the will realize earning through future dividend payments from the
subsidiary amounting to Rs. 500,000 per year. Tax is payable on any

Page 16 of 25
 remittance or dividends and no dividends have been declared for the
current year.
b) Legion was acquired on June 01, 20X1 and is a company which undertakes
various projects ranging from debt factoring to investing in property and
commodities. The following details relate to Legion for the year ending May
31, 20X2.
i) Legion has a portfolio of readily marketable government securities
which are held as current assets. These investments are stated at
market value in the balance sheet and any gain or loss is taken to the
income statement. These gains and losses are taxed when the
investments are sold. Currently accumulated unrealized gains are Rs.4
million.
ii) Legion has calculated that it requires a specific allowance of Rs.2
million against loans in its portfolio. Tax relief is available when specific
loan is written off.
iii) When Cohort acquired Legion it had unused tax losses brought
forward. At June 01, 20x1, it appeared that Legion would have
sufficient to realize all the unused tax loss.
The current tax rate for Cohort is 30% and for public companies is 35%.
Required: -
Write a note suitable for presentation to the partner of an accounting firm setting the
deferred tax implications of the above information for Cohort Group of companies.

Page 17 of 25
ANSWERS TO EXAMPLES
A-1
a) Deferred Tax
2004 2005 2006
Rs. Rs. Rs.
8,600 9,020 19,845

b) Current tax
2005 2006
Rs. Rs.
Current tax 3,570 2,359

c) Tax expense
2005 2006
Rs. Rs.
Current tax 3,570 2,359
Deferred tax 420 823
Effect of tax rate -- (1,128)
3,990 2,054
Tax on revaluation surplus (31,800x35%) -- 11,130
d) Notes to the accounts –deferred tax liability
2005 2006
Rs. Rs.
Taxable temporary differences
Accelerated rate of depreciation under tax laws 9,720 10,321
2005 (24,300x40%)
2006 (29,490x35%)
Timing difference on:
Development cost fully charged in the year of incurrence 100
2005 (250x40%)
Revaluation surplus 10,574
2006 (31,800 – 1,590)x35%
Deductible temporary difference
Timing difference on provision for liability for healthcare (800) (1,050)
2005 (2,000x40%)
2006 (3,000x35%)
Closing deferred tax liability 9,020 19,845
e) Reconciliation of tax on accounting profit and tax expense
2005 2006
Rs. Rs.
Tax expense 3,990 2,054
Tax on accounting profit 2005 8,775x40% 3,510 3,059
2006 8,740x35%
Tax effect of:-
Donation (500x40% / 350x35%) 200 123
Provision for penalty (700x40%) 280
Change in tax rate (9,020x5/40) (1,128)
3,990 2,054

Page 18 of 25
f) Reconciliation of applicable tax rate and effective tax rate
2005 2006
% %
Effective tax rate 2005 (3,990/8,775)x100 45.47 23.50
2006 (2,054/8,740)x100
Applicable tax rate 40.00 35.00
Tax effect off: -
Donation 2005 (200/8,775)x100 2.28 1.40
2006 (123/8,740)x100
Provision for penalty 2005 (280/8,775)x100 3.19 --
Change in tax rate (1,128/8,740)x100 -- 12.90
45.47 23.50
W-1 Calculation of taxable profit and current tax
2005 2006
Rs. Rs.
Profit before tax 8,775 8,740
Add:-
Donations 500 350
Provision for penalty 700 --
Amortization of development cost 250 --
Liability for healthcare 2,000 3,000
Less: -
Tax depreciation (8,100) (11,850)
Taxable profit 8,925 6,740
Current tax 2005 (8,925x40%)
2006 (6,740x35%) 3,570 2,359

W-2 Calculation of deferred Tax -2004

CV TB TTD DTD
Rs. Rs. Rs. Rs.
Product development cost 500 -- 500 --
Property, plant and equipment 36,000 15,000 21,000 --

21,500 --
Deferred tax @ 40% 8,600
W-3 Calculation of deferred Tax -2005
CV TB TTD DTD
Rs. Rs. Rs. Rs.
Product development cost 250 -- 250 --
Property, plant and equipment 37,200 12,900 24,300 --
Liability for health care 2,000 -- -- 2,000
24,550 2,000
Deferred tax @ 40% x 22,550 9,020
W-4 Calculation of deferred Tax -2006
CV TB TTD DTD
Rs. Rs. Rs. Rs.
Property, plant and equipment 75,750 16,050 59,700 --
Liability for health care 3,000 -- -- 3,000

Page 19 of 25
 59,700 3,000
Deferred tax @ 35% x 56,700 19,845
W-5 Carrying value –Property, plant and equipment
Building Vehicle Total
Rs. Rs. Rs.
Cost - Dec. 31, 2004 50,000 10,000 60,000
Acc. Dep. Dec. 31, 2004 (20,000) (4,000) (24,000)
Carrying value Dec. 31, 2004 30,000 6,000 36,000
Additions during the year 2005 6,000 -- 6,000
Depreciation for 2005 (2,800) (2,000) (4,800)
Carrying value Dec. 31, 2005 33,200 4,000 37,200
Additions during the year 2006 -- 15,000 15,000
Revaluation surplus 31,800 -- 31,800
Carrying value Dec. 31, 2006 65,000 19,000 84,000
Depreciation for the year 2006 (3,250) (5,000) (8,250)
Carrying value as at Dec. 31, 2006 61,750 14,000 75,750
W-6 Tax base property, plant and equipment
Building Vehicle Total
Rs. Rs. Rs.
Cost - Dec. 31, 2004 50,000 10,000 60,000
Acc. Dep. Dec. 31, 2004 (40,000) (5,000) (45,000)
Carrying value Dec. 31, 2004 10,000 5,000 15,000
Additions during the year 2005 6,000 -- 6,000
Depreciation for 2005 (5,600) (2,500) (8,100)
Carrying value Dec. 31, 2005 10,400 2,500 12,900
Additions during the year 2006 -- 15,000 15,000
Carrying value Dec. 31, 2006 10,400 17,500 27,900
Depreciation for the year 2006 (5,600) (6,250) (11,850)
Carrying value as at Dec. 31, 2006 4,800 11,250 16,050

A-2
Deferred tax at date of acquisition
CV TB TTD DTD
Rs. Rs. Rs. Rs.
Inventory 174 124 50 --
Property, plant and equipment 270 155 115 --
Retirement obligation 30 -- -- 30
Total 165 30
Net taxable differences 135
Deferred tax @ 40% 135x40% 54

Calculation of goodwill at date of acquisition

Rs. Rs.
Cos of investment 600
Fair value of net assets
Without deferred tax 504
Deferred tax liability (54) (450)
Goodwill 150

Page 20 of 25
Calculation of deferred tax in consolidated financial statements
CV TB TTD
Rs. Rs. Rs.
At date of acquisition
Net assets 450
Goodwill 150
600 600 --
After one year
Net assets 520
Goodwill 150
670 600 70
Deferred tax can’t be if both the
following condition satisfies
a) TTD will not reverse in the
foreseeable future
b) Investor has control over
reversal

A-3 calculation of deferred tax on convertible loan

CV TB TTD Rate D.T.L
31-12-x4 750 1,000 249 40% 100
31-12-x5 826 1,000 174 40% 70
31-12-x6 909 1,000 91 40% 36
31-12-x7 1,000 1,000 -- 40% --
Accounting double entry required
X4 X5 X6 X7
Equity 100 DTL 30 DTL 34 DTL 36
DTL 100 PL 30 PL 34 PL 36

A-4
a) Calculation of current tax/tax expense
Rs. (000) Rs. (000)
Tax expense
Current tax 10,200
Deferred tax 5,250 15,450
Calculation of current tax
Profit before tax 50,000
Add: - Inadmissible deductions
Accounting depreciation 15,000
Fines and penalties 1,500
Accrued expenses 3,000
Advance income 2,000
Amortization of development cost 5,000 26,500
Less: - admissible deductions
Tax depreciation 20,000
Provision for doubtful debts 500
Interest receivable 2,000 22,500
Taxable profit 54,000
Un-used tax loss (20,000)
Net taxable profit 34,000

Page 21 of 25
 Current tax @ 34,000x30% 10,200

b) Calculation of deferred tax-opening

CV TB TTD DTD
Rs. Rs. Rs. Rs.
Fixed assets 240,000 220,000 20,000 --
Provision for doubtful debts -- 2,000 -- 2,000
Deferred cost 25,000 -- 25,000 --
Un-used tax losses -- 20,000 -- 20,000
45,000 22,000
Net taxable temporary difference 23,000
Deferred tax liability@ 30% 6,900
Calculation of deferred tax-closing
Fixed assets 225,000 200,000 25,000 --
Trade receivable 34,000 35,500 -- 1,500
Deferred cost 20,000 -- 20,000 --
Sundry receivables 15,000 13,000 2,000 --
Advance income 2,000 -- -- 2,000
Creditors 15,500 12,500 -- 3,000
Total 47,000 6,500
Net taxable differences 40,500
Deferred tax closing @30% 12,150
Opening deferred tax 6,900
Deferred tax for the year 5,250
Closing deferred tax 12,150
A-5
Identify the tax base of the following: -
a) NIL
b) Rs. 300
c) Rs. 100,000
d) Rs. 105,000
e) Rs. 5,000
f) Rs. 100
g) Rs. NIL
h) Rs. NIL
A-6
Year Reversal Rate Rs.
2007 2,500,000 35% 875,000
2008 1,500,000 38% 570,000
2009 1,000,000 40% 400,000
Total 1,845,000

A-7
a) Calculation of deferred tax
CV TB TTD DTL
Rs. Rs. Rs. Rs.
Cost June 30, 2005 300,000 300,000 -- --
Depreciation 31-12-2005 (14,000) (187,500)
286,000 112,500 173,500 52,050

Page 22 of 25
 Depreciation 31-12-2006 (28,000) (28,125)
258,000 84,375 173,625 52,088
Depreciation 31-12-2007 (28,000) (21,094)
230,000 63,281 166,719 50,016

b) Ledger account for deferred tax

Rs. Rs.
b/f -
PL 52,050
c/d 52,050
52,050 52,050
b/f 52,050
PL 38
c/d 52,088
52,088 52,088
b/f 52,088
PL 2,072
c/d 50,016
52,088 52,088
A-8
The applicable tax rate to be charged to taxable temporary difference of Rs. 40 for
calculation of deferred tax is based on the purpose for which the assets is held.
The deferred tax will be Rs. 8 (40x20%) if the asset to be sold and Rs. 12 (40x30%) if the
asset is to be held for use in the business.
A-9
a) The taxable/deductible temporary differences arising on finance leases are
differences on initial recognition on which IAS 12 prohibits recognition of
deferred tax liability or asset both on initial and subsequent recognition.
Therefore, while calculating taxable profit of the year accounting
depreciation of Rs. 2.4 (12/5) and interest expense of Rs. 0.96 (12x8%) will be
added back and rental paid of Rs. 3 will be deducted from accounting profit
to determine the taxable profit.
b) The carrying value of stock in the consolidated statement of financial position
will be Rs. 7 after eliminating of intra group profit of Rs. 2, however, the tax
base will be from individual financial statements which are Rs. 9, and
therefore, a deductible difference of Rs. 2 will be identified in the
consolidated financial statements. This deductible difference of Rs. 2 will result
in recognition of deferred tax of Rs. 0.6 in consolidated financial statements.
c) The deferred tax will be calculated as under: -
CV TB TTD DTD
Rs. Rs. Rs. Rs.
Before impairment loss
Net assets 6 4 2 --
Goodwill 1 1 -- --
7 5 2 --
Deferred tax liability @ 30% (2x30%)= 0.6million
After impairment
Net assets (6-08) 5.2 4 1.2 --
Goodwill (1-1) 0 0 -- --

Page 23 of 25
 5.2 4 1.2 --
Deferred tax liability @30% (1.2x30%)= 0.36
The deferred tax liability will reduce by Rs. 0.24 will and credit will be
recognized in the profit or loss account.
A-10
a) The goodwill on the acquisition of AIR will result in goodwill of Rs. 1 million if no
deferred tax to be recognized at the date of acquisition. If deferred tax to be
recognized at the date of acquisition of Rs. 0.15 [(4-3.5) x 0.30], the goodwill
will increase to Rs. 1.15 million.
i) If the intangible asset to be de-recognized, the goodwill of at the date
of acquisition will be increase by Rs. 0.5 million.
ii) The carrying value of goods will be Rs. 1.2 [1.8-{(1.8x1)/3}] million and
tax base will be Rs. 1.8 million, which will result in deductible temporary
difference of Rs. 0.6 million and deferred tax asset of Rs. 0.18 (0.6x30%)
million.
iii) The retained earnings of subsidiary company also results in taxable
temporary difference and deferred tax liability would not be
recognized if the taxable temporary difference will not reverse in
foreseeable future and the investor has control over the reversal. As in
this situation the taxable temporary difference up to Rs. 500,000 will
reverse in the foreseeable future therefore, deferred tax liability of Rs.
150,000 (500,000x30%) can be recognized in the consolidated financial
statements.
b) The deferred tax on Legion will be recognized as under: -
i) There is a taxable temporary difference of Rs. 4 million as the gains are
only taxable when they are realized. Therefore, the cost of investment
will be the tax base and the difference between carrying value (Fair
value) and tax base of Rs. 4 million is a taxable temporary difference.
The company should recognize the deferred tax of Rs. 1.2 million
(4x30%)
ii) As the tax relief is only available when the bad debts are written off
therefore, the deductible temporary difference of Rs. 2 million will result
in deferred tax asset of Rs. 0.6 million be recognized.
iii) The un-used tax losses if to be used by the parent company, it will
affect the profit and deferred tax asset of the parent company. If the
un-used tax losses to be used by the subsidiary company then, it will
affect the goodwill at the date of acquisition, if probable to be
recovered at the date of acquisition. However, if the realization of un-
used tax losses was not probable at the date of acquisition, deferred
tax will be recognized after the date of acquisition by debiting
deferred tax asset and crediting the effect in profit or loss account.

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