Ind As 12

CHAPTER 9
1
IND AS ON ITEMS
IMPACTING THE FINANCIAL
STATEMENTS
UNIT 1:
INDIAN ACCOUNTING STANDARD 12 : INCOME TAXES
LEARNING OUTCOMES
After studying this unit, you will be able to:
 List the objective and scope of the standard
 Define the terms used in the standard like accounting profit, taxable profit
(tax loss), tax expense (tax income), current tax, deferred tax liabilities,
deferred tax assets, temporary differences, taxable temporary differences,
deductible temporary differences and the tax base
 Recognise current tax liabilities and current tax assets
 Recognise deferred tax liabilities and deferred tax assets
 Demonstrate when Ind AS permit or require certain assets to be carried at
fair value or to be revalued
 Identify the situations where temporary difference may arise on initial
recognition of an asset or liability
 Recognise deferred tax asset for all deductible temporary differences
 Evaluate the cases, when a deferred tax asset arises on initial recognition
of an asset
© The Institute of Chartered Accountants of India

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 Measure current tax liabilities (assets) for the current and prior periods
 Measure deferred tax assets and liabilities using the tax rates
 Identify the items recognised outside profit or loss
 Calculate the deferred tax arising from a business combination
 Calculate current and deferred tax arising from share-based payment
transactions
 Account for tax assets and tax liabilities
 Offset tax assets with tax liabilities
 Present the tax expense in the Statement of Profit and Loss with respect
to various transactions
 Disclose the major components of tax expense (income)
 Account for the income taxes on account of changes in the tax status of
an entity or its shareholders.

INDIAN ACCOUNTING STANDARD 12 9.3
UNIT OVERVIEW
• Accounting profit
• Taxable profit (tax loss)
• Tax expense (tax income)
• Current tax
• Deferred tax liabilities
Definition • Deferred tax assets
• Temporary differences
• Taxable temporary differences
• Deductible temporary differences
• Tax base
• Current Tax
Tax Expense • Deferred Tax
• Recognition
• Measurement
Current tax • Accounting of Current Tax Effects
• Offsetting Current Tax Assets and Current Tax Liabilities
• Compute carrying amount

• Compute tax base
• Compute temporary differences
• Classify temporary differences
• Identify exceptions
Deferred Tax • Assess (also reassess) deductible temporary differences, tax losses and
tax credits
• Determine the tax rate (law)
• Calculate and recognise deferred tax
• Accounting of deferred tax
• Offsetting deferred tax assets and deferred tax liabilities
• Deferred tax arising from a business combination

Practical Application • Current and deferred tax arising from share-based payment transactions
• Change in tax status of an entity or its shareholders
• Disclose components of tax expenses (income)

• Tax related to items charged directly to equity
• Tax related to items recognised in statement of other comprehensive
income
• Explanation of the relationship between tax expense (income) and
Disclosure accounting profit
• Change in tax rates
• Unrecognised deductible temporary differences, unused tax losses and
unused tax credits
• Temporary differences associated with investments in subsidiaries etc.
• Amount of deferred tax liabilities (assets) or income (expense)

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1.1 OBJECTIVE
There was a time in India, few decades back when the concept of zero income tax entities was
prevalent. Due to various income tax benefits, these companies had no current tax liability for any
income tax that was payable based on that year’s accounting profit. Thus, no provision of income
tax was created. Profit after tax used to be equal to profit before tax. But from accounting
perspective, this was not a correct reflection of results. Quite a few of these tax benefits were
primarily accelerated benefits.
For example, depreciation was deductible in taxation on written down value method (WDV)
whereas in the books of accounts, entities could claim depreciation on straight line method (SLM).
As everybody knows that under WDV method, in initial years’ depreciation charge is greater than
depreciation under SLM. This resulted into accounting profits but no taxable profits. But over the
useful life of the asset, depreciation under both methods is equal. In later years, depreciation
charge under SLM would be higher than in depreciation under WDV. Therefore, in later years, in
such a situation, the taxable profits will be higher than the book profits. This will require a higher
tax provision in books when compared to the accounting profits of that year. Basically, this
differential will be due to non-provision of tax liability in an earlier year.
Example 1
An entity has acquired an asset for 10,000. The depreciation rate as per income tax is 40%
on WDV basis. In books of account, entity claims depreciation on equivalent SLM basis of
16.21%. The entity has accounting and taxable profits of 20,000 from year 1 to year 4,
inclusive, before any allowance of depreciation in either case.
The tax rate is 30%. Assuming no concept of deferred tax, the provision for current tax would be
computed as under:
Year 1 2 3 4
Cost of the asset 10,000 10,000 10,000 10,000

Depreciation rate – WDV 40% 40% 40% 40%
Depreciation amount – WDV 4,000 2,400 1,440 864
Taxable profits before depreciation 20,000 20,000 20,000 20,000
Less: Depreciation (4,000) (2,400) (1,440) (864)
Taxable profits after depreciation 16,000 17,600 18,560 19,136
Tax rate 30% 30% 30% 30%
Tax amount 4,800 5,280 5,568 5,741

However, in the books of accounts, the situation will be as under:

Year 1 2 3 4
(a) Cost of the asset 10,000 10,000 10,000 10,000
(b) Depreciation rate – SLM 16.21% 16.21% 16.21% 16.21%
(c) Depreciation amount – SLM 1,621 1,621 1,621 1,621
(d) Accounting profits before depreciation 20,000 20,000 20,000 20,000
(e) Less: Depreciation (1,621) (1,621) (1,621) (1,621)
(f) Accounting profits after depreciation 18,379 18,379 18,379 18,379
(g) Tax amount – as above 4,800 5,280 5,568 5,741
(h) Effective tax rate=(g)/(f) 26.12% 28.73% 30.30% 31.24%
(i) Tax @ 30% tax rate {30%*(f)} 5,514 5,514 5,514 5,514
Thus, from the above two tables, for an accountant the tax should be 5,514 in all cases as per
the accounting profit. The results are distorted. You will observe that in year 3, in books, the
amount of tax provision is higher by 54 (5,568 – 5,514) and in year 4, it is higher by 227
(5,741 - 5,514). This is so because in year 1 & 2, these figures are lower by 714 (5,514 – 4,800)
& 234 (5,514 – 5,280). Thus, the liability that was incurred in year 1 & 2 is paid year 3 onwards.
However, no provision of the differential ( 714 in year 1 & 234 in year 2) is made.
The provision of differential should have been made by the entity following three major accounting
concepts and convention of periodicity, matching and accrual. The entity has merely deferred the
payment of tax to subsequent year. This understanding and appreciation of situation gave rise to
the concept of deferred tax liabilities or deferred tax assets.
In earlier years, deferred tax was recognised based on concepts of timing differences and
permanent differences based on differences in accounting profits and taxable profits known as
income tax liability method. This concept stands revised with this Accounting Standard which
recognised deferred tax based on temporary differences that arises due to difference in the
carrying value of an item of asset or liability as per books of accounts with the carrying value of
that item as per income tax provisions, known as tax base. This method is known as balance
sheet approach.
This Accounting Standard though titled as ‘income taxes’ primarily deals with deferred tax though
guidance is provided on current tax.

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Differences
Other than Temporary

Temporary Differences
Differences
Taxable Temporary Deductible Temporay Cannot be

Difference Difference reversed
(Results in DTL) (Results in DTA)
1.2 SCOPE
 The objective of this Standard is to prescribe the accounting treatment for income taxes.
Income taxes for the purpose of this Standard includes:
(a) all domestic and foreign taxes which are based on taxable profits;
(b) taxes, such as withholding taxes (Tax Deducted at Source), which are payable by a
subsidiary, associate or joint venture on distributions to the reporting entity.
Domestic and Foreign Methods of Accounting for

Taxes; Including Government Grants or
withholding taxes which Investment tax credits (But
are payable by a it deals with accounting for
subsidiary, Associate or temporary differences
Joint Arrangements on arising from such grants
distributions to the and investment tax credits)
Reporting Entity
 Further, the income-tax for the purpose of this Standard could be classified as:
(a) Current tax being current tax consequence that arises due to transactions and other
events of the current period that are recognised in an entity’s financial statements.
(b) Deferred tax being future tax consequence that arises due to the future
(i) recovery of the carrying amount of assets or
(ii) settlement of carrying amount of the liabilities that are recognised in an entity’s
balance sheet. For example: Recovery of fixed assets means by way of
depreciation or sale and for other assets by way of realization.

 Before we proceed further, it is essential to understand the fundamental principle in

recognising deferred tax. This is enunciated in the Standard as under:
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 recognise a deferred tax liability (deferred tax asset).
Let us try to understand the aforesaid principle with the help of an example:
Example 2
(a) Whenever an entity recognises an asset, it expects that it will recover the carrying value
of that asset. For example, if an entity recognises an item of land at 1,00,000, it
expects that it will be able to recover at least 1,00,000 if that land is sold sometime in
the future.
(b) Assume that under the income tax provisions, if this piece of land is sold after holding
it for more than one year, there will be an indexation benefit @ 10% per year. Thus, if
the land is sold after one year, the cost of the land will for the purpose of taxation will
be assumed at 1,10,000 ( 1,00,000 + 10%). If it is sold after two years, the cost of
the land for the purpose of taxation will be assumed at 1,21,000 ( 1,10,000 + 10%).
(c) The tax rate in all years continues to be flat 30%.
(d) Thus, the recovery of the carrying value of land after two years will result into a tax
saving of 6,300 i.e. 30% of 21,000 (1,21,000-1,00,000). For instance, if after two and
half years, the land is sold for 1,50,000, the entity will pay a tax of 8,700 at 30% of
29,000 ( 1,50,000 – 1,21,000). If there would have been no indexation benefits,
the tax liability would have been 15,000 at 30% of 50,000 ( 1,50,000 – 1,00,000).
Saving in tax is of 6,300 (15,000-8,700).
(e) In view of the above savings, the entity should recognise a deferred tax asset of 6,300
in this case in Year 1.
(f) This principle has to be applied to each item of asset or liability.
Note: There are controversial views in case of Indexation of land for a temporary difference
because if the land is not going to be sold in a near future particularly in business then in
such case it is not advisable to calculate temporary difference.
 The Standard also provides guidance as to where the current tax or deferred tax should be
recognised, accounted and presented.

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 An entity may incur a loss in the current period and set off against a profit in the earlier
period. As the entity would recover a tax paid in the earlier year, the entity should recognize
the benefit of tax recoverable as an asset.
 Items of current tax or defer tax recognized in profit and loss are subject to two exceptions:
1. An item of current tax or defer tax pertaining to other comprehensive income should be
recognized in other comprehensive income
2. An item of current tax or defer tax pertaining to direct equity should be recognized in
direct equity
Tax Accounting
Transactions and Events recognised Transactions and events

Outside Profit and Loss recognised in Profit or Loss
Related Tax effects Related Tax effects also

Related Tax Effect recognised in
recognised in Other recognised in Profit or
Statement of changes in Equity
Comprehensive Income Loss
 In addition, the Standard deals with the:

(a) recognition of deferred tax assets arising from unused tax losses or unused tax credits;
(b) presentation of income taxes in the financial statements; and
(c) disclosure of information relating to income taxes.
The recognition of deferred tax assets

arising from unused tax losses or
unused tax credits
The presentation of income taxes in

the financial statements and
The disclosure of information relating

to income taxes
 The Standard however, does not deal with the methods of accounting for government grants
(see Ind AS 20, Accounting for Government Grants and Disclosure of Government
Assistance) or investment tax credits. However, it deals with the accounting for temporary
differences that may arise from such grants or investment tax credits.

1.3 DEFINITIONS
Having understood, the basic concepts of current tax and deferred tax, the following definitions
needs to be appreciated:
(a) Accounting profit is profit or loss for a period before deducting tax expense.
(b) Taxable profit (tax loss) is the profit (loss) for a period, computed as per the income tax
act, upon which income taxes are payable (recoverable).
(c) 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.
(d) Current tax is the amount of income taxes payable (recoverable) in respect of the taxable
profit (tax loss) for a period.
(e) Deferred tax liabilities are the amounts of income taxes payable in future periods in respect
of taxable temporary differences.
(f) Deferred tax assets are the amounts of income taxes recoverable in future periods in
respect of:
 deductible temporary differences;
 the carry forward of unused tax losses; and
 the carry forward of unused tax credits.
(g) Temporary differences are differences between the carrying amount of an asset or liability
in the balance sheet and its tax base.
(h) Temporary differences may be either:
 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
 deductible temporary differences, which are temporary differences that will result in
amounts that are deductible in determining taxable profit (tax loss) of future periods
when the carrying amount of the asset or liability is recovered or settled.
Comparison with AS 22:
 Timing differences are the differences between taxable income and accounting income
for a period that originate in one period and are capable of reversal in one or more
subsequent periods.
 Thus, it can be seen that while AS 22 spoke of timing differences with reference to income,

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Ind AS 12 speaks of temporary differences with reference to carrying amounts and tax
bases of assets and liabilities. In other words, AS 22 adopts a P/L approach, whereas Ind
AS 12 adopts a balance sheet approach towards accounting for taxes on income.
(i) The tax base of an asset or liability is the carrying amount to that asset or liability for tax
purposes.
To facilitate, easy understanding, this chapter has been divided as under:
(a) Part A : Tax Expense
(b) Part B : Current Tax, its Recognition, Measurement and Presentation
(c) Part C : Deferred Tax, its Recognition, Measurement and Presentation
(d) Part D : Practical Application
(e) Part E : Disclosures
1.4 PART A: TAX EXPENSE (TAX INCOME)

 Tax expense or 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.
 The following needs to be appreciated:
(a) Tax expense could be positive or negative. Thus, there could be a tax income.
(b) Tax expense is the aggregate of:
 current tax; and
 deferred tax.
1.5 PART B: CURRENT TAX, ITS RECOGNITION,

MEASUREMENT AND PRESENTATION
1.5.1 Current Tax
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit
(tax loss) for a period.
1.5.2 Recognition
(a) Current tax liability
 Current tax for current and prior periods shall, to the extent unpaid, be recognised as a
liability.

 The exact liability of current tax crystallises only on preparation and finalisation of
financial statements at the end of the reporting period.
 Any excess of this liability over the prepaid taxes (advance tax) and withhold taxes
(TDS) is to be treated as current liability. This liability may be for the current reporting
period or may relate to earlier reporting periods.
(b) Current tax assets
If the amount already paid in respect of current and prior periods exceeds the amount
due for those periods, the excess shall be recognised as an asset.
1.5.3 Measurement
(a) 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.
(b) Uncertain tax position interpretations
 An entity computes its current income-taxes in accordance with the provisions contained
in the taxation laws. Taxation laws provide certain benefits or require enhancements in
accordance with the fiscal, economic and other policies of the country. These at times
are prone to varying interpretations and settled by the appellate authorities after a
considerable period from the reporting period. The taxability remains uncertain.
 Ind AS 12 requires that current tax liabilities or assets for the current period or the period
should be computed based on the amount it expects to pay. It is suggested that
statistical tools may be used in computing the current tax with respect to the uncertain
tax interpretations.
 Thus, computation of current tax at best is an estimate. Any change in this estimate
based on subsequent developments should be treated as a change in estimate in
accordance with Ind AS 8.
(c) Enacted or substantive enacted
 The tax rates in computing the current tax should be based on taxation laws that have
enacted or substantively enacted.
 A proposed legislation is enacted when all the formalities with respect to the legislation
is completed. In India, the enactment occurs when the legislation is notified in the
gazette on and from the date it comes into force as mentioned in the said gazette
notification.
 Implicit in the word ‘substantively enacted’ is the emphasis that in the relevant situation
the enactment process is not fully completed. The process of enactment of a taxation

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law in India is as under:
— Finance bill is presented in Lok Sabha of Indian Parliament.
— It is discussed and passed by the Lok Sabha.
— It then moves to Rajya Sabha of Indian Parliament.
— It is discussed in the Rajya Sabha.
— It is then presented before the President for assent.
— It is then notified in the gazette of India.
 Now, at which stage an entity should conclude that the legislation is substantively
enacted becomes a key consideration. More so, the finance bill in India is normally
presented on the last day of February and is enacted by the 3 rd week of May. The
reporting period of most of the entities ends on 31 st March and listed entities attempt to
issue their financial statements within 4-6 weeks of the reporting date.
 Ind AS 12 does not provide any guidance.
 It is therefore suggested that the entity should explicitly disclose in its financial
statements the accounting policy with respect to the adoption of tax rates based on the
principle of ‘substantive enactment’. Needless to add, the policy should be applied
consistently. If material, the variation due to adoption of rates based on ‘substantive
enactment’ should also be disclosed.
1.5.4 Accounting of Current Tax Effects
(a) The accounting of current tax effects of a transaction of an event is consistent with the
accounting for that transaction or event.
(b) The current tax effects of a transaction shall follow its accounting treatment if the item is
recognised in statement of profit or loss, its current tax effect will be recognised in statement
of profit or loss.
(c) For further discussion on this topic, refer Accounting for Deferred Tax.
1.5.5 Offsetting Current Tax Assets and Current Tax Liabilities
(a) An entity shall offset current tax assets and current tax liabilities if, and only if, the entity:
 has a legally enforceable right to set off the recognised amounts; and
 intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
(b) Although current tax assets and liabilities are separately recognised and measured they are
offset in the balance sheet subject to criteria similar to those established for financial
instruments in Ind AS 32. An entity will normally have a legally enforceable right to set off a

current tax asset against a current tax liability when they relate to income taxes levied by the
same taxation authority and the taxation laws permit the entity to make or receive a single
net payment.
(c) In consolidated financial statements, a current tax asset of one entity in a group is offset
against a current tax liability of another entity in the group if, and only if, the entities
concerned have a legally enforceable right to make or receive a single net payment and the
entities intend to make or receive such a net payment or to recover the asset and settle the
liability simultaneously.
Illustration 1A
H Ltd. is a manufacturing company, wanting to calculate its taxable profit or loss for the year
ended 31 March 20X8. The statement of profit and loss and other comprehensive income, the
balance sheet and the notes are given below.
Tax rate for the financial year 20X7-20X8 is 30%, but the new tax rate of 32%, for the year
20X8-20X9 and beyond, has already been enacted before the year end.
Calculate taxable profit for the financial year 20X7-20X8 and the related current tax expense.
Balance Sheet as of 31 March 20X8
ASSETS
Non-current assets
Property, plant and equipment 4,20,00,000
Product development costs 21,00,000
Investment in subsidiary – S Ltd. 1,54,00,000
Current assets
Trading investments 72,80,000
Trade receivables 2,19,10,000
Inventories 1,06,40,000
Cash and cash equivalents 63,00,000
TOTAL ASSETS 10,56,30,000
EQUITY & LIABILITIES
Equity
Share capital 4,20,00,000
Accumulated profits 2,86,24,330
Revaluation surplus 30,80,000

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Non-current liabilities
Deferred income - government grants 14,00,000
Liability for product warranty costs 5,60,000
Deferred tax liability (from 20X6-20X7) 7,75,670
Current liabilities
Trade payables 2,67,40,000
Medical benefits for employees 24,50,000
TOTAL EQUITY & LIABILITIES 10,56,30,000
Extract of Statement of profit and loss for the year ended 31 March 20X8
Revenue 16,81,40,000
Cost of sales (13,44,00,000)
Gross profit 3,37,40,000
Operating costs (2,68,80,000)
Profit from operations 68,60,000
Finance costs (9,10,000)
Profit before taxation 59,50,000
Notes:
1. Depreciation expense for the year financial year 20X7-20X8 allowable as per the Income Tax
Rules is 72,10,000. Depreciation as allowed for the purposes of financial reporting included
in operating costs is 59,50,000. Cost of PPE is 5,60,00,000 and H Ltd. deducted
expenses of 1,45,60,000 in its tax returns prior to financial year 20X7-20X8. Further, as
of 31 March 20X8, H Ltd. for the first time revalued its property, plant and equipment to
market value of 4,20,00,000 (revaluation surplus = 30,80,000).
2. In 20X4-20X5, H Ltd. incurred product development costs of 35,00,000. These costs were
recognized as an asset and amortized over period of 10 years. For tax purposes,
H Ltd. deducted full product development costs when they were in 20X4-20X5.
3. Trading investments were acquired in the preceding year at a cost of 80,50,000. These
investments are classified as at fair value through profit or loss and thus recognized in their
fair value. Fair value adjustments are not allowable by the tax authorities.
4. Bad debt provision amounts to 45,50,000 and relates to 2 debtors: debtor A – 28,00,000
(receivable originates in 20X5-20X6 and 100% provision was recognized in the preceding
year) and debtor B – 17,50,000 (receivable originates in 20X6-20X7 and 100% provision
was recognized in F.Y. 20X7-20X8). Tax law allows deduction of 20% of provision for debtors

overdue for more than 1 year, another 30% for debtors overdue for more than 2 years and
remaining 50% for debtors overdue for more than 3 years.
5. H Ltd. created a provision for inventory obsolescence in accordance with Ind AS 2
requirements. New provision created in 20X7-20X8 was 3,78,000 (total provision:
6,30,000). Being a general provision, this provision is not tax deductible.
6. Government grants are not taxable. Full government grant received in 20X7-20X8 is included
in the balance sheet.
7. In 20X7-20X8, H Ltd. increased a liability for product warranty costs by 1,75,000. Product
warranty costs are not tax deductible until the company pays claims. Claims paid in
20X7-20X8 amounted to 2,17,000.
8. During the year, H Ltd. introduced health care benefits for employees. The expenses are
allowable for tax purposes only when benefits are paid but in line with Ind AS 19, recognized
in profit or loss when employees provide service.
9. Penalties towards violation of laws included in operating expenses amount to 63,000.
These are not deductible for tax purposes.
10. Tax law allows to deduct expenses for petrol only up to 1,40,000 per vehicle per year.
H Ltd. had 4 vehicles in 20X7-20X8 and its total petrol expenses amounted to 7,21,000.
Note: This illustration is prepared for the purposes of understanding the computation of current
tax and is in no way based on the provisions of the Income Tax Act, 1961. For the purposes of
Financial Reporting, the tax treatments will be given in the question.
Solution:
Calculation of current tax expense
Accounting profit (A) 59,50,000
Add back:
Accounting depreciation 59,50,000
Amortization of product development costs (W.N.1) 3,50,000
Revaluation of trading investments 7,70,000
Bad debt provisions - 20X7-20X8 17,50,000
Inventory obsolescence provision 3,78,000
Product warranty costs provision - 20X7-20X8 1,75,000
Provision for health care benefit costs 24,50,000
Fines and Penalties disallowed for tax purposes 63,000
Petrol over limit (W.N.3) 1,61,000
Total (B) 120,47,000

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Deduct:
Tax depreciation (72,10,000)
Tax allowance for bad debt provisions (W.N.2) (11,90,000)
Product warranty costs provision - claims paid (2,17,000)
Total (C) (86,17,000)
Taxable profit / loss: (A+B-C) 93,80,000
Tax rate is 30%
Current income tax (93,80,000 x 30%) 28,14,000
Journal Entry
Profit or loss - Current income tax expense Dr. 28,14,000

To Credit Current income tax liabilities 28,14,000
Working Notes:
1. Product development costs:
Annual amortization ( 35,00,000/ 10) 3,50,000
2. Bad debt provisions:
Debtor A - 28,00,000 from 20X5-20X6
> 2 years - 30% deductible in 20X7-20X8 8,40,000
Debtor B - 17,50,000 from 20X6-20X7
> 1 year - 20% deductible in 20X7-20X8 3,50,000
Total - tax deductible in 20X7-20X8 11,90,000
3. Petrol expenses
Actual expenses 7,21,000
Tax deductible (4 x 140,000) 5,60,000
Excess 1,61,000
*****

1.6 PART C: DEFERRED TAX, ITS RECOGNITION,

MEASUREMENT AND PRESENTATION
The following steps should be followed in the recognition, measurement and presentation of
deferred tax liabilities or assets:
Step 1: Compute carrying amounts of assets and liabilities
Step 2: Compute tax base
Step 3: Compute temporary differences
Step 4: Classify temporary differences into either:
 Taxable temporary difference
 Deductible temporary difference
Step 5: Identify exceptions
Step 6: Assess deductible temporary differences, tax losses and tax credits
Step 7: Determine the tax rate
Step 8: Calculate and recognise deferred tax
Step 9: Accounting of deferred tax
Step 10: Offsetting of deferred tax liabilities and deferred tax assets
These are now discussed in detail.
1.6.1 Step 1: Compute carrying amount
For the purpose of this Standard, we can define carrying amount at which an asset or liability is
recognised in the balance sheet, after making necessary adjustments like depreciation,
impairment, etc. In other words, carrying amount of the assets and liabilities means balance as
per the ledger.
Example 3
Entity A had acquired an item of plant and machinery for 1,00,000 on 1 st April, 20X1. It
depreciated this item @ 10% per annum on SLM basis. For the year ended 31 st March, 20X2, it
provides depreciation of 10,000. The carrying amount of this item of plant and machinery as on
31 st March, 20X2 is 90,000.

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1.6.2 Step 2: Compute tax base
(a) The tax base of an asset or liability is the amount attributed to that asset or liability for tax
purposes.
Example 4
Entity A had acquired an item of plant and machinery for 1,00,000 on 1 st April, 20X1. It
depreciated this item @ 10% per annum on SLM basis. For the year ended 31 st March, 20X2,
it provides depreciation of 10,000. The carrying amount of this item of plant and machinery
as on 31 st March, 20X2 is 90,000. As per taxation laws, this item of plant and machinery
has to be depreciated @ 30% per annum on WDV basis. Thus, the entity, for the purposes
of taxation, computes depreciation of 30,000. The tax base of this item of plant and
machinery is 70,000 ( 1,00,000 – 30,000).
In the above scenario, if Entity A decides to revalue the item of plant and machinery and
measures it at 1,50,000, the carrying value of the item of plant and machinery will be
1,50,000. For tax purposes, if the revaluation is ignored, the tax base remains 70,000
(Initial cost 1,00,000 – 30,000).
(b) Four scenarios could be anticipated for computation of the tax base of either an asset or a
liability:
 Tax base of an asset.
 Tax base of a liability.
 Items with a tax base but no carrying amount.
 Items of assets and liabilities where tax base is not apparent.
Let us examine and compute tax base under each of the four scenarios:
(i) Tax base of an asset
The principle to compute tax base of an asset is as under:
 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.
 The carrying amount of the asset could be recovered either through sale of the
asset or through its use or partly through use and partly through sale. The method
of recovery has to be determined at each reporting date.

Examples 5-9
5. Entity A has inventory with carrying amount of 1,00,000 as at the reporting
date. It recovers the value of inventory through sale in a subsequent reporting
period. The sale value is the economic benefit derived by the entity and is
taxable. However, as per the matching and other concepts, against this sale
the entity is entitled to deduct its cost. The cost is the carrying amount of the
inventory i.e., 1,00,000. The tax base in this case is 1,00,000.
6. Entity A has acquired an item of asset for 1,00,000 for production of certain
items to be sold by the entity. It is deductible equally over two years in the
books of accounts. The carrying amount as the end of first reporting period
is 50,000 ( 1,00,000 – 50,000). In the income tax, 75,000 is deductible
in year 1 and balance is deductible in year 2. We have to compute its tax
base as on the last day of the first reporting period. However, in income-tax,
it can claim only 25,000 being 25% of the cost of the asset as 75% has
already been claimed in year 1. Thus, the tax base in this case is 25,000.
7. Interest receivable has a carrying amount of 100. The related interest
revenue will be taxed on a cash basis. The tax base of the interest receivable
is nil.
8. An entity that follows mercantile system of accounting has trade receivables
of 1,000. It creates a general bad debt allowance of 50. The carrying
amount in the books of accounts of trade receivables is thus 950. However,
in income-tax, general bad debt provision is not deductible. In the subsequent
period, entity is able to recover only 950. The amount recovered is a taxable
economic benefit. But for tax purposes, entity is entitled for a deduction of
1,000 against this recovery of trade receivable. The tax base in the current
year is 1,000.
9. An entity that follows mercantile system of accounting has trade receivables
of 1,000. It creates a specific bad debt of 50. The carrying amount in the
books of accounts of trade receivables is thus 950. In the subsequent
period, entity is able to recover only 950. Further, in income-tax, specific
bad debt provision is deductible in the very year it is created. The amount
recovered is a taxable economic benefit. For tax purposes, entity will be
entitled for a deduction of 950 against this recovery of trade receivable. The
tax base is 950.
 If those economic benefits will not be taxable, the tax base of the asset is equal to
its carrying amount.
 It is quite feasible that in certain cases, the economic benefits that are derived
from the recovery of an asset are not taxable. In these situations, the tax base of
the asset is taken at its carrying amount.

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Examples 10 & 11
10. An entity has an investment in listed equity shares. There is no tax on gains
that arise on sale of these listed equity shares. Thus, the tax base in this
case will be the carrying amount of the investments.
11. An entity has given a loan of 10,000 which is the carrying amount. The
repayment of loan has no tax consequences. The tax base is 10,000.
(ii) Tax base of a liability
The principle to compute tax base of a liability is as under:
 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.
Examples 12 & 13
12. Current liabilities include accrued expenses with a carrying amount of 100.
The related expense will be deducted for tax purposes on a cash basis.
The tax base of the accrued expenses is nil.
13. Current liabilities include accrued expenses with a carrying amount of 100.
The related expense has already been deducted for tax purposes.
The tax base of the accrued expenses is 100.
 If those liabilities are not tax deductible, the tax base of that liability is equal to its
carrying amount.
Example 14
Current liabilities include accrued fines and penalties with a carrying amount of
100. Fines and penalties are not deductible for tax purposes.
The tax base of the accrued fines and penalties is 100.
 It is an other than temporary difference, as the expenses are not allowable as per
income tax.
Example 15
A loan payable has a carrying amount of 100. The repayment of the loan will
have no tax consequences.
The tax base of the loan is 100.
 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.

Example 16
Current liabilities include interest revenue received in advance, with a carrying
amount of 100. The related interest revenue was taxed on a cash basis.
The tax base of the interest received in advance is nil.
(iii) Items with a tax base but no carrying amount
 There are certain items that have a tax base but no carrying amount. These
include items that are charged to revenue statement in the period in which they
are incurred but are allowed as a deduction over a number of periods as per the
taxation laws.
Examples 17 & 18
17. A Limited has been incorporated recently. It incurred 1,00,000 on its
incorporation. It has been charged to revenue in the very first accounting
period. The taxation laws allow deduction over a period of 5 years. The
carrying amount at the end of year 1 is Nil.
The tax base will be 80,000 (20,000 x 4) as 20,000 being 1/5 th is allowable
as a deduction in taxation laws over 4 years.
18. Public issue expenses. The entity may have written off the public issue
expenses in the very first year. But since tax laws permit deduction over 5
years, the temporary differences will exist till complete deduction is claimed
in taxation laws.
(iv) Items of assets and liabilities where tax base is not apparent
 There could be situations where it may be difficult to compute the tax base of an
item. One however, knows the carrying amount. This is because of the provisions
of taxation laws. Whereas in books of accounts, all or most of the revenue and
gains are included as part of one single performance statement, in the taxation
laws they are charged under different head.
 The taxable amount amongst other things depends under which head an item at
the time of recovery may be charged. In India, income or gains are charged either
as ‘Salaries’, ‘Income from house property’, ‘Profits and gains of business’, ‘Capital
Gain’ & ‘Income from other sources’. Further certain specific or weighted
deductions are also permissible. For example, rental income is subject to a flat
deduction. So how will you compute the rental income received in advance?
Moreover, there are cases depending upon the substance of the transaction, the
rental income is to be charged as business income. At times, reverse may be the
case. Many more similar situations could be anticipated.

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Example 19
Entity A has an industrial undertaking that consists of land, building, plant and
machinery. It is contemplating disposing the entity. It has the option to recover
the carrying amount of the entity either by disposing the entire entity as a slump
sale or dispose of each asset on a piecemeal basis. Depending upon the manner
of recovery and period of holding, the carrying amount may be subject to indexation
benefit, the recovery may be charged either as a business profit or capital gains.
Again, it could be long-term gain capital gain or short-term capital gain. As at the
end of the reporting period, the entity is not sure of the manner and time of
recovery.
 So, how should one proceed with the determination of the tax base? It is a matter
of judgment. The Standard states that one should refer the fundamental principle
as enumerated in the Standard. The principle is reproduced hereunder:
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 recognise a
deferred tax liability (deferred tax asset)
 It is recommended, if material, the basis of judgment and related uncertainties
should be disclosed.
(c) Tax base is determined with reference to the tax returns of each entity. This poses no
problems when computing tax base of a stand-alone entity. In some jurisdiction, taxation
laws, in the case of a group permits a consolidated tax return. In such cases, tax bases
should be determined based on a consolidated tax return. If this is not so, then the basis
should be individual tax returns. The carrying amount in both the cases shall be determined
on the basis of consolidated financial statements.
Illustration 1B (in continuation to Illustration 1A):
Based on the balance sheet and notes of H Ltd. from previous example, calculate tax base of its
assets and liabilities as of 31 March 20X8. Note that balance sheet has been adjusted by current
tax expense and liability.
Balance Sheet as of 31 March 20X8
ASSETS
Non-current assets
Property, plant and equipment 420,00,000
Product development costs 21,00,000

Investment in subsidiary – S Ltd. 154,00,000

Current assets
Trading investments 72,80,000
Trade receivables 219,10,000
Inventories 106,40,000
Cash and cash equivalents 63,00,000
Total Assets 10,56,30,000
EQUITY & LIABILITIES
Equity
Share capital 420,00,000
Accumulated profits 258,10,330
Revaluation surplus 30,80,000
Long-term liabilities
Deferred income - government grants 14,00,000
Liability for product warranty costs 5,60,000
Deferred tax liability (from 20X6-20X7) 7,75,670
Current liabilities
Trade payables 267,40,000
Medical benefits for employees 24,50,000
Current Tax Liability 28,14,000
Total Equity & Liabilities 10,56,30,000
Remaining information are same as per Illustration 1A.
Solution:
Determination of Tax Base
Item Carrying amount Tax base

Property, plant and equipment 420,00,000 342,30,000
Product development costs 21,00,000 0
Investment in subsidiary 154,00,000 154,00,000
Trading investments 72,80,000 80,50,000
Trade receivables 219,10,000 247,10,000
Inventories 106,40,000 112,70,000

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Cash and cash equivalents 63,00,000 63,00,000
Deferred income - government grants -14,00,000 0
Liability for product warranty costs -5,60,000 0
Trade payables -267,40,000 -267,40,000
Health care benefits for employees -24,50,000 0
Working Notes:
1. Property, plant and equipment

Cost 560,00,000
Less: current tax depreciation (72,10,000)
Less: PY tax depreciation (145,60,000)
Tax base 3,42,30,000
2. Trade receivables - bad debt provisions:
I Calculation of cost
Carrying amount 219,10,000
Add back: bad debt provision 45,50,000
Cost 2,64,60,000 A
II Debtor A - 28,00,000 from 20X5-20X6
> 1 year - 20% deducted in 20X6-20X7 5,60,000
> 2 years - 30% deducted in 20X7-20X8 8,40,000
Already deducted for tax: 14,00,000
III Debtor B - 17,50,000 from 20X6-20X7
> 1 year - 20% deducted in 20X7-20X8 3,50,000
Total deducted for tax purposes 17,50,000 B
Tax base of trade receivables: 2,47,10,000 A-B
*****

1.6.3 Step 3: Compute temporary differences
Temporary
Differences
Deferred Tax Deferred Tax

Assets Liabilities
In respect of In respect of In respect of In respect of

Deductible carry forward of carry forward of Taxable
Temporary unused tax unused tax Temporary
Differences losses credit Differences
(a) The term temporary difference is defined as the difference between the carrying amount of
an asset or liability in the balance sheet and its tax base.
Example 20
An entity has an item of plant and machinery acquired on the first day of the reporting
period for 1,00,000. It depreciates it @ 20% p.a on SLM basis. The carrying amount
in balance sheet is 80,000. The taxation laws require depreciation @ 30% on WDV
basis. The tax base at the end of the reporting period is 70,000. The temporary
difference is 10,000 ( 80,000 – 70,000).
(b) The contention in favour of temporary difference is that at the end of the day, all differences
between the carrying amount and tax base of an asset or liability will reverse. At most the
entity may be able to delay the timing of reversal but the difference will ultimately have
reversed, therefore the term ‘temporary difference’ is used. The cumulative impact is ‘zero’.
Example 21
An entity acquires an asset on the first day of reporting period for 120 with a useful life of
6 years and no residual value. It depreciates the asset on SLM basis. The tax rate is 30%.
The tax depreciation is as assumed in the computation below.

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The following computations are performed.
Financial Statements
Year 1 2 3 4 5 6
Gross Block 120 120 120 120 120 120
Cumulative Depreciation (20) (40) (60) (80) (100) (120)
Carrying Amount 100 80 60 40 20 0
Tax Computation
Year 1 2 3 4 5 6
Tax base brought forward 120 30 20 13 8 3
Depreciation charge (assumed) (90) (10) (7) (5) (5) (3)
Tax base carried forward 30 20 13 8 3 0
Temporary Difference
Year 1 2 3 4 5 6
Carrying Amount 100 80 60 40 20 0
Tax base carried forward (30) (20) (13) (8) (3) 0
Temporary difference 70 60 47 32 17 0
Cumulative impact +70 –10 –13 –15 –15 –17
+70 –70
Movement in Balance Sheet
Year 1 2 3 4 5 6
Temporary difference 70 60 47 32 17 0
Deferred tax liability 21 18 14 10 5 0
Movement in provision +21 -3 -4 -4 -5 -5
Cumulative +21 -21
(c) To some, it may appear that temporary differences and timing differences are one and the
same term. It is not so. It can however, be said that temporary difference includes timing
differences. Timing differences arise when income or expense is included in accounting
profit in one period but is included in taxable profit in a different period.
(d) Examples of temporary differences in the nature of timing differences are as under.

Example 22
 Interest income recognized in income statement on a time proportion basis but
recognized in taxable profit on cash basis as and when income is received.
 Depreciation used in determining taxable income may differ from that used in
determining accounting profit.
 Development costs may be capitalized and amortize over future periods in determining
accounting profit but deducted in determining taxable profit in the period in which they
are incurred.
(e) Examples of temporary differences other than in the nature of timing differences are as
under:
Example 23: Business combinations
The identifiable assets acquired and liabilities assumed in a business combination are
recognised at their fair values in accordance with Ind AS 103, Business Combinations, but
no equivalent adjustment is made for tax purposes.
With limited exceptions, the identifiable assets acquired and liabilities assumed in a business
combination are recognised 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. However, it may be noted that the resulting deferred
tax liability affects goodwill.
Example 24: Revaluation: assets are revalued and no equivalent adjustment is made
for tax purposes.
Indian Accounting Standards permit or require certain assets to be carried at fair value or to
be revalued (see, for example, Ind AS 16, Property, Plant and Equipment, Ind AS 38,
Intangible Assets, Ind AS 109, Financial Instruments and Ind AS 116 Leases).
In some jurisdictions, the revaluation or other restatement of an asset to fair value affects
taxable profit (tax loss) for the current period. As a result, the tax base of the asset is
adjusted and no temporary difference arises.
In other jurisdictions, 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.
Nevertheless, the future recovery of the carrying amount will result in a taxable flow of
economic benefits to the entity and the amount that will be deductible for tax purposes will

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differ from the amount of those economic benefits. 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.
This is true even if:
(a) the entity does not intend to dispose of the asset. In such cases, the revalued carrying
amount of the asset will be recovered through use and this will generate taxable income
which exceeds the depreciation that will be allowable for tax purposes in future periods;
or
(b) tax on capital gains is deferred if the proceeds of the disposal of the asset are invested
in similar assets. In such cases, the tax will ultimately become payable on sale or use
of the similar assets.
1.6.4 Step 4: Classify temporary differences

(a) Temporary differences are to be classified into:
 Taxable temporary differences
 Deductible temporary differences
(b) Taxable temporary differences are those temporary differences that results 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.
As the name ‘taxable temporary difference’ suggests, these are the temporary differences
that will be taxed in future. These taxable temporary differences will increase tax liabilities.
All taxable temporary differences, subject to limited exceptions, give rise to deferred tax
liability.
Taxable temporary difference arises where the:
 carrying amount of an asset exceeds its tax base; or
 tax base of a liability exceeds its carrying amount.
Example 25
An asset which costs 150 has a carrying amount of 100. Cumulative depreciation
for tax purposes is 90 and the tax rate is 25%.
The tax base of the asset is 60 (cost of 150 less cumulative tax depreciation of
90). To recover the carrying amount of 100, the entity must earn taxable income of
100 but will only be able to deduct tax depreciation of 60. Consequently, the entity
will pay income taxes of 10 ( 40 at 25%) when it recovers the carrying amount of the
asset. The difference between the carrying amount of 100 and the tax base of 60
is a taxable temporary difference of 40.

(c) Deductible temporary differences are those temporary differences that results in amounts
that are deductible in determining taxable profit (tax loss) of future periods when the carrying
amount of the asset or liability is recovered or settled.
Again, it should be noted, the name ‘deductible temporary difference’ suggests, these are
the temporary differences that will be deducted in future when computing the tax liability.
These deductible temporary differences will reduce tax liabilities. All deductible temporary
differences, subject to exceptions/recognition criteria, give rise to deferred tax assets.
Deductible temporary difference arises where the:
 carrying amount of a liability exceeds its tax base; or
 tax base of an asset exceeds its carrying amount.
Example 26
An entity recognises a liability of 100 for gratuity and leave encashment expenses
by creating a provision for gratuity and leave encashment. For tax purposes, any
amount with regard to gratuity and leave encashment will not be deductible until the
entity pays the same. The tax rate is 25%.
The tax base of the liability is nil (carrying amount of 100, less the amount that will
be deductible for tax purposes in respect of that liability in future periods). In settling
the liability for its carrying amount, the entity will reduce its future taxable profit by an
amount of 100 and, consequently, reduce its future tax payments by 25 ( 100 at
25%). The difference between the carrying amount of 100 and the tax base of nil
is a deductible temporary difference of 100.
(d) Based on the above discussions, a matrix as under may be drawn:
For Assets For Liabilities
If carrying amount > Taxable Temporary Deductible Temporary
tax base Difference Difference
↓ ↓
Deferred Tax Liability Deferred Tax Asset
(e.g. WDV as per books > (e.g. Provision for Bonus as
WDV as per Income Tax) per books > Provision for
Bonus as per IT)
If carrying amount < Deductible Temporary Taxable Temporary
tax base Difference Difference
↓ ↓
Deferred Tax Asset Deferred Tax Liability
(e.g. WDV as per books < (e.g. Loan carrying amount
WDV as per Income Tax) as per books< Loan carrying
amounts as per tax)
If carrying amount = No temporary difference No temporary difference
tax base

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(e) Further examples of taxable temporary differences:
 Transactions that affect profit or loss
Example 27
1. Interest revenue is received in arrears and is included in accounting profit on a time
apportionment basis but is included in taxable profit on a cash basis.
2. Revenue from the sale of goods is included in accounting profit when goods are
delivered but is included in taxable profit when cash is collected.
In this case, there is also a deductible temporary difference associated with any
related inventory.
3. Depreciation of an asset is accelerated for tax purposes.
4. Development costs have been capitalised and will be amortised to the statement of
profit and loss but were deducted in determining taxable profit in the period in which
they were incurred.
5. Prepaid expenses have already been deducted on a cash basis in determining the
taxable profit of the current or previous periods.
 Transactions that affect the balance sheet
Example 28
1. Depreciation of an asset is not deductible for tax purposes and no deduction will be
available for tax purposes when the asset is sold or scrapped.
2. A borrower records a loan at the proceeds received (which equal the amount due
at maturity), less transaction costs. Subsequently, the carrying amount of the loan
is increased by amortisation of the transaction costs to accounting profit using
effective rate of interest. The transaction costs were deducted for tax purposes in
the period when the loan was first recognised.
3. A loan payable was measured on initial recognition at the amount of the net
proceeds, net of transaction costs. The transaction costs are amortised to
accounting profit over the life of the loan. Those transaction costs are not
deductible in determining the taxable profit of future, current or prior periods.
4. The liability component of a compound financial instrument (for example a
convertible bond) is measured at a discount to the amount repayable on maturity
(see Ind AS 32, Financial Instruments: Presentation). The discount is not
deductible in determining taxable profit (tax loss).

 Fair value adjustments and revaluation

Example 29
1. Financial assets are carried at fair value which exceeds cost, but no equivalent
adjustment is made for tax purposes.
2. An entity revalues property, plant and equipment (under the revaluation model
treatment in Ind AS 16, Property, Plant and Equipment) but no equivalent
 Business combinations and consolidation
Example 30
1. The carrying amount of an asset is increased to fair value in a business combination
and no equivalent adjustment is made for tax purposes.
2. Reductions in the carrying amount of goodwill are not deductible in determining
taxable profit and the cost of the goodwill would not be deductible on disposal of
the business.
3. Unrealised losses resulting from intragroup transactions are eliminated by inclusion
in the carrying amount of inventory or property, plant and equipment.
4. Retained earnings of subsidiaries, branches, associates and joint ventures are
included in consolidated retained earnings, but income taxes will be payable if the
profits are distributed to the reporting parent.
5. Investments in foreign subsidiaries, branches or associates or interests in foreign
joint ventures are affected by changes in foreign exchange rates.
6. The non-monetary assets and liabilities of an entity are measured in its functional
currency but the taxable profit or tax loss is determined in a different currency.
 Hyperinflation
Example 31
Non-monetary assets are restated in terms of the measuring unit current at the end of
the reporting period (see Ind AS 29, Financial Reporting in Hyperinflationary
Economies) and no equivalent adjustment is made for tax purposes.
(f) Further examples of deductible temporary differences:
 Transactions that affect profit or loss

Example 32
1. Retirement benefit costs are deducted in determining accounting profit as service

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is provided by the employee, but are not deducted in determining taxable profit until
the entity pays either retirement benefits or contributions to a fund. (note: similar
deductible temporary differences arise where other expenses, such as gratuity and
leave encashment or interest, are deductible on a cash basis in determining taxable
profit.)
2. Accumulated depreciation of an asset in the financial statements is greater than the
cumulative depreciation allowed up to the end of the reporting period for tax
purposes.
3. The cost of inventories sold before the end of the reporting period is deducted in
determining accounting profit when goods or services are delivered but is deducted
in determining taxable profit when cash is collected. (it may be noted, there is also
a taxable temporary difference associated with the related trade receivable.)
4. The net realisable value of an item of inventory, or the recoverable amount of an
item of property, plant or equipment, is less than the previous carrying amount and
an entity therefore reduces the carrying amount of the asset, but that reduction is
ignored for tax purposes until the asset is sold.
5. Preliminary expenses (or organisation or other start-up costs) are recognised as an
expense in determining accounting profit but are not permitted as a deduction in
determining taxable profit until a later period.
6. Income is deferred in the balance sheet but has already been included in taxable
profit in current or prior periods.
7. A government grant which is included in the balance sheet as deferred income will
not be taxable in future periods.
 Fair value adjustments and revaluation
Example 33
Financial assets are carried at fair value which is less than cost, but no equivalent
 Business combinations and consolidation
Example 34
1. A liability is recognised at its fair value in a business combination, but none of the
related expense is deducted in determining taxable profit until a later period.
2. Unrealised profits resulting from intragroup transactions are eliminated from the
carrying amount of assets, such as inventory or property, plant or equipment, but
no equivalent adjustment is made for tax purposes.

3. Investments in foreign subsidiaries, branches or associates or interests in foreign

joint ventures are affected by changes in foreign exchange rates.
4. The non-monetary assets and liabilities of an entity are measured in its functional
currency but the taxable profit or tax loss is determined in a different currency.
 Deferred tax liabilities are created for all taxable temporary differences with limited
exceptions. Similarly, deferred tax assets are created for all deductible temporary
differences subject to limited exceptions and recognition criteria. In Step 5 we will
discuss the exceptions with respect to creation to deferred tax and in Step 6 we
will discuss the recognition criteria area for deferred tax assets. However, before
we proceed further, let’s discuss the principle in recognising deferred tax liabilities
or deferred tax asset.
 These are:
(a) Deferred tax liability
 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 recognised in accordance with paragraph
39 of Ind AS 12.
(b) Deferred tax asset
 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
utilised, 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).

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 However, for deductible temporary differences associated with
investments in subsidiaries, branches and associates, and interests in
joint ventures, a deferred tax asset shall be recognised in accordance
with paragraph 44 of Ind AS 12.
 From a reading of the aforesaid principles, deferred tax liabilities and deferred tax
assets needs to be recognised in most of the cases. But the recognition of deferred
tax liabilities or deferred tax assets are subject to exceptions with respect to the
following items:
(a) the initial recognition of goodwill arising in a business combination (exception
1);
(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) (exception 2);
(c) temporary differences associated with investments in subsidiaries, branches
and associates, and interests in joint ventures (exception 3).
These exceptions are discussed in Step 5.
 Also deferred tax assets should be created only to the extent of the probability of
availability of taxable profits. In case, this probability of availability of taxable
profits is missing, deferred tax assets should not be created. The profit probability
recognition criterion is discussed in Step 6.
Illustration 1C (in continuation to Illustration 1A):
Based on the data from above illustration 1A of H Ltd., calculate temporary differences and
deferred tax. Note from Illustration 1A: Tax rate for 20X7-20X8 is 30%, but the new tax rate of
32% for the year 20X8-20X9 and beyond has already been enacted before the year end.
Solution:
Calculation of Temporary Differences / Deferred Tax
Item Carrying Tax base Temporary Taxable / DTA / DTL

amount difference deductible at 32%
Property, plant and equipment 4,20,00,000 3,42,30,000 77,70,000 taxable (24,86,400)
Product development costs 21,00,000 0 21,00,000 taxable (6,72,000)
Investment in subsidiary S Ltd. 1,54,00,000 1,54,00,000 0 0
Trading investments 72,80,000 80,50,000 (7,70,000) deductible 2,46,400

Trade receivables 2,19,10,000 2,47,10,000 (28,00,000) deductible 8,96,000
Inventories 1,06,40,000 1,12,70,000 (6,30,000) deductible 2,01,600
Cash and cash equivalents 63,00,000 63,00,000 0 0
Deferred income - government grants (14,00,000) 0 (14,00,000) excluded 0
Liability for product warranty costs (5,60,000) 0 (5,60,000) deductible 1,79,200
Trade payables (2,67,40,000) (2,67,40,000) 0 0
Medical benefits for employees (24,50,000) 0 (24,50,000) deductible 7,84,000
Deferred tax asset - total 23,07,200
Deferred tax liability - total (31,58,400)
Deferred tax total (8,51,200)
*****
1.6.5 Step 5: Identify exceptions
(a) Exception 1: The initial recognition of goodwill in the case of a business combination
 In the case of a business combination, when the consideration paid exceeds the net
identifiable assets, goodwill is created.
 Technically speaking, goodwill arising in a business combination is measured as the
excess of (a) over (b) below:
(a) the aggregate of:
(i) the consideration transferred measured in accordance with Ind AS 103, which
generally requires acquisition date fair value;
(ii) the amount of any non-controlling interest in the acquiree recognized in
accordance with Ind AS 103; and
(iii) in a business combination achieved in stages, the acquisition-date fair value
of the acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and
liabilities assumed measured in accordance with Ind AS 103.
 As per principles enunciated in this Ind AS 12, the entity has to determine the tax base
of this goodwill to compute the temporary difference, either taxable or deductible, at the
time of recognition and subsequently when impairment takes place. The Standard
provides separate guidance for taxable temporary difference (Situation A) and
deductible temporary difference (Situation B).
 Situation A: Where the temporary difference is in the nature of taxable temporary
difference. Again, in this case, the prescribed treatment is different where good will is

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not tax deductible (Situation A1) and where it is tax deductible (Situation A2).
 (Situation A1: Where it is not tax deductible)
(a) At the time of initial recognition of goodwill:
(i) Quite a few tax jurisdictions do not permit this goodwill as a tax deductible
expense. Also, the cost of goodwill is often not deductible when a subsidiary
dispose of its underlying business. Put simply, the tax base of goodwill is Nil.
But the entity has a taxable temporary difference as the goodwill (an asset)
has a carrying amount leading to a deferred tax liability.
(ii) The Standard does not permit the recognition of the resulting deferred tax
liability as goodwill is measured as a residual and the recognition of the
deferred tax liability would increase the carrying amount of goodwill, resulting
into a circular type of computation.
Deferred tax liability is not recognised for goodwill since the recognition shall
be done through goodwill itself. This is going to result in inflating the goodwill
amount, and therefore is not permitted.
Example 35
An entity acquires a subsidiary and pays 1,00,000. The fair value of net
identifiable assets is 65,000. The following entry shall be made in the
books:
Entry 1:
Goodwill Dr. 35,000
Net Assets Dr. 65,000
To Consideration 1,00,000
The tax base of goodwill is Nil. Hence the taxable temporary difference is
35,000. Assuming tax rate to be 30%, deferred tax liability of 10,500
needs to be created. Now because of recognition of this deferred tax liability,
the following entry needs to be passed instead of the above entry:
Entry 2:
Goodwill Dr. 45,500
Net assets Dr. 65,000
To Consideration 1,00,000
To Deferred tax liability 10,500
The temporary difference now is 45,500 and not 35,000 and the resultant

deferred tax liability should be 13,650 (45,500 x 30%) and not 10,500.
Thus, deferred tax liability in entry 2 should be increased by 3,150 which in
turn will increase goodwill by a similar amount. This is going to inflate the
goodwill since the impact is taken in goodwill itself.
Therefore, no deferred tax liability is to be recognised in the case of taxable
temporary difference arising on the initial recognition of goodwill in a business
combination in tax jurisdiction where such goodwill is not tax deductible.
(b) Subsequently at the time of impairment, if required, in the carrying amount:
(i) This goodwill as per Ind AS 103 is not amortised though tested for impairment.
(ii) Subsequent reduction in a deferred tax liability that is unrecognised because
it arises from the initial recognition of goodwill is also regarded as arising from
the initial recognition of goodwill and is therefore not recognised.
Example 36
In the aforesaid Example 35, after 2 years goodwill is tested for impairment
and the entity recognises an impairment loss of 10,000, the amount of the
taxable temporary difference relating to the goodwill is reduced from 35,000
to 25,000, with a resulting decrease in the value of the unrecognised
deferred tax liability. That decrease in the value of the unrecognised deferred
tax liability is also regarded as relating to the initial recognition of the goodwill
and is therefore prohibited from being recognised as per this Ind AS 12.
 Situation A2: Where it is tax deductible
In tax jurisdiction, where goodwill is tax deductible, deferred tax liability should be
recognised for the taxable temporary difference.
 Situation B: where the difference is in the nature of deductible difference
In all cases, deferred tax asset, subject to recognition criteria discussed in step 6 below,
should be recognised.
 Summary of Exception 1
No deferred tax liability is to be recognised for taxable temporary difference arising on
goodwill arising in a business combination in tax jurisdictions where such goodwill is not
tax deductible.
In all other cases of temporary difference, either taxable or deferred, either deferred tax
liability or deferred tax asset should be recognised in accordance with other provisions
of this Ind AS.

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(b) Exception 2: 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)
 The Standard prohibits recognition of deferred tax liability or deferred tax assets in
cases of either taxable or deductible temporary difference arising in a transaction:
(a) is not a business combination; and
(b) does not affect neither the accounting profit nor the taxable profit.
 As per the Standard, three types of transactions of assets or liabilities could be
anticipated:
Type 1: In the nature of business combination
In such a case, recognise deferred tax liabilities or deferred tax assets on temporary
differences between the carrying amount and respective tax base of assets or liabilities
except on goodwill (in certain circumstances)
Type 2: Where the transaction impacts accounting profit (i.e. statement of profit
or loss) (like sale of goods, recognition of debtors)
In such a case, recognise any deferred tax in statement of profit or loss:
Type 3: Where the transaction is not a business combination & does not impact
accounting profit nor taxable profit, such as purchase of assets or receipt of
government grants.
This exception relates to the transaction of the third type.
Example 37
Entity A acquires a foreign made vehicle for 1,00,000 directly from the vehicle
manufacturer. The transaction is not a part of any business combination. The tax laws
do not permit any depreciation thereon. Also, any profits at the time of sale are not
taxable or losses are not tax deductible. This vehicle thus has a tax base of Nil. There
is a taxable temporary difference of 1,00,000. Assuming a tax rate of 30%, the entity
should create a deferred tax liability of 30,000. But the Standard does not permit.
 The Standard implies that if the carrying amount of any asset or liability is not equal to
its tax base at the time of its transaction where the transaction is:
(i) Not in the nature of business combination.
(ii) Not impacting either the accounting profit or the taxable profit.
(iii) Neither deferred tax liability nor deferred tax asset should be recognised.
 The following is a brief checklist:

(i) Is the transaction in the nature of business combination?

(ii) Whether the transaction impacts accounting profit?
(iii) Whether the transaction impacts taxable profits?
(iv) Whether the carrying amount is equal to tax base?
 Depending on the answers to the checklist, deferred tax asset or liability needs to be
determined in accordance with the guidance under this exception.
 Furthermore, an entity does not recognise subsequent changes in unrecognised
deferred tax liability or asset as the asset is depreciated.
Example 38
Entity X acquired an intangible asset (a license) for 10 Cr that has a life of five years. The
asset will be solely recovered through use. No tax deductions can be claimed, as the license
is amortised or as when the license expires. No tax deductions are available on disposal.
Trading profits from using the license will be taxed at 30%.
The tax base of the asset is nil, because the cost of the intangible asset is not deductible for
tax purposes (either in use or on disposal). A temporary difference of 10 Cr arises; prima
facie a deferred tax liability of 3 Cr should be recognized on this amount. However, no
deferred tax is recognised on the asset’s initial recognition. This is because the temporary
difference did not arise from a business combination and did not affect accounting or taxable
profit at the time of the recognition.
The asset will have a carrying amount of 8 Cr at the end of year 1. The entity will pay tax
of 2.40 Cr through recovery of the asset by earning taxable amounts of 8 Cr. The deferred
tax liability is not recognised, because it arises from initial recognition of an asset. Similarly,
no deferred tax is recognised in later periods.
(c) Exception 3: Temporary differences associated with 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:
(i) the existence of undistributed profits of subsidiaries, branches, associates and
joint ventures;

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(ii) changes in foreign exchange rates when a parent and its subsidiary are based in
different countries; and
(iii) 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.
 Should an entity recognise a deferred tax liability in these cases? The guiding principle
is:
An entity shall recognise 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:
(i) the parent, investor or venturer is able to control the timing of the reversal of the
temporary difference; and
(ii) it is probable that the temporary difference will not reverse in the foreseeable
future.
Now let us examine where the parent, investor or venture is able to control the timing
of reversal of taxable temporary difference. Generally, the taxable temporary difference
will get reversed on distribution of dividends.
 Subsidiary/branches: As a parent controls the dividend policy of its subsidiary, it is
able to control the timing of the reversal of temporary differences associated with that
investment (including the temporary differences arising not only from undistributed
profits but also from any foreign exchange translation differences). Furthermore, it
would often be impracticable to determine the amount of income taxes that would be
payable when the temporary difference reverses. Therefore, when the parent has
determined that those profits will not be distributed in the foreseeable future the parent
does not recognise a deferred tax liability. The same considerations apply to
investments in branches.

Relevant Extracts from Financial Statements of selected Listed Entities are

presented below:
Annual Report of Bharti Airtel Ltd. for the year ending 31 March 2022 (Page 358)
(Source: Annual report for 2021-2022 of Bharti Airtel Ltd.)
The non-monetary assets and liabilities of an entity are measured in its functional
currency (see Ind AS 21, The Effects of Changes in Foreign Exchange Rates) in the
exchange rate which give rise to temporary differences that result in a recognised
deferred tax liability or (subject to recognition criteria) asset. The resulting deferred tax
is charged or credited to profit or loss.
 Associate: An investor in an associate does not control that entity and is usually not in
a position to determine its dividend policy. Therefore, in the absence of an agreement
requiring that the profits of the associate will not be distributed in the foreseeable future,
an investor recognises a deferred tax liability arising from taxable temporary differences
associated with its investment in the associate. In some cases, an investor may not be
able to determine the amount of tax that would be payable if it recovers the cost of its
investment in an associate, but can determine that it will equal or exceed a minimum
amount. In such cases, the deferred tax liability is measured at this amount.
 Joint Venture: The arrangement between the parties to a joint venture usually deals
with the sharing of the profits and identifies whether decisions on such matters require
the consent of all the venturers or a specified majority of the venturers. When the
venturer can control the sharing of profits and it is probable that the profits will not be
distributed in the foreseeable future, a deferred tax liability is not recognised.
The aforesaid discussion related to recognition of deferred tax liability on taxable
temporary difference. But there could be deductible temporary differences. So what is
the guiding principle for recognition of deferred tax assets on deductible temporary
differences?

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 The principle is:
An entity shall recognise 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 that:
(i) the temporary difference will reverse in the foreseeable future; and
(ii) taxable profit will be available against which the temporary difference can be
utilised.
Both the conditions have to be satisfied.
 In deciding whether a deferred tax asset is recognised for deductible temporary
differences associated with its investments in subsidiaries, branches and associates,
and its interests in joint ventures, an entity considers the guidance set out in Step 6
below.
1.6.6 Step 6: Assess (also reassess) deductible temporary differences,
tax losses and tax credits
(a) As we are aware that deductible temporary differences reduce the taxable profits of future
periods. It signifies that future tax payments will be smaller by a particular amount. However,
economic benefits will flow to the entity in the form of lower tax liability in future only in case
it has future profits. If there are no future profits, it means there are no tax payments which
in turn mean that deductible temporary differences are of no benefit.
Illustration 2
The directors of H Ltd. wish to recognise a material deferred tax asset in relation to 250 Cr
of unused trading losses which have accumulated as at 31 st March 20X1. H Ltd. has
budgeted profits for 80 Cr for the year ended 31 st March 20X2. The directors have forecast
that profits will grow by 20% each year thereafter.
However, the market is currently depressed and sales orders are at a lower level for the first
quarter of 20X2 than they were for the same period in any of the previous five years. On
extrapolating the sales order book, it is noted that the improvement in trading results may
occur after the next couple of years to come at the position of breakeven and the budgeted
profits shared by the directors of H Ltd. do not appear to be in line with the sales order book.
H Ltd. operates under a tax jurisdiction which allows for trading losses to be only carried
forward for a maximum of two years.
Analyse whether a deferred tax asset can be recognized in the financial statements of
H Ltd. for the year ended 31 st March 20X1?

Solution
In relation to unused trading losses, the carrying amount is zero since the losses have not
yet been recognised in the financial statements of H Ltd. A potential deferred tax asset does
arise but the determination of the tax base is more problematic.
The tax base of an asset is the amount which will be deductible against taxable economic
benefits from recovering the carrying amount of the asset. Where recovery of an asset will
have no tax consequences, the tax base is equal to the carrying amount. H Ltd. operates
under a tax jurisdiction which only allows losses to be carried forward for two years. The
maximum the tax base could be is therefore equal to the amount of unused losses for years
20X0 and 20X1 since these only are available to be deducted from future profits. The tax
base though needs to be restricted to the extent that there is a probability of sufficient future
profits to offset the trading losses. The directors of H Ltd. should base their forecast of the
future profitability on reasonable and supportable assumptions. There appears to be
evidence that this is not the case.
H Ltd. has accumulated trading losses and there is little evidence that there will be an
improvement in trading results within the next couple of years. The market is depressed and
sales orders for the first quarter of 20X2 are below levels in any of the previous five years.
The forecast profitability for 20X2 and subsequent growth rate therefore appear to be
unrealistically optimistic.
Given that losses can only be carried forward for a maximum of two years, it is unlikely that
any deferred tax asset should be recognised.
Hence, the contention of directors to recognized deferred tax assets in relation to
250 crores is not correct.
*****
Example 39
Entity A has deductible temporary difference of 1,00,000 for the financial year ended
31 st March, 20X1. It anticipates a future profit of 3,00,000 in next year against which the
said deductible temporary differences could be set off. The tax rate is 30%. Thus, in future
the entity will pay tax on 2,00,000 ( 3,00,000 – 1,00,000). The tax liability is 60,000
@ 30% tax rate.
Had there been no deductible temporary difference, the tax liability would be 90,000
@ 30% on 3,00,000. Thus, there is an inflow of economic benefit of 30,000 through a
lower cash outflow.
However, if there is no probability of taxable profits in future, the entity is not able to derive
any economic benefit (by way of lower cash outflow in future) because of the existing of
deductible temporary difference.

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(b) Therefore, an entity should recognise deferred tax assets only when it is probable that
taxable profits will be available against which the deductible temporary differences can be
utilised. This is based on the principle of prudence and conservatism. It should be noted
that the entity has to make sufficient taxable profits in future. Not making losses will not
suffice.
(c) If tax law does not impose any restrictions on sources of taxable profits against which it may
make deductions on the reversal of that deductible temporary difference, an entity assesses
a deductible temporary difference in combination with all of its other deductible temporary
differences.
(d) If tax law restricts the utilisation of losses to deduction against income of a specific type, a
deductible temporary difference is assessed in combination only with other deductible
temporary differences.
(e) Probable means more likely than not. The Standard provides a three step criteria to be
applied in a serial order. The criterion is applied in the case of the same taxable entity
assessed by the same taxation authority.
Criteria No. 1 : Existence of taxable temporary differences
The entity at the balance sheet should see whether there are sufficient taxable temporary
differences whose reversal pattern matches with the reversal profile of deductible temporary
differences.
Particulars Year
1 2 3
Taxable temporary difference
Opening balance 10,000 5,000 2,000
Recognised in taxable income 5,000 3,000 2,000
Closing balance 5,000 2,000 -
Deductible temporary difference
Recognised in taxable income 4,000 3,000 1,000
Statement of taxable income
Taxable temporary difference 5,000 3,000 2,000
Deductible temporary difference 4,000 3,000 1,000
The entity can recognise deferred tax assets for the entire deductible temporary
differences.

Example 40
As at 31 st March, 20X1, an entity has both taxable temporary differences and deductible
temporary difference with the following reversal pattern. Deductible temporary differences
cannot be carried forward.
Particulars Year
1 2 3
Taxable temporary difference
Recognized in taxable income 5,000 3,000 2,000
Deductible temporary difference
Opening balance 8,000 4,000 -
Recognized in taxable income 4,000 4,000 -
Closing balance 4,000 - -
Statement of taxable income
Taxable temporary difference 5,000 3,000 2,000
Deductible temporary difference 4,000 4,000 -
The entity can recognize deferred tax assets for the deductible temporary differences up to
7,000 ( 4,000 for year 1 & 3,000 for year 2) as a taxable temporary difference of that
amount is available.
Criteria No. 2: Probability of future profits
The entity has to apply probability criteria on its future profitability. If it is probable that there
will be sufficient taxable profits, then to the extent of available profits, deductible temporary
differences should be applied for recognition of deferred tax assets.
Examples 41- 43
41. If in the aforesaid example 40, the entity expects a profit of 750 in year 2, then deferred
tax asset should be created on 7,750 ( 4,000 + 3,000 + 750).
However, taxable profits arising in future from future origination of deductible temporary
differences should not be considered as deductible temporary differences will require
future taxable profits for utilisation.
42. An entity has unutilised deductible temporary difference of 1,000 at the end of year 1
that is going to be reversed in the year 2. In year 2, taxable profits are computed
because of tax disallowances of unpaid statutory liabilities of 1,000 which can be
claimed as deduction only in year 3, if paid, but cannot be carried forward. The entity
expects nil taxable profit in year 3. In this case, no deferred tax asset will be created.

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43. An entity has unutilised deductible temporary difference of 1,000 at the end of year 1
that is going to be reversed in the year 2. In year 2, taxable profits are computed
because of tax disallowances of unpaid statutory liabilities of 1,000 which can be
claimed as deduction only in year 3, if paid, but cannot be carried forward. The entity
expects taxable profit of 450 in year 3. In this case, deferred tax asset will be created
at appropriate rate on deductible temporary difference of 450 only.
Criteria No. 3: Availability of tax planning opportunities
If even after applying criteria no. 2, still there are unrecognised deductible temporary
differences, the entity endeavour to see whether any tax planning opportunities are available.
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:
(i) electing to have interest income taxed on either a received or receivable basis;
(ii) deferring the claim for certain deductions from taxable profit;
(iii) selling, and perhaps leasing back, assets that have appreciated but for which the tax
base has not been adjusted to reflect such appreciation; and
(iv) 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 utilisation 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.
(d) Unused tax losses and unused tax credits:
 A deferred tax asset shall be recognised 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 utilised.
 The criteria for recognising deferred tax assets arising from the carry forward of unused
tax losses and tax credits are the same as the criteria for recognising deferred tax
assets arising from deductible temporary differences. However, the existence of
unused tax losses is strong evidence that future taxable profit may not be available.
Therefore, when an entity has a history of recent losses, the entity recognises a deferred
tax asset arising from unused tax losses or tax credits only to the extent that the entity
has sufficient taxable temporary differences or there is convincing other evidence that
sufficient taxable profit will be available against which the unused tax losses or unused

tax credits can be utilised by the entity. In such circumstances, paragraph 82 of Ind AS
12 requires disclosure of the amount of the deferred tax asset and the nature of the
evidence supporting its recognition.
(e) When an entity has a history of recent losses, the entity should consider the following
guidance:
 The criteria for recognising deferred tax assets arising from the carry forward of unused
tax losses and tax credits are the same as the criteria for recognising deferred tax
assets arising from deductible temporary differences.
 However, the existence of unused tax losses is strong evidence that future taxable profit
may not be available. Therefore, when an entity has a history of recent losses, the entity
recognises a deferred tax asset arising from unused tax losses or tax credits only to the
extent that the entity has sufficient taxable temporary differences or there is convincing
other evidence that sufficient taxable profit will be available against which the unused
tax losses or unused tax credits can be utilised by the entity.
 In such circumstances, this Ind AS requires disclosure of the amount of the deferred tax
asset and the nature of the evidence supporting its recognition.
 To assess the probability that taxable profit will be available against which the unused
tax losses or unused tax credits can be utilised, the entity should consider the following:
(i) 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 utilised before
they expire;
(ii) whether it is probable that the entity will have taxable profits before the unused tax
losses or unused tax credits expire;
(iii) whether the unused tax losses result from identifiable causes which are unlikely to
recur; and
(iv) whether tax planning opportunities 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 utilised.
 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 utilised, the deferred tax asset is not to
be recognised.
(f) Reassessment of unrecognised Deferred Tax Assets:
 At the end of each reporting period, the entity should reassess unrecognised deferred
tax assets. It may need to recognise a previously unrecognised deferred tax asset to

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the extent it has now become probable that future taxable profits will be available for
deferred tax assets to be recovered. For example, improvement in trading conditions
may make it probable for an entity to generate sufficient taxable profits in future years
to enable it to meet the recognition criteria laid down above.
(g) Uncertainty over income tax treatment
 In assessing whether and how an uncertain tax treatment affects the determination of
taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates,
an entity shall assume that a taxation authority will examine amounts it has a right to
examine and have full knowledge of all related information when making those
examinations.
 If an entity concludes it is probable that the taxation authority will accept an uncertain
tax treatment, the entity shall determine the taxable profit (tax loss), tax bases, unused
tax losses, unused tax credits or tax rates consistently with the tax treatment used or
planned to be used in its income tax filings.
 If an entity concludes it is not probable that the taxation authority will accept an
uncertain tax treatment, the entity shall reflect the effect of uncertainty in determining
the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or
tax rates. An entity shall reflect the effect of uncertainty for each uncertain tax treatment
by using either of the following methods, depending on which method the entity expects
to better predict the resolution of the uncertainty:
(a) The most likely amount—the single most likely amount in a range of possible
outcomes. The most likely amount may better predict the resolution of the
uncertainty if the possible outcomes are binary or are concentrated on one value.
(b) The expected value—the sum of the probability-weighted amounts in a range of
possible outcomes. The expected value may better predict the resolution of the
uncertainty if there is a range of possible outcomes that are neither binary nor
concentrated on one value.
 If an uncertain tax treatment affects current tax and deferred tax (for example, if it affects
both taxable profit used to determine current tax and tax bases used to determine
deferred tax), an entity shall make consistent judgements and estimates for both current
tax and deferred tax.
Comparison to AS 22:
Para 15: Except in the situations stated in paragraph 17, deferred tax assets should be recognised
and carried forward only to the extent that there is a reasonable certainty that sufficient future
taxable income will be available against which such deferred tax assets can be realised.
Para 16: While recognising the tax effect of timing differences, consideration of prudence cannot

be ignored. Therefore, deferred tax assets are recognised and carried forward only to the extent
that there is a reasonable certainty of their realisation. This reasonable level of certainty would
normally be achieved by examining the past record of the enterprise and by making realistic
estimates of profits for the future.
Para 17: Where an enterprise has unabsorbed depreciation or carry forward of losses under tax
laws, deferred tax assets should be recognised only to the extent that there is virtual certainty
supported by convincing evidence that sufficient future taxable income will be available against
which such deferred tax assets can be realised.
Ind AS 12 and AS 22 both require exercise of prudence while recognizing deferred tax assets.
However, AS 22 emphasizes on virtual certainty supported by convincing evidence for recognizing
deferred tax asset, whereas Ind AS 12 requires only probable existence of taxable profit against
which deductible temporary differences can be utilized. Thus, the requirement of recognizing
deferred tax asset under AS 22 is very strict (virtual certainty moves towards more than 95%
certainty through evidence such as a strong order book for the future, firm orders in hand etc.),
whereas under Ind AS 12, the same is more realistic focusing only on probable existence of
taxable profits. Ind AS 12 moves to exercise caution only in case of unused tax losses, where it
specifies that deferred tax asset arising from unused tax losses or tax credits can be recognized
only to the extent that the entity has sufficient taxable temporary differences or there is convincing
other evidence that sufficient taxable profit will be available against which the unused tax losses
or unused tax credits can be utilised by the entity.
1.6.7 Step 7: Determine the tax rate (law)

(a) Having determined the taxable temporary differences and deductible temporary difference
that needs to be considered for recognition of deferred tax liabilities or assets respectively,
we now need to determine the tax for creation to deferred tax liabilities or assets. The
principal is:
Deferred tax assets and liabilities shall be measured:
(i) at the tax rates that are expected to apply to the period when the asset is realised or
the liability is settled;
(ii) based on tax rates (and tax laws) that have been enacted or substantively enacted by
the end of the reporting period.
(b) We have already discussed above the meaning of ‘enacted’ or ‘substantively enacted’.
The same discussion applies here also. But another key word that needs to be understood
in the principle is ‘expected to apply’. Since, we are dealing in the future and future is
uncertain, we have to measure this uncertainty. This leads to application of judgment. The
tax rates or the tax laws that will apply in future depends on various factors such as manner

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of recovery of asset or settlement of liability, levels of income, distribution of profits among
others. These are now discussed below.
It should however be remembered that 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 end of the reporting period, to recover or settle the carrying
amount of its assets and liabilities.
(c) Manner of recovery of asset or settlement of liability:
 In some jurisdictions, the manner in which an entity recovers (settles) the carrying
amount of an asset (liability) may affect either or both of (a) the tax rate applicable when
the entity recovers (settles) the carrying amount of the asset (liability); and (b) the tax
base of the asset (liability). In such cases, an entity measures deferred tax liabilities
and deferred tax assets using the tax rate and the tax base that are consistent with the
expected manner of recovery or settlement.
Examples 44 & 45
44. An asset has a carrying amount of 100 and a tax base of 60. A tax rate of 20%
would apply if the asset was sold and a tax rate of 30% would apply to other
income.
The entity recognises a deferred tax liability of 8 ( 40 at 20%) if it expects to
sell the asset without further use or a deferred tax liability of 12 ( 40 at 30%) if
it expects to retain the asset and recover its carrying amount through use.
45. An asset with a cost of 100 and a carrying amount of 80 is revalued to 150.
No equivalent adjustment is made for tax purposes. Accumulated depreciation for
tax purposes is ₹ 30 and the tax rate is 30%. If the asset’s sale proceeds exceeds
the cost (₹ 100), a gain of only ₹ 30 (being the cumulative tax depreciation of
₹ 30 claimed) will be included in taxable income but sale proceeds in excess of
cost (₹ 100) will not be taxable.
The tax base of the asset is 70 and there is a taxable temporary difference of
80 ( 150 the revalued amount is the carrying amount).
If the entity expects to recover the carrying amount by using the asset, it must
generate taxable income of 150, but will only be able to deduct depreciation of
70. On this basis, there is a deferred tax liability of 24 ( 80 at 30%).
If the entity expects to recover the carrying amount by selling the asset immediately
for proceeds of 150, the deferred tax liability is computed as follows:
(i) Sale proceeds 150
(ii) Sale proceeds in excess of cost ( 100) 50

(iii) Taxable proceeds 100

(iv) Tax base 70
(v) Taxable temporary difference 30
(vi) Tax rate 30%
(vii) Deferred tax liability 9
 Thus, 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 end of the reporting period, to recover or settle the carrying amount of its assets
and liabilities.
 However, an issue may arise as to how to interpret the term ‘recovery’ in relation to an
asset that is not depreciated (non-depreciable asset) and is revalued in accordance with
paragraph 31 (revaluation model) of Ind AS 16.
 The accounting principle in this case is as under:
 The deferred tax liability or asset that arises from the revaluation of a non-
depreciable asset in accordance with paragraph 31 of Ind AS 16 shall be measured
on the basis of the tax consequences that would follow from recovery of the
carrying amount of that asset through sale, regardless of the basis of measuring
the carrying amount of that asset.
 Accordingly, if the tax law specifies a tax rate applicable to the taxable amount
derived from the sale of an asset that differs from the tax rate applicable to the
taxable amount derived from using an asset, the former rate (tax rate applicable to
the taxable amount derived from the sale of an asset) is applied in measuring the
deferred tax liability or asset related to a non-depreciable asset.
(d) Levels of taxable income:
When different tax rates apply to different levels of taxable income, deferred tax assets and
liabilities are measured using the average rates that are expected to apply to the taxable
profit (tax loss) of the periods in which the temporary differences are expected to reverse.
(e) Distribution 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 to shareholders of the entity. In some
other jurisdictions, income taxes may be refundable or payable if part or all of the net profit
or retained earnings is paid out as a dividend to shareholders of the entity. In these
circumstances, current and deferred tax assets and liabilities are measured at the tax rate
applicable to undistributed profits.

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Example 46
The following example deals with the measurement of current and deferred tax assets and
liabilities for an entity in a jurisdiction where income taxes are payable at a higher rate on
undistributed profits (50%) with an amount being refundable when profits are distributed.
The tax rate on distributed profits is 35%. At the end of the reporting period,
31 st December, 20X1, the entity does not recognise a liability for dividends proposed or
declared after the reporting period. As a result, no dividends are recognised in the year
20X1. Taxable income for 20X1 is 1,00,000. The net taxable temporary difference for the
year 20X1 is 40,000.
The entity recognises a current tax liability and a current income tax expense of 50,000.
No asset is recognised for the amount potentially recoverable as a result of future dividends.
The entity also recognises a deferred tax liability and deferred tax expense of 20,000
( 40,000 at 50%) representing the income taxes that the entity will pay when it recovers or
settles the carrying amounts of its assets and liabilities based on the tax rate applicable to
undistributed profits.
Subsequently, on 15 th March, 20X2 the entity recognises dividends of 10,000 from previous
operating profits as a liability.
On 15 th March, 20X2, the entity recognises the recovery of income taxes of 1,500 (15% of
the dividends recognised as a liability) as a current tax asset and as a reduction of current
income tax expense for 20X2.
1.6.8 Step 8: Calculate and recognise deferred tax

(a) This is the simplest of all steps. Having determined the taxable temporary differences and
the deductible temporary differences as per Step 6 and the applicable tax rates with
reference to tax laws, one has to multiply amount determined in Step 6 with the rates
determined in Step 7.
 Taxable temporary differences when multiplied with tax rates will lead to deferred tax
liabilities.
 Deductible temporary differences when multiplied with rates will lead to deferred tax
assets.
(b) The following should be kept in mind:
 Deferred tax liabilities or assets should not be discounted.
 The carrying amount of a deferred tax asset shall be reviewed at the end of each
reporting period.
 An entity shall reduce the carrying amount of a deferred tax asset to the extent that it
is no longer probable that sufficient taxable profit will be available to allow the benefit

of part or all of that deferred tax asset to be utilised.

 Any such reduction shall be reversed to the extent that it becomes probable that
sufficient taxable profit will be available.
1.6.9 Step 9: Accounting of deferred tax
(a) The accounting of deferred tax effects of a transaction of an event is consistent with the
accounting for that transaction or event.
(b) A transaction and the deferred tax effects of a transaction may be accounted for in:
 Statement of profit and loss;
 Outside profit and loss account:
(i) In other comprehensive income such as revaluation amount in accordance with
Ind AS 16, Property, Plant and Equipment
(ii) Directly in equity such as correction of an error in accordance with Ind AS 8,
Accounting Policies, Changes in Accounting Estimates and Errors.
(c) However, 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 change in tax rates or tax laws;
— a reassessment of the recoverability of deferred tax assets; or
— a change in the expected manner of recovery of an asset.
 In such cases, the resulting deferred tax is recognised in profit or loss, except to the
extent that it relates to items previously recognised outside profit or loss.
(d) In exceptional circumstances, it may be difficult to determine the amount of current and
deferred tax that relates to items recognised outside profit or loss (either in other
comprehensive income or directly in equity).
 This may be the case, for example, when a change in the tax rate or other tax rules
affects a deferred tax asset or liability relating (in whole or in part) to an item that was
previously recognised outside profit or loss; or
 In such cases, the current and deferred tax related to items that are recognised outside
profit or loss are based on a reasonable pro rata allocation of the current and deferred
tax of the entity in the tax jurisdiction concerned, or other method that achieves a more
appropriate allocation in the circumstances.
(e) Ind AS 16 does not specify whether an entity should transfer each year from revaluation
surplus to retained earnings an amount equal to the difference between the depreciation or

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amortisation on a revalued asset and the depreciation or amortisation based on the cost of
that asset.
 If an entity makes such a transfer, the amount transferred is net of any related deferred
tax.
 Similar considerations apply to transfers made on disposal of an item of property, plant
or equipment.
(f) When an asset is revalued for tax purposes and that revaluation is related to an accounting
revaluation of an earlier period, or to one that is expected to be carried out in a future period,
the tax effects of both the asset revaluation and the adjustment of the tax base are
recognised in other comprehensive income in the periods in which they occur.
(g) When an entity pays dividends to its shareholders, it may be required to pay a portion of the
dividends to taxation authorities on behalf of shareholders. In many jurisdictions this amount
is referred to as a withholding tax. Such an amount paid or payable to taxation authorities is
charged to equity as a part of the dividends.
1.6.10 Step 10: Offsetting deferred tax assets and deferred tax liabilities
(a) An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
 the entity has a legally enforceable right to set off current tax assets against current tax
liabilities; and
 the deferred tax assets and the deferred tax liabilities relate to income taxes levied by
the same taxation authority on either:
(i) the same taxable entity; or
(ii) different taxable entities which intend either to settle current tax liabilities and
assets on a net basis, or to realise 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.
(b) To avoid the need for detailed scheduling of the timing of the reversal of each temporary
difference, this Standard requires an entity to set off a deferred tax asset against a deferred
tax liability of the same taxable entity if, and only if, they relate to income taxes levied by the
same taxation authority and the entity has a legally enforceable right to set off current tax
assets against current tax liabilities.
(c) In rare circumstances, an entity may have a legally enforceable right of set off, and an
intention to settle net, for some periods but not for others. In such rare circumstances,
detailed scheduling may be required to establish reliably whether the deferred tax liability of
one taxable entity will result in increased tax payments in the same period in which a deferred

tax asset of another taxable entity will result in decreased payments by that second taxable
entity.
Illustration 3
On 1 st April 20X1, S Ltd. leased a machine over a 5 year period. The present value of lease
liability is 120 Cr (discount rate of 8%) and is recognized as lease liability and corresponding
Right of Use (RoU) Asset on the same date. The RoU Asset is depreciated under straight line
method over the 5 years. The annual lease rentals are 30 Cr payable starting 31 st March 20X2.
The tax law permits tax deduction on the basis of payment of rent.
Assuming tax rate of 30%, you are required to explain the deferred tax consequences for the
above transaction for the year ended 31 st March 20X2.
Solution
A temporary difference effectively arises between the value of the machine for accounting
purposes and the amount of lease liability, since the rent payment is eligible for tax deduction.
Tax base of the machine is nil as the amount is not eligible for deduction for tax purposes.
Tax base of the lease liability is nil as it is measured at carrying amount less any future tax
deductible amount
Recognition of deferred tax on 31 st March 20X2:
Carrying amount in balance sheet
RoU Asset (120 Cr – 24 Cr (Depreciation)) 96.00 Dr
Lease Liability (120 Cr + 9.60 Cr (120 Cr x 8%) - 30 Cr) 99.60 Cr
Net Amount 3.60 Cr
Tax Base 0.00 Cr
Temporary Difference (deductible) 3.60 Cr
Deferred Tax asset to be recognized ( 3.60 Cr x 30%) 1.08 Cr
*****
1.7 PART D: PRACTICAL APPLICATION

1.7.1 Deferred tax arising from a business combination
(a) As discussed above, temporary differences may arise in a business combination. In
accordance with Ind AS 103, an entity recognises 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 deferred

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tax liabilities affect the amount of goodwill or the bargain purchase gain the entity recognises.
However, in accordance with this Ind AS, in certain circumstances, an entity does not
recognise deferred tax liabilities arising from the initial recognition of goodwill.
Illustration 4
On 1 st April 20X1, A Ltd. acquired 12 Cr shares (representing 80% stake) in B Ltd. by means
of a cash payment of 25 Cr. It is the group policy to value the non-controlling interest in
subsidiaries at the date of acquisition at fair value. The market value of an equity share in
B Ltd. at 1 st April 20X1 can be used for this purpose. On 1 st April 20X1, the market value of
a B Ltd. share was 2.00
On 1 st April 20X1, the individual financial statements of B Ltd. showed the net assets at
23 Cr.
The directors of A Ltd. carried out a fair value exercise to measure the identifiable assets
and liabilities of B Ltd. at 1 st April 20X1. The following matters emerged:
– Property having a carrying value of 15 Cr at 1 st April 20X1 had an estimated market
value of 18 Cr at that date.
– Plant and equipment having a carrying value of 11 Cr at 1 st April 20X1 had an
estimated market value of 13 Cr at that date.
– Inventory in the books of B Ltd. is shown at a cost of 2.50 Cr. The fair value of the
inventory on the acquisition date is 3 Cr.
The fair value adjustments have not been reflected in the individual financial statements of
B Ltd. In the consolidated financial statements, the fair value adjustments will be regarded
as temporary differences for the purposes of computing deferred tax. The rate of deferred
tax to apply to temporary differences is 20%.
Assume that the current book value (prior to fair valuation exercise under Ind AS 103) equals
the tax base.
Calculate the deferred tax impact on above and calculate the goodwill arising on acquisition
of B Ltd.
Solution
Computation of Net Assets of B Ltd.
As per books 23.00 Cr
Add: Fair value differences not recognized in books of B Ltd.:
Property (18 Cr – 15 Cr) 3.00 Cr
Plant and Equipment (13 Cr – 11 Cr) 2.00 Cr

Inventory (3 Cr – 2.5 Cr) 0.50 Cr

28.5 Cr
Less: Deferred tax liability on fair value difference @ 20%
[(3 Cr + 2 Cr + 0.50 Cr) x 20%] ( 1.10 Cr)
Total Net Assets at Fair Value 27.40 Cr
Computation of Goodwill:
Purchase Consideration 25.00 Cr
Add: Non-Controlling Interest [{(12 Cr x (20% / 80%)} x 2 per share] 6.00 Cr
31.00 Cr
Less: Net Assets at Fair Value ( 27.40 Cr)
Goodwill on acquisition date 3.60 Cr
*****
(b) As a result of a business combination, the probability of realising a pre-acquisition deferred
tax asset of the acquirer could change. An acquirer may consider it probable that it will
recover its own deferred tax asset that was not recognised before the business combination.
For example, the acquirer may be able to utilise the benefit of its unused tax losses against
the future taxable profit of the acquiree. Alternatively, as a result of the business combination
it might no longer be probable that future taxable profit will allow the deferred tax asset to be
recovered. In such cases, the acquirer recognises a change in the deferred tax asset in the
period of the business combination but does not include it as part of the accounting for the
business combination. Therefore, the acquirer does not take it into account in measuring the
goodwill or bargain purchase gain it recognises in the business combination.
(c) The potential benefit of the acquiree’s income tax loss carry forwards or other deferred tax
assets might not satisfy the criteria for separate recognition when a business combination is
initially accounted for but might be realised subsequently. An entity shall recognise acquired
deferred tax benefits that it realises after the business combination as follows:
 Acquired deferred tax benefits recognised within the measurement period that result
from new information about facts and circumstances that existed at the acquisition date
shall be applied to reduce the carrying amount of any goodwill related to that acquisition.
If the carrying amount of that goodwill is zero, any remaining deferred tax benefits shall
be recognised in other comprehensive income and accumulated in equity as capital
reserve or recognised directly in capital reserve, depending on whether paragraph 34
or paragraph 36A of Ind AS 103 would have applied had the measurement period
adjustments been known on the date of acquisition itself.

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 All other acquired deferred tax benefits realised shall be recognised in profit or loss (or,
if this Standard so requires, outside profit or loss).
1.7.2 Current and deferred tax arising from share-based payment
transactions
(a) In some tax jurisdictions, an entity receives a tax deduction (i.e., an amount that is deductible
in determining taxable profit) that relates to remuneration paid in shares, share options or
other equity instruments of the entity. The amount of that tax deduction may differ from the
related cumulative remuneration expense and may arise in a later accounting period. For
example, in some jurisdictions, an entity may recognise an expense for the consumption of
employee services received as consideration for share options granted, in accordance with
Ind AS 102, Share- based Payment, and not receive a tax deduction until the share options
are exercised, with the measurement of the tax deduction based on the entity’s share price
at the date of exercise.
(b) As with the preliminary expenses, the difference between the tax base of the employee
services received to date (being the amount permitted as a deduction in future periods under
taxation laws), and the carrying amount of nil, is a deductible temporary difference that
results in a deferred tax asset. If the amount permitted as a deduction in future periods under
taxation laws is not known at the end of the period, it shall be estimated, based on information
available at the end of the period. For example, if the amount permitted as a deduction in
future periods under taxation laws is dependent upon the entity’s share price at a future date,
the measurement of the deductible temporary difference should be based on the entity’s
share price at the end of the period.
(c) As noted above, in (a), the amount of the tax deduction or estimated future tax deduction,
measured in accordance with paragraph (b) above may differ from the related cumulative
remuneration expense. This Standard requires that current and deferred tax should be
recognised as income or an expense and included in profit or loss for the period, except to
the extent that the tax arises from (a) a transaction or event that is recognised, in the same
or a different period, outside profit or loss, or (b) a business combination. If the amount of
the tax deduction (or estimated future tax deduction) exceeds the amount of the related
cumulative remuneration expense, this indicates that the tax deduction relates not only to
remuneration expense but also to an equity item. In this situation, the excess of the
associated current or deferred tax should be recognised directly in equity.
Illustration 5
On 1 st April 20X1, P Ltd. had granted 1 Cr share options worth 4 Cr s(fair value) ubject to a two-
year vesting period. The income tax law permits a tax deduction at the exercise date of the
intrinsic value of the options. The intrinsic value of the options at 31 st March 20X2 was 1.60 Cr
and at 31 st March 20X3 was 4.60 Cr. The increase in the fair value of the options on 31 st March
20X3 was not foreseeable at 31 st March 20X2. The options were exercised at 31 st March 20X3.

Give the accounting for the above transaction for deferred tax for period ending 31 st March, 20X2
and 31 st March, 20X3. Assume that there are sufficient taxable profits available in future against
any deferred tax assets. Tax rate of 30% is applicable to P Ltd.
Solution:
On 31 st March 20X2:
The tax benefit is calculated as under:
Carrying amount of Share based payment 0.00 Cr
Tax Base of Share based payment ( 1.60 Cr x ½) 0.80 Cr
Temporary Difference (Carrying amount – tax base) 0.80 Cr
Deferred Tax Asset recognized (Temporary Difference x Tax rate)
(0.80 Cr x 30%) 0.24 Cr
Journal Entry for above:
Deferred Tax Asset Dr. 0.24 Cr
To Tax Expense 0.24 Cr
(Being DTA recognized on equity option)
On 31 st March 20X3:
The options have been exercised and a current tax benefit will be available to the entity on the
basis of intrinsic value of 4.60 Cr. Initially recognized deferred tax asset will no longer be
required.
The accounting entry will be done as under:
Tax Expense Dr 0.24 Cr
To Deferred Tax Asset 0.24 Cr
(Being DTA reversed on the exercise of the option)
*****
1.7.3 Change in tax status of an entity or its shareholders
(a) 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.

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(b) 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 recognised 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.
(c) The issue is how an entity should account for the tax consequences of a change in its tax
status or that of its shareholders.
(d) The accounting principles that should be adopted in this situation are as under:
 A change in the tax status of an entity or its shareholders does not give rise to increases
or decreases in amounts recognised 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 recognised amount of equity or in amounts
recognised in other comprehensive income.
 Those tax consequences that relate to changes in the recognised 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 recognised in other comprehensive
income shall be recognised in other comprehensive income.
1.8 PART E: DISCLOSURES

This Ind AS not only deals with recognition and measurement of income-taxes but also requires
quite a few disclosures with respect to these income tax. These are discussed as under.
1.8.1 Disclosure 1: Disclose components of tax expenses (income)
(a) Each of the major components of tax expense (income) is to be disclosed separately.
(b) As we know, 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. The tax expense
(income) related to profit or loss or loss from ordinary activities shall be presented in
statement of profit or loss.

(c) The components of tax expense (income) include:

 current tax expense (income);
 any adjustments recognised in the period for current tax of prior periods;
 the amount of deferred tax expense (income) relating to the origination and reversal of
temporary differences;
 the amount of deferred tax expense (income) relating to changes in tax rates or the
imposition of new taxes;
 the amount of the benefit arising from a previously unrecognised tax loss, tax credit or
temporary difference of a prior period that is used to reduce current tax expense;
 the amount of the benefit from a previously unrecognised tax loss, tax credit or
temporary difference of a prior period that is used to reduce deferred tax expense;
 deferred tax expense arising from the write-down, or reversal of a previous write-down,
of a deferred tax asset; and
 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 Ind AS 8, because they
cannot be accounted for retrospectively.
1.8.2 Disclosure 2: Tax related to items charged directly to equity

(a) Indian Accounting Standards require or permit particular items to be credited or charged
directly to equity.
(b) Examples of such items are:
 an adjustment to the opening balance of retained earnings resulting from either a
change in accounting policy that is applied retrospectively or the correction of an error
(see Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors); and
 amounts arising on initial recognition of the equity component of a compound financial
instrument (see paragraph 23).
(c) The current and deferred tax relating to these items have to be recognised and accounted
for directly in equity.
(d) This Ind AS requires disclosure of the aggregate current and deferred tax relating to items
that are charged or credited directly to equity.

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1.8.3 Disclosure 3: Tax related to items recognised in statement of other

comprehensive income
(a) Indian Accounting Standards require or permit particular items to be recognised in other
comprehensive income.
(b) Examples of such items are:
 a change in carrying amount arising from the revaluation of property, plant and
equipment (see Ind AS 16); and
 exchange differences arising on the translation of the financial statements of a foreign
operation (see Ind AS 21).
(c) The current and deferred tax relating to these items have to be recognised and accounted
for in the statement of other comprehensive income.
(d) This Ind AS requires disclosure of the amount of income tax relating to each component of
other comprehensive income.
1.8.4 Disclosure 4: Explanation of the relationship between tax expense
(income) and accounting profit
(a) In ideal situation, if accounting profit is say 100 and tax rate is 30%, the tax expense should
be 30. But this is seldom the case due to differences in accounting principles and standards
vis–a–vis tax laws.
(b) Therefore, this Standard requires an explanation to be disclosed of the relationship between
tax expense (income) and accounting profit in either or both of the following forms:
 a numerical reconciliation between tax expense (income) and the product of accounting
profit multiplied by the applicable tax rate(s), disclosing also the basis on which the
applicable tax rate(s) is (are) computed; or
 a numerical reconciliation between the average effective tax rate (tax expense divided
by the accounting profit) and the applicable tax rate, disclosing also the basis on which
the applicable tax rate is computed.
Example 47
An entity has made an accounting profit of 1,00,000. The tax rate is 30%. In
computing the accounting profit, a penalty of 10,000 has been considered which is
not tax deductible. There are no other tax impacts. In this case, the taxable profits are
1,10,000 ( 1,00,000 + 10,000) and tax expense @ 30% is 33,000.
The two types of disclosures are as under:

Particulars Amount ( )
Accounting profit 1,00,000
Tax at the applicable tax rate of 30% 30,000
Tax effect of expenses that are not deductible in determining
taxable profits:
Penalties 3,000
Tax expense 33,000
The effective tax rate is as per the national income-tax rate.
Particulars %
Applicable tax rate 30
Tax effect of expenses that are not deductible in determining taxable
profits - Penalties 3
Average effective tax rate 33
The effective tax rate is as per the national income-tax rate.
(c) These disclosures enable users of financial statements to understand whether the
relationship between tax expense (income) and accounting profit is unusual and to
understand the significant factors that could affect that relationship in the future. The
relationship between tax expense (income) and accounting profit may be affected by such
factors as revenue that is exempt from taxation, expenses that are not deductible in
determining taxable profit (tax loss), the effect of tax losses and the effect of foreign tax
rates.
(d) In explaining the relationship between tax expense (income) and accounting profit, an entity
uses an applicable tax rate that provides the most meaningful information to the users of its
financial statements. Often, the most meaningful rate is the domestic rate of tax in the
country in which the entity is domiciled, aggregating the tax rate applied for national taxes
with the rates applied for any local taxes which are computed on a substantially similar level
of taxable profit (tax loss).

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Relevant Extracts from Financial Statements of selected Listed Entities are presented
below:
1. Annual Report of Reliance Industries Ltd. for the year ending 31 st March 2022
(Page 335):
(Source: Annual report for 2021-2022 of Reliance Industries Ltd.)

2. Annual Report of Hindustan Unilever Ltd. for the year ending 31 st March 2022 (Page
160)
(Source: Annual report for 2021-2022 of Hindustan Unilever Ltd.)

3. Annual Report of Larsen & Toubro Ltd. for the year ending 31 st March 2022 (Page 438)
(Source: Annual report for 2021-2022 of Larsen & Toubro Ltd.)
4. Annual Report of SpiceJet Ltd. for the year ending 31 st March 2022 (Page 110)
(Source: Annual report for 2021-2022 of SpiceJet Ltd.)
(e) However, for an entity operating in several jurisdictions, it may be more meaningful to
aggregate separate reconciliations prepared using the domestic rate in each individual
jurisdiction. The following example illustrates how the selection of the applicable tax rate
affects the presentation of the numerical reconciliation.
Example 48
In 20X2, an entity has accounting profit in its own jurisdiction (country A) of 1,500 (20X1:

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2,000) and in country B of 1,500 (20X1: 500). The tax rate is 30% in country A and
20% in country B. In country A, expenses of 100 (20X1: 200) are not deductible for tax
purposes.
The following reconciliation will be prepared:
Particulars Amount ( )
20X2 20X1
Accounting profit 3,000 2,500
Tax at the domestic rate of 30% 900 750
Tax effect of expenses that are not deductible for tax purposes 30 60
Effect of lower tax rates in country B (150) (50)
Tax expense 780 760
Relevant Extracts from Financial Statements of selected Listed Entities are presented
below:
Annual Report of Bharti Airtel Ltd. for the year ending 31 st March 2022 (Page 357):
The impact of different tax rates is disclosed separately in Consolidated Financial Statements
whose extract is given below [10th line item with amounts of ₹ 2,594 and ₹ (13,887)]:
(Source: Annual report for 2021-2022 of Bharti Airtel Ltd.)

Illustration 6
A Ltd.’s profit before tax according to Ind AS for Year 20X1-20X2 is 100 thousand and taxable
profit for year 20X1-20X2 is 104 thousand. The difference between these amounts arose as
follows:
1. On 1 st February, 20X2, it acquired a machine for 120 thousand. Depreciation is charged
on the machine on a monthly basis for accounting purpose. Under the tax law, the machine
will be depreciated for 6 months. The machine’s useful life is 10 years according to Ind AS
as well as for tax purposes.
2. In the year 20X1-20X2, expenses of 8 thousand were incurred for charitable donations.
These are not deductible for tax purposes.
Prepare necessary entries as at 31 st March 20X2, taking current and deferred tax into account.
The tax rate is 25%. Also prepare the tax reconciliation in absolute numbers as well as the tax
rate reconciliation.
Solution
Current tax= Taxable profit x Tax rate = 104 thousand x 25% = 26 thousand.
Computation of Taxable Profit:
in thousand
Accounting profit 100
Add: Donation not deductible 8
Less: Excess Depreciation (6-2) (4)
Total Taxable profit 104
in thousand in thousand
Profit & loss A/c Dr. 26
To Current Tax 26
Deferred tax:
Machine’s carrying amount according to Ind AS is 118 thousand ( 120 thousand –
2 thousand)
Machine’s carrying amount for taxation purpose = 114 thousand ( 120 thousand –
6 thousand)

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Deferred Tax Liability = 4 thousand x 25%
in thousand
Profit & loss A/c Dr. 1
To Deferred Tax Liability 1
Tax reconciliation in absolute numbers:
in thousand
Profit before tax according to Ind AS 100
Applicable tax rate @ 25%
Tax 25
Expenses not deductible for tax purposes ( 8 thousand x 25%) 2
Tax expense (Current and deferred) 27
Tax rate reconciliation
Applicable tax rate 25%
Expenses not deductible for tax purposes 2%
Average effective tax rate 27%
*****
1.8.5 Disclosure 5: Change in tax rates
(a) The applicable tax rates may change due to variety of reasons. There could be a change in
the manner of recovery of the asset. The tax laws may have changed. There could be a
change in the structure of the entity.
(b) In case there are changes in the applicable tax rate(s) compared to the previous accounting
period, an explanation has to be provided.
1.8.6 Disclosure 6: Unrecognised deductible temporary differences,
unused tax losses and unused tax credits
(a) The Standard lays down criteria for recognising deferred tax assets on deductible temporary
differences, unused tax losses and unused tax credits. For example, whether a sufficient
taxable temporary difference is available, is there a probability of future profits and are there
any tax planning opportunities.
(b) If the laid down recognition criteria could not be met, no deferred tax asset is recognised on
these deductible temporary differences, unused tax losses and unused tax credits.

(c) The Standard requires the amount (and expiry date, if any) of deductible temporary
differences, unused tax losses, and unused tax credits for which no deferred tax asset is
recognised in the balance sheet, to be disclosed.
Relevant Extracts from Financial Statements of selected Listed Entities are presented below:
A. Annual Report of SpiceJet Ltd. for the year ending 31 st March 2022 (Page 111):

Annual Report of Larsen and Toubro Ltd. for the year ending 31 st March 2020 (Page
416):
(Source: Annual report for 2021-2022 of Larsen and Toubro Ltd.)

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1.8.7 Disclosure 7: Temporary differences associated with investments
in subsidiaries etc.
(a) The aggregate amount of temporary differences associated with investments in subsidiaries,
branches and associates and interests in joint ventures, for which deferred tax liabilities have
not been recognised should be disclosed.
(b) It would often be impracticable to compute the amount of unrecognised deferred tax liabilities
arising from investments in subsidiaries, branches and associates and interests in joint
ventures. Therefore, this Standard requires an entity to disclose the aggregate amount of
the underlying temporary differences but does not require disclosure of the deferred tax
liabilities.
(c) Nevertheless, where practicable, entities are encouraged to disclose the amounts of the
unrecognised deferred tax liabilities because financial statement users may find such
information useful.
A Annual Report of SpiceJet Ltd. for the year ending 31 March 2022 (Page 111):

B. Annual Report of Larsen and Toubro Ltd. for the year ending 31 March 2020 (Page 416):
(Source: Annual report for 2021-2022 of Larsen and Toubro Ltd.)
1.8.8 Disclosure 8: Amount of deferred tax liabilities (assets) or income

(expenses)
(a) As per the criteria laid down in the Standard, deferred tax liabilities have to be recognised
for taxable temporary differences and deferred tax assets have to be recognised for
deductible temporary differences, unused tax losses and unused tax credits.
(b) Where deferred taxes have been recognised, the following should be disclosed in respect of
each type of temporary difference, and in respect of each type of unused tax losses and
unused tax credits:
 the amount of the deferred tax assets and liabilities recognised in the balance sheet for
each period presented;
 the amount of the deferred tax income or expense recognised in profit or loss, if this is
not apparent from the changes in the amounts recognised in the balance sheet.

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1.8.9 Disclosure 9: Discontinued operations
The following should be disclosed in respect of discontinued operations, the tax expense relating
to:
(i) the gain or loss on discontinuance; and

(ii) the profit or loss from the ordinary activities of the discontinued operation for the period,
together with the corresponding amounts for each prior period presented.
1.8.10 Disclosure 10: Dividend tax
(a) At times dividends relating to the reporting period are proposed or declared after the reporting
date but before the financial statements are approved for issue. These are disclosed but not
recognised in financial statements.
(b) In such a situation, an entity should disclose the amount of income tax consequences of
dividends to shareholders of the entity that were proposed or declared before the financial
statements were approved for issue, but are not recognised as a liability in the financial
statements.
1.8.11 Disclosures 11: In case of business combination
The following should be disclosed:
 if a business combination in which the entity is the acquirer causes a change in the amount
recognised for its pre-acquisition deferred tax asset, the amount of that change; and
 if the deferred tax benefits acquired in a business combination are not recognised at the
acquisition date but are recognised after the acquisition date, a description of the event or
change in circumstances that caused the deferred tax benefits to be recognised.
1.8.12 Disclosure 12: Deferred tax asset and evidence thereto where
based on future taxable profits
An entity shall disclose the amount of a deferred tax asset and the nature of the evidence
supporting its recognition, when:
 the utilization of the deferred tax asset is dependent on future taxable profits in excess of the
profits arising from the reversal of existing taxable temporary differences; and
 the entity has suffered a loss in either the current or preceding period in the tax jurisdiction
to which the deferred tax asset relates.

1.8.13 Disclosure 13: Tax consequences of distribution of dividends

(a) As discussed above, in some tax jurisdiction tax rates depend on the fact whether dividend
is distributed or not.
(b) In these circumstances, an entity shall disclose the nature of the potential income tax
consequences that would result from the payment of dividends to its shareholders. In
addition, the entity shall disclose the amounts of the potential income tax consequences
practicably determinable and whether there are any potential income tax consequences not
practicably determinable.
(c) The aforesaid disclosure requirement requires an entity to disclose the nature of the potential
income tax consequences that would result from the payment of dividends to its
shareholders. An entity also discloses the important features of the income tax systems and
the factors that will affect the amount of the potential income tax consequences of dividends.
(d) However, it would sometimes not be practicable to compute the total amount of the of the
total amount may be easily determinable. For example, in a consolidated group, a parent
and some of its subsidiaries may have paid income taxes at a higher rate on undistributed
profits and be aware of the amount that would be refunded on the payment of future dividends
to shareholders from consolidated retained earnings. In this case, that refundable amount is
disclosed.
(e) If applicable, the entity also discloses that there are additional potential income tax
consequences not practicably determinable. In the parent’s separate financial statements, if
any, the disclosure of the potential income tax consequences relates to the parent’s retained
earnings.
(f) An entity required to provide the disclosures referred above is also required to provide
disclosures related to temporary differences associated with investments in subsidiaries,
branches and associates or interests in joint ventures. In such cases, an entity considers this
in determining the information to be disclosed under this requirement. For example, an entity
ay be required to disclose the aggregate amount of temporary differences associated with
investments in subsidiaries for which no deferred tax liabilities have been recognised. If it is
impracticable to compute the amounts of unrecognised deferred tax liabilities, there may be
amounts of potential income tax consequences of dividends not practicably determinable
related to these subsidiaries.
1.8.14 Disclosure 14: Tax related contingencies
An entity discloses any tax-related contingent liabilities and contingent assets in accordance with
Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets. Contingent liabilities and
contingent assets may arise, for example, from unresolved disputes with the taxation authorities.

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1.8.15 Disclosure 15: Change in tax rates or tax laws
Where changes in tax rates or tax laws are enacted or announced after the reporting period, an
entity discloses any significant effect of those changes on its current and deferred tax assets and
liabilities (see Ind AS 10, Events after the Reporting Period).
Annual Report of SpiceJet Ltd. for the year ending 31 st March 2020 (Page 415):
(Source : Annual report of 2019-2020 of SpiceJet Ltd.)

Illustration 7
An entity has a deductible temporary difference of 50,000. It has no taxable temporary
differences against which it can be offset. The entity is also not anticipating any future profits.
However, it can implement a tax planning strategy which can generate profits up to 60,000. The
cost of implementing this tax planning strategy is 12,000. The tax rate is 30%. Compute the
deferred tax asset that should be recognised.
Solution
The entity should recognise a deferred tax asset of 14,400 @ 30% of 48,000 ( 60,000 –
12,000).
The balance deferred tax asset of 600 @ 30% on 2,000 ( 50,000 – 48,000) shall remain
unrecognised.
*****
Illustration 8
A Limited recognises interest income in its books on accrual basis. However, for income tax
purposes the method is ‘cash basis’. On 31 st December, 20X1, it has interest receivable of
10,000 and the tax rate was 25%. On 28 th February, 20X2, the finance bill is introduced in the
legislation that changes the tax rate to 30%. The finance bill is enacted as Act on 21 st May, 20X2.
Discuss the treatment of deferred tax in case the reporting date of A Limited’s financial statement
is 31 st December, 20X1 and these are approved for issued on 31 st May, 20X2.
Solution
The difference of 10,000 between the carrying value of interest receivable of 10,000 and its
tax base of NIL is a taxable temporary difference.
A Limited has to recognise a deferred tax liability of 2,500 ( 10,000 x 25%) in its financial
statements for the reporting period ended on 31 st December, 20X1.
It will not recognise the deferred tax liability @ 30% because as on 31 st December, 20X1, this tax
rate was neither substantively enacted or enacted on the reporting date. However, if the effect of
this change is material, A Limited should disclose this difference in its financial statements.
*****
Illustration 9
A Ltd prepares financial statements to 31 st March each year. The rate of income tax applicable
to A Ltd is 20%. The following information relates to transactions, assets and liabilities of A Ltd
during the year ended 31 st March 20X2:
(i) A Ltd has a 40% shareholding in L Ltd. A Ltd purchased this shareholding for 45 Cr. The
shareholding gives A Ltd significant influence over L Ltd but not control and therefore A Ltd.

9.76 2.76 FINANCIALa REPORTING
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accounts for its interest in L Ltd using the equity method. The equity method carrying value
of A Ltd’s investment in L Ltd was 70 Cr on 31 st March 20X1 and 75 Cr on
31 st March 20X2. In the tax jurisdiction in which A Ltd operates, profits recognised under the
equity method are taxed if and when they are distributed as a dividend or the relevant
investment is disposed of.
(ii) A Ltd. measures its head office building using the revaluation model. The building is revalued
every year on 31 st March. On 31 st March 20X1, carrying value of the building (after
revaluation) was 40 Cr and its tax base was 22 Cr. During the year ended
st
31 March 20X2, A Ltd charged depreciation in its statement of profit or loss of 2 Cr and
claimed a tax deduction for tax depreciation of 1.25 Cr. On 31 st March 20X2, the building
was revalued to 45 Cr. In the tax jurisdiction in which A Ltd operates, revaluation of
property, plant and equipment does not affect taxable income at the time of revaluation.
Basis the above information, you are required to compute:
(a) The deferred tax liability of A Ltd at 31 st March 20X2
(b) The charge or credit to both profit or loss and other comprehensive income relating to
deferred tax for the year ended 31 st March 20X2
Solution:
(A) Deferred Tax Liability as at 31 st March 20X2

Investment in L Ltd:
Carrying Amount = 75 Cr
Tax base = 45 Cr (Purchase cost)
Temporary Difference = 30 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized as
a taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of 6 Cr
is recognized:
Head office building
Carrying Amount = 45 Cr (Revalued amount on 31 st March 20X2)
Tax base = 20.75 Cr (22 Cr – 1.25 Cr)
Temporary Difference = 24.25 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized as
a taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of
4.85 Cr is created.
Total Deferred Tax Liability 6 Cr + 4.85 Cr = 10.85 Cr

(B) Charge to Statement of Profit or Loss for the year ended 31 st March 20X2:
Investment in L Ltd.
Particulars Carrying amount Tax Base Temporary
Difference
Opening Balance (1 st April 20X1) 70 Cr 45 Cr 25 Cr
Closing Balance (31 st March 20X2) 75 Cr 45 Cr 30 Cr
Net Change 5 Cr
Increase in Deferred Tax Liability (20% tax rate) 1 Cr
Considering the increase in the value of investment arising through Statement of Profit or
Loss, the accounting for the increase in deferred tax liability is made as under:
Tax expense (Profit or Loss Statement) Dr 1 Cr
To Deferred Tax Liability 1 Cr
(Being increase in deferred tax liability recognized)
Head Office Building:
The deferred tax liability at 31 st March 20X1 is 3.6 Cr (20% x { 40 Cr – 22 Cr}).
At 31 st March 20X2, prior to revaluation, the carrying amount of the property is 38 Cr and
its tax base is 20.75 Cr ( 22 Cr – 1.25 Cr). The deferred tax liability at this point is
3.45 Cr (20% x { 38 Cr – 20.75 Cr}).
The reduction in this liability is 0.15 Cr ( 3.6 Cr – 3.45 Cr). This would be credited to
income tax expense in arriving at profit or loss.
Post revaluation, the carrying value of the building becomes 45 Cr and the tax base stays
the same. Therefore, the new deferred tax liability is 4.85 Cr (20% x ( 45 Cr –
20.75 Cr)). The increase in the deferred tax liability of 1.4 Cr ( 4.85 Cr – 3.45 Cr) is
charged to other comprehensive income.
*****
Illustration 10
K Ltd prepares consolidated financial statements to 31 st March each year. During the year ended
31 st March 20X2, K Ltd entered into the following transactions:
(a) On 1 st April 20X1, K Ltd purchased an equity investment for 2,00,000. The investment was
designated as fair value through other comprehensive income. On 31 st March 20X2, the fair
value of the investment was 2,40,000. In the tax jurisdiction in which K Ltd operates,
unrealised gains and losses arising on the revaluation of investments of this nature are not

9.78 a
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taxable unless the investment is sold. K Ltd has no intention of selling the investment in the
foreseeable future.
(b) On 1 st August 20X1, K Ltd sold products to A Ltd, a wholly owned subsidiary operating in the
same tax jurisdiction as K Ltd, for 80,000. The goods had cost to K Ltd for 64,000. By
31 st March 20X2, A Ltd had sold 40% of these goods, selling the remaining during next year.
(c) On 31 st October 20X1, K Ltd received 2,00,000 from a customer. This payment was in
respect of services to be provided by K Ltd from 1 st November 20X1 to 31 st July 20X2. K Ltd
recognised revenue of 1,20,000 in respect of this transaction in the year ended
31 st March 20X2 and will recognise the remainder in the year ended 31 st March 20X3. Under
the tax jurisdiction in which K Ltd operates, 2,00,000 received on 31 st October 20X1 was
included in the taxable profits of K Ltd for the year ended 31 st March 20X2.
Explain and show how the tax consequences (current and deferred) of the three transactions
would be reported in its statement of profit or loss and other comprehensive income for the year
ended 31 st March 20X2. Assume tax rate to be 25%.
Solution:
(a) Because the unrealised gain on revaluation of the equity investment is not taxable until sold,
there are no current tax consequences. The tax base of the investment is 2,00,000. The
revaluation creates a taxable temporary difference of 40,000 ( 2,40,000 – 2,00,000).
This creates a deferred tax liability of 10,000 ( 40,000 x 25%). The liability would be non-
current. The fact that there is no intention to dispose of the investment does not affect the
accounting treatment. Because the unrealised gain is reported in other comprehensive
income, the related deferred tax expense is also reported in other comprehensive income.
(b) When K Ltd sold the products to A Ltd, K Ltd would have generated a taxable profit of
16,000 ( 80,000 – 64,000). This would have created a current tax liability for K Ltd and
the group of 4,000 ( 16,000 x 25%). This liability would be shown as a current liability
and charged as an expense in arriving at profit or loss for the period.
In the consolidated financial statements the carrying value of the unsold inventory would be
38,400 ( 64,000 x 60%). The tax base of the unsold inventory would be 48,000
( 80,000 x 60%). In the consolidated financial statements there would be a deductible
temporary difference of 9,600 ( 38,400 – 48,000) and a potential deferred tax asset of
2,400 ( 9,600 x 25%). This would be recognised as a deferred tax asset since A Ltd is
expected to generate sufficient taxable profits against which to utilise the deductible
temporary difference. The resulting credit would reduce consolidated deferred tax expense
in arriving at profit or loss.
(c) The receipt of revenue in advance on 1 st October 20X1 would create a current tax liability of
50,000 ( 200,000 x 25%) as at 31 st March 20X2. The carrying value of the revenue
received in advance at 31 st March 20X2 is 80,000 ( 200,000 – 120,000). Its tax base is

nil. The deductible temporary difference of 80,000 would create a deferred tax asset of
20,000 ( 80,000 x 25%). The asset can be recognised because K Ltd has sufficient
taxable profits against which to utilise the deductible temporary difference.
*****
1.9 SIGNIFICANT CHANGES IN IND AS 12 VIS-À-VIS AS 22

S. No. Particulars Ind AS 12 AS 22
1. Approach for Ind AS 12 is based on balance AS 22 is based on income
creating Deferred sheet approach. statement approach.
Tax It requires recognition of tax
consequences of differences It requires recognition of tax
between the carrying amounts consequences of differences
of assets and liabilities and between taxable income and
their tax base. accounting income. For this
purpose, differences between
taxable income and
accounting income are
classified into permanent and
timing differences.
2. Limited Exceptions As per Ind AS 12, subject to As per AS 22, deferred tax
for Recognition of limited exceptions, deferred tax assets are recognised and
Deferred Tax Asset asset is recognised for all carried forward only to the
deductible temporary extent that there is a
differences to the extent that it reasonable certainty that
is probable that taxable profit sufficient future taxable
will be available against which income will be available
the deductible temporary against which such deferred
difference can be utilised. The tax assets can be realised.
criteria for recognising deferred Where deferred tax asset is
tax assets arising from the recognised against
carry forward of unused tax unabsorbed depreciation or
losses and tax credits are the carry forward of losses under
same that for recognising tax laws, it is recognised only
deferred tax assets arising from to the extent that there is
deductible temporary virtual certainty supported by
differences. However, the convincing evidence that
existence of unused tax losses sufficient future taxable
is strong evidence that future income will be available

9.80 a
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taxable profit may not be against which such deferred
available. Therefore, when an tax assets can be realised.
entity has a history of recent AS 22 explains what may be
losses, the entity recognises a considered as virtual
deferred tax asset arising from certainty supported by
unused tax losses or tax credits convincing evidence.
only to the extent that the entity
has sufficient taxable
temporary differences or there
is convincing other evidence
that sufficient taxable profit will
be available against which the
unused tax losses or unused
tax credits can be utilised by
the entity.
3. Recognition of As per Ind AS 12, current and AS 22 does not specifically
Current and Deferred deferred tax are recognised as deal with this aspect.
Tax income or an expense and
included in profit or loss for the
period, except to the extent that
the tax arises from a
transaction or event which is
recognised outside profit or
loss, either in other
comprehensive income or
directly in equity, in those
cases tax is also recognised in
other comprehensive income or
in equity, as appropriate.
4. Investments in As per Ind AS 12, deferred tax AS 22 does not deal with this
subsidiaries, liability is recognised for all aspect.
associates and joint taxable temporary differences
ventures associated with investments in
subsidiaries, associates and
joint ventures, if certain
conditions are satisfied.
5. Elimination of profit As per Ind AS 12, deferred tax As per AS 22, deferred tax in
and losses resulting should be recognised on consolidated financials are a
from the intragroup temporary differences that simple aggregation of the
transactions arise from the elimination of

profit and losses resulting from deferred tax recognised by

the intragroup transactions. the group entities.
6. DTA/DTL arising out Ind AS 12 requires that AS 22 does not deal with this
of Revaluation of deferred tax asset/liability aspect.
Assets arising from revaluation of non-
depreciable assets shall be
measured on the basis of tax
consequences from the sale of
asset rather than through use.
7. Changes in Entities Ind AS 12 provides guidance as AS 22 does not deal with this
Tax Status or that of to how an entity should account aspect.
its Shareholders for the tax consequences of a
change in its tax status or that
of its shareholders.
8. Guidance for Ind AS 12 does not specifically AS 22 specifically provides
Recognition of deal with these situations. guidance regarding
Deferred Tax in a recognition of deferred tax in
Tax Holiday Period the situations of Tax Holiday
under Sections 80-IA and 80-
IB and Tax Holiday under
Sections 10A and 10B of the
Income Tax Act, 1961.
Similarly, AS 22 provides
guidance regarding
recognition of deferred tax
asset in case of loss under
the head ‘capital gains’
9. In case of a company Ind AS 12 does not specifically AS 22 specifically provides
paying tax under deal with this aspect. guidance regarding tax rates
section 115JB. to be applied in measuring
deferred tax assets/liabilities
in a situation where a
company pays tax under
section 115JB.
10. Guidance on Ind AS 12 gives special AS 11 gives no such
Uncertainty Over guidance on it. guidance.
Income Tax
Treatment

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FOR SHORTCUT TO IND AS WISDOM: SCAN ME!
TEST YOUR KNOWLEDGE

Questions
1. An asset which cost 150 has a carrying amount of 100. Cumulative depreciation for tax
purposes is 90 and the tax rate is 25%. Calculate the tax base and the corresponding
deferred tax or liability, if any.
2. On 1 st April 20X1, ABC Ltd acquired 100% shares of XYZ Ltd for 4,373 crore. By
31 st March, 20X5, XYZ Ltd had made profits of 5 crore, which remain undistributed. Based
on the tax legislation in India, the tax base investment in XYZ Ltd is its original cost. Show
deferred tax treatment.
3. ABC Ltd. acquired 30% of the shares in PQR Ltd. on 1 st January, 20X1 for 1,000 crore. By
31 st March, 20X5, PQR Ltd. had made profits of 50 crore (ABC Ltd.'s share), which
remained undistributed. Based on the tax legislation in India, the tax base of the investment
in PQR Ltd. is its original cost. Show deferred tax treatment.
4. A company had purchased an asset at 1,00,000. Estimated useful life of the asset is
5 years and depreciation rate is 20% SLM. Depreciation rate for tax purposes is 25% SLM.
The operating profit is 1,00,000 for all the 5 years. Tax rate is 30% for the next 5 years.
Calculate the Book Value as per financial and tax purposes and then DTL.
5. A Ltd. acquired B Ltd. The following assets and liabilities are acquired in a business
combination: 000’s
Fair Value Carrying Temporary

amount Difference
Plant and Equipment 250 260 (10)
Inventory 120 125 (5)

Debtors 200 210 (10)

570 595 (25)
9% Debentures (100) (100)
470 495
Consideration paid 500 500
Goodwill 30 5 (25)
Assume tax rate as 30%.

Calculate deferred tax asset assuming that the carrying amount is the tax base and prepare
the journal entries.
6. B Limited is a newly incorporated entity. Its first financial period ends on 31 st March, 20X1.
As on the said date, the following temporary differences exist:
(a) Taxable temporary differences relating to accelerated depreciation of 9,000. These
are expected to reverse equally over next 3 years.
(b) Deductible temporary differences relating to preliminary expenses of 4,000 expected
to reverse equally over next 4 years.
It is expected that B Limited will continue to make losses for next 5 years. Tax rate is 30%.
Losses can be carried forward but not backwards.
Discuss the treatment of deferred tax as on 31 st March, 20X1.
7. X Ltd. prepares consolidated financial statements to 31 st March each year. During the year
ended 31 st March 20X2, the following events affected the tax position of the group:
(i) Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of
30,00,000. Y Ltd. is unable to utilise this loss against previous tax liabilities. Income-
tax Act does not allow Y Ltd. to transfer the tax loss to other group companies. However,
it allows Y Ltd. to carry the loss forward and utilise it against company’s future taxable
profits. The directors of X Ltd. do not consider that Y Ltd. will make taxable profits in
the foreseeable future.
(ii) Just before 31 st March, 20X2, X Ltd. committed itself to closing a division after the year
end, making a number of employees redundant. Therefore, X Ltd. recognised a
provision for closure costs of 20,00,000 in its statement of financial position as at
31 st March, 20X2. Income-tax Act allows tax deductions for closure costs only when
the closure actually takes place. In the year ended 31 st March 20X3, X Ltd. expects to
make taxable profits which are well in excess of 20,00,000. On 31 st March, 20X2,
X Ltd. had taxable temporary differences from other sources which were greater than
20,00,000.

9.84 2.84 FINANCIALa REPORTING
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(iii) During the year ended 31 st March, 20X1, X Ltd. capitalised development costs which
satisfied the criteria in paragraph 57 of Ind AS 38 ‘Intangible Assets’. The total amount
capitalised was 16,00,000. The development project began to generate economic
benefits for X Ltd. from 1 st January, 20X2. The directors of X Ltd. estimated that the
project would generate economic benefits for five years from that date. The
development expenditure was fully deductible against taxable profits for the year ended
31 st March, 20X2.
(iv) On 1 st April, 20X1, X Ltd. borrowed 1,00,00,000. The cost to X Ltd. of arranging the
borrowing was 2,00,000 and this cost qualified for a tax deduction on 1 st April, 20X1.
The loan was for a three-year period. No interest was payable on the loan but the
amount repayable on 31 st March, 20X4 will be 1,30,43,800. This equates to an
effective annual interest rate of 10%. As per the Income-tax Act, a further tax deduction
of 30,43,800 will be claimable when the loan is repaid on 31 st March, 20X4.
Explain and show how each of these events would affect the deferred tax assets / liabilities
in the consolidated balance sheet of X Ltd. group at 31 st March, 20X2 as per Ind AS. Assume
the rate of corporate income tax is 20%.
8. PQR Ltd., a manufacturing company, prepares consolidated financial statements to
31 st March each year. During the year ended 31st March, 20X2, the following events affected
the tax position of the group:
 QPR Ltd., a wholly owned subsidiary of PQR Ltd., incurred a loss adjusted for tax
purposes of 30,00,000. QPR Ltd. is unable to utilise this loss against previous tax
liabilities. Income-tax Act does not allow QPR Ltd. to transfer the tax loss to other group
companies. However, it allows QPR Ltd. to carry the loss forward and utilise it against
company’s future taxable profits. The directors of PQR Ltd. do not consider that
QPR Ltd. will make taxable profits in the foreseeable future.
 During the year ended 31 st March, 20X2, PQR Ltd. capitalised development costs which
satisfied the criteria as per Ind AS 38 ‘Intangible Assets’. The total amount capitalised
was 16,00,000. The development project began to generate economic benefits for
PQR Ltd. from 1 st January, 20X2. The directors of PQR Ltd. estimated that the project
would generate economic benefits for five years from that date. The development
expenditure was fully deductible against taxable profits for the year ended
31 st March, 20X2.
 On 1 st April, 20X1, PQR Ltd. borrowed 1,00,00,000. The cost to PQR Ltd. of arranging
the borrowing was 2,00,000 and this cost qualified for a tax deduction on
1 st April 20X1. The loan was for a three-year period. No interest was payable on the
loan but the amount repayable on 31 st March 20X4 will be 1,30,43,800. This equates
to an effective annual interest rate of 10%. As per the Income-tax Act, a further tax
deduction of 30,43,800 will be claimable when the loan is repaid on 31 st March, 20X4.

Explain and show how each of these events would affect the deferred tax assets / liabilities
in the consolidated balance sheet of PQR Ltd. group at 31 st March, 20X2 as per Ind AS. The
rate of corporate income tax is 30%.
9. An entity is finalising its financial statements for the year ended 31 st March, 20X2. Before
31 st March, 20X2, the government announced that the tax rate was to be amended from
40 per cent to 45 per cent of taxable profit from 30 th June, 20X2.
The legislation to amend the tax rate has not yet been approved by the legislature. However,
the government has a significant majority and it is usual, in the tax jurisdiction concerned, to
regard an announcement of a change in the tax rate as having the substantive effect of actual
enactment (i.e. it is substantively enacted).
After performing the income tax calculations at the rate of 40 per cent, the entity has the
following deferred tax asset and deferred tax liability balances:
Deferred tax asset 80,000

Deferred tax liability 60,000
Of the deferred tax asset balance, 28,000 related to a temporary difference. This deferred
tax asset had previously been recognised in OCI and accumulated in equity as a revaluation
surplus.
The entity reviewed the carrying amount of the asset in accordance with para 56 of
Ind AS 12 and determined that it was probable that sufficient taxable profit to allow utilisation
of the deferred tax asset would be available in the future.
Show the revised amount of Deferred tax asset & Deferred tax liability and present the
necessary journal entries.
10. On 1 st January 20X2, entity H acquired 100% share capital of entity S for 15,00,000. The
book values and the fair values of the identifiable assets and liabilities of entity S at the date
of acquisition are set out below, together with their tax bases in entity S’s tax jurisdictions.
Any goodwill arising on the acquisition is not deductible for tax purposes. The tax rates in
entity H’s and entity S’s jurisdictions are 30% and 40% respectively.
Acquisitions Book values Tax base Fair values

’000 ’000 ’000
Land and buildings 600 500 700
Property, plant and equipment 250 200 270
Inventory 100 100 80
Accounts receivable 150 150 150
Cash and cash equivalents 130 130 130

9.86 a
v
v
Accounts payable (160) (160) (160)
Retirement benefit obligations (100) - (100)
You are required to calculate the deferred tax arising on acquisition of Entity S. Also
calculate the Goodwill arising on acquisition.
Answers
1. The tax base of the asset is 60 (cost of 150 less cumulative tax depreciation of 90).
To recover the carrying amount of 100, the entity must earn taxable income of 100, but
will only be able to deduct tax depreciation of 60. Consequently, the entity will pay income
taxes of 10 ( 40 at 25%) when it recovers the carrying amount of the asset. The difference
between the carrying amount of 100 and the tax base of 60 is a taxable temporary
difference of 40. Therefore, the entity recognises a deferred tax liability of 10 ( 40 at
25%) representing the income taxes that it will pay when it recovers the carrying amount of
the asset.
2. A taxable temporary difference of 5 crore exists between the carrying value of the
investment in XYZ at the reporting date of 4,378 crore ( 4,373 crore + 5 crore) and its
tax base of 4,373 crore. Since a parent, by definition, controls a subsidiary, it will be able
to control the reversal of this temporary difference, for example - through control of the
dividend policy of the subsidiary. Therefore, deferred tax on such temporary difference is
generally not provided unless it is probable that the temporary will reverse in the foreseeable
future.
3. A taxable temporary difference of 50 crore therefore exists between the carrying value of
the investment in PQR at the reporting date of 1,050 crore ( 1,000 crore + 50 crore) and
its tax base of 1,000 crore. As ABC Ltd. does not completely control PQR Ltd. it is not in
a position to control the dividend policy of PQR Ltd. As a result, it cannot control the reversal
of this temporary difference and deferred tax is provided on temporary differences arising on
investments in PQR Ltd. i.e. 50 crore.
4. Calculation of the Book Value as per financial and tax purposes.
Financial Accounting: 000’s
Year 1 2 3 4 5
Gross Block 100 100 100 100 100
Accumulated Depreciation 20 40 60 80 100
Carrying Amount 80 60 40 20 0

Tax Accounting: 000’s
Year 1 2 3 4 5
Gross Block 100 100 100 100 100
Accumulated Depreciation 25 50 75 100 100
Calculation of DTL: 000’s
Year 1 2 3 4 5
Tax Base 75 50 25 0 0
Difference 5 10 15 20 0
Deferred Tax Liability (Difference x 30%) 1.5 3 4.5 6 0
5. In this case there is a Deferred Tax Asset as the Tax base of assets acquired is higher by
25,000. DTA would be 7,500 (25,000 x 30%)
Journal entry:
Plant and equipment Dr 250
Inventory Dr 120
Debtors Dr 200
Goodwill Dr 22.5 (30- 7.5)
DTA Dr 7.5
To 9% Debentures 100
To Bank 500
6. The year-wise anticipated reversal of temporary differences is as under:
Particulars Year Year Year Year

ending on ending on ending on ending on
31 st 31 st 31 st 31 st
March, March, March, March,
20X2 20X3 20X4 20X5
Reversal of taxable temporary

difference relating to accelerated
depreciation over next 3 years
( 9,000/3) 3,000 3,000 3,000 Nil
Reversal of deductible temporary

9.88 a
v
v
difference relating to preliminary
expenses over next 4 years
( 4,000/4) 1,000 1,000 1,000 1,000
B Limited will recognise a deferred tax liability of 2,700 on taxable temporary difference
relating to accelerated depreciation of 9,000 @ 30%.
However, it will limit and recognise a deferred tax asset on reversal of deductible temporary
difference relating to preliminary expenses reversing up to year ending 31 st March, 20X4
amounting to 900 ( 3,000 @ 30%). No deferred tax asset shall be recognized for the
reversal of deductible temporary difference for the year ending on 31 st March, 20X5 as there
are no taxable temporary differences. Further, the outlook is also a loss. However, if there
are tax planning opportunities that could be identified for the year ending on 31 st March, 20X5
deferred tax asset on the remainder of 1,000 ( 4,000 – 3,000) of deductible temporary
difference could be recognised at the 30% tax rate.
7. (i) The tax loss creates a potential deferred tax asset for the group since its carrying value
is nil and its tax base is 30,00,000.
However, no deferred tax asset can be recognised because there is no prospect of
being able to reduce tax liabilities in the foreseeable future as no taxable profits are
anticipated.
(ii) The provision creates a potential deferred tax asset for the group since its carrying value
is 20,00,000 and its tax base is nil.
This deferred tax asset can be recognised because X Ltd. is expected to generate
taxable profits in excess of 20,00,000 in the year to 31 st March, 20X3.
The amount of the deferred tax asset will be 4,00,000 ( 20,00,000 x 20%).
This asset will be presented as a deduction from the deferred tax liabilities caused by
the (larger) taxable temporary differences.
(iii) The development costs have a carrying value of 15,20,000 ( 16,00,000 –
( 16,00,000 x 1/5 x 3/12)).
The tax base of the development costs is nil since the relevant tax deduction has already
been claimed.
The deferred tax liability will be 3,04,000 ( 15,20,000 x 20%). All deferred tax
liabilities are shown as non-current.
(iv) The carrying value of the loan at 31 st March, 20X2 is 1,07,80,000 ( 1,00,00,000 –
2,00,000 + ( 98,00,000 x 10%)).
The tax base of the loan is 1,00,00,000.

This creates a deductible temporary difference of 7,80,000 ( 1,07,80,000 –

1,00,00,000) and a potential deferred tax asset of 1,56,000 ( 7,80,000 x 20%).
Due to the availability of taxable profits next year (see part (ii) above), this asset can be
recognised as a deduction from deferred tax liabilities.
8. Impact on consolidated balance sheet of PQR Ltd. group at 31 st March, 20X2
 The tax loss creates a potential deferred tax asset for the PQR Ltd. group since its
carrying value is nil and its tax base is 30,00,000. However, no deferred tax asset
can be recognised because there is no prospect of being able to reduce tax liabilities in
the foreseeable future as no taxable profits are anticipated.
 The development costs have a carrying value of 15,20,000 ( 16,00,000 –
( 16,00,000 x 1/5 x 3/12)). The tax base of the development costs is nil since the
relevant tax deduction has already been claimed. The deferred tax liability will be
4,56,000 ( 15,20,000 x 30%). All deferred tax liabilities are shown as non-current.
 The carrying value of the loan at 31 st March, 20X2 is 1,07,80,000 ( 1,00,00,000 –
200,000 + ( 98,00,000 x 10%)). The tax base of the loan is 1,00,00,000. This creates
a deductible temporary difference of 7,80,000 and a potential deferred tax asset of
2,34,000 ( 7,80,000 x 30%).
9. Calculation of Deductible temporary differences:
Deferred tax asset = 80,000
Existing tax rate = 40%
Deductible temporary differences = 80,000/40%
= 2,00,000
Calculation of Taxable temporary differences:
Deferred tax liability = 60,000
Existing tax rate = 40%
Deductible temporary differences = 60,000 / 40%
= 1,50,000
Of the total deferred tax asset balance of 80,000, 28,000 is recognized in OCI
Hence, Deferred tax asset balance of Profit & Loss is 80,000 - 28,000 = 52,000
Deductible temporary difference recognized in Profit & Loss is 1,30,000 (52,000 / 40%)
Deductible temporary difference recognized in OCI is 70,000 (28,000 / 40%)
The adjusted balances of the deferred tax accounts under the new tax rate are:

9.90 a
v
v
Deferred tax asset
Previously credited to OCI-equity 70,000 x 0.45 31,500
Previously recognised as Income 1,30,000 x 0.45 58,500
90,000
Deferred tax liability
Previously recognized as expense 1,50,000 x 0.45 67,500
The net adjustment to deferred tax expense is a reduction of 2,500. Of this amount,
3,500 is recognised in OCl and 1,000 is charged to P&L.
The amounts are calculated as follows:
Carrying Carrying Increase (decrease)
amount amount in deferred tax
at 45% at 40% expense
Deferred tax assets
Previously credited to OCI-equity 31,500 28,000 (3,500)
Previously recognised as Income 58,500 52,000 (6,500)
90,000 80,000 (10,000)
Deferred tax liability
Previously recognized as expense 67,500 60,000 7,500
Net adjustment (2,500)
An alternative method of calculation is:

DTA shown in OCI 70,000 x (0.45 - 0.40) 3,500
DTA shown in Profit or Loss 1,30,000 x (0.45-0.40) 6,500
DTL shown in Profit or Loss 1,50,000 x (0.45 -0.40) 7,500
Journal Entries
Deferred tax asset Dr. 3,500

OCI –revaluation surplus 3,500
Deferred tax expense 6,500

Deferred tax expense Dr. 7,500

Deferred tax liability 7,500
Alternatively, a combined journal entry may be passed as follows:

Deferred tax expense Dr. 1,000
To OCI –revaluation surplus 3,500
To Deferred tax liability 7,500
10. Calculation of Net assets acquired (excluding the effect of deferred tax liability):
Net assets acquired Tax base Fair values

’000 ’000
Land and buildings 500 700
Property, plant and equipment 200 270
Inventory 100 80
Accounts receivable 150 150
Cash and cash equivalents 130 130
Total assets 1,080 1,330
Accounts payable (160) (160)
Retirement benefit obligations - (100)
Net assets before deferred tax liability 920 1,070
Calculation of deferred tax arising on acquisition of entity S and goodwill
’000 ’000
Fair values of S’s identifiable assets and liabilities (excluding 1,070
deferred tax)
Less: Tax base (920)
Temporary difference arising on acquisition 150
Net deferred tax liability arising on acquisition of entity S 60
( 1,50,000 @ 40%)
Purchase consideration 1,500

9.92 a
v
v
Less: Fair values of entity S’s identifiable assets and 1,070
liabilities (excluding deferred tax)
Deferred tax liability (60) (1,010)
Goodwill arising on acquisition 490
Note: Since, the tax base of the goodwill is nil, taxable temporary difference of 4,90,000
arises on goodwill. However, no deferred tax is recognised on the goodwill. The deferred
tax on other temporary differences arising on acquisition is provided at 40% and not 30%,
because taxes will be payable or recoverable in entity S’s tax jurisdictions when the
temporary differences will be reversed.

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CHAPTER 9

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

• Compute carrying amount

• Deferred tax arising from a business combination

• Disclose components of tax expenses (income)

© The Institute of Chartered Accountants of India

Cost of the asset 10,000 10,000 10,000 10,000

© The Institute of Chartered Accountants of India

However, in the books of accounts, the situation will be as under:

© The Institute of Chartered Accountants of India

Other than Temporary

Taxable Temporary Deductible Temporay Cannot be

Domestic and Foreign Methods of Accounting for

© The Institute of Chartered Accountants of India

 Before we proceed further, it is essential to understand the fundamental principle in

© The Institute of Chartered Accountants of India

Transactions and Events recognised Transactions and events

Related Tax effects Related Tax effects also

 In addition, the Standard deals with the:

The recognition of deferred tax assets

The presentation of income taxes in

The disclosure of information relating

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

1.4 PART A: TAX EXPENSE (TAX INCOME)

1.5 PART B: CURRENT TAX, ITS RECOGNITION,

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Profit or loss - Current income tax expense Dr. 28,14,000

© The Institute of Chartered Accountants of India

1.6 PART C: DEFERRED TAX, ITS RECOGNITION,

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Investment in subsidiary – S Ltd. 154,00,000

Item Carrying amount Tax base

© The Institute of Chartered Accountants of India

1. Property, plant and equipment

© The Institute of Chartered Accountants of India

1.6.3 Step 3: Compute temporary differences

Deferred Tax Deferred Tax

In respect of In respect of In respect of In respect of

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Movement in Balance Sheet

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© The Institute of Chartered Accountants of India

1.6.4 Step 4: Classify temporary differences

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

 Fair value adjustments and revaluation

(f) Further examples of deductible temporary differences: