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Forcurrent Forfuture
period periods
Deferredtax Deferredtax
Taxespayable Taxesrecoverable
asset liability
Asset = CA < TaxBase Liability = CA > Tax Base Asset = CA > TaxBase Liability = CA < Tax Base
TIMING
RECOGNITION
DIFFERENCES
To the extent
Included in Included in
Exception Taxable profit will be
accounting profit accounting profit
Available infuture
IAS-12
1. Objective
The objective of this Standard is to prescribe the accounting treatment for income taxes. The principal issue in
accounting for income taxes is how to account for the current and future tax consequences of:
(a) The future recovery (settlement) of the carrying amount of assets (liabilities) that are recognized in an
entity's balance sheet; and
(b) Transactions and other events of the current period that are recognized in an entity's financial
statements
Basic Principle
It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle
the carrying amount of that asset or liability. If it is probable that recovery or settlement of that carrying
amount will make future tax payments larger (smaller) than they would be if such recovery or settlement
were to have no tax consequences, this Standard requires an entity to recognize a deferred tax liability
(deferred tax asset), with certain limited exceptions.
2. Scope
This Standard shall be applied in accounting for income taxes.
I. Income taxes include all domestic and foreign taxes, which are based on taxable profits. Income taxes
also include taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint
venture on distributions to the reporting entity.
II. This Standard does not deal with the methods of accounting for government grants (IAS 20) or
investment tax credits. However, this Standard does deal with the accounting for temporary
differences that may arise from such grants or investment tax credits.
3. Definitions
Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established
by the taxation authorities, upon which income taxes are payable (recoverable).
Tax expense (tax income) is the aggregate amount included in the determination of profit or loss for the period
in respect of current tax and deferred tax.
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for
a period.
Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable
temporary differences.
Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
(a) Deductible temporary differences;
(b) The carry forward of unused tax losses; and
(c) The carry forward of unused tax credits.
Temporary differences are differences between the carrying amount of an asset or liability in the balance
sheet and its tax base. Temporary differences may be either:
(a) taxable temporary differences, which are temporary differences that will result in taxable amounts in
determining taxable profit (tax loss) of future periods when the carrying amount of the asset or
liability is recovered or settled; or
(b) deductible temporary differences, which are temporary differences that will result in amounts that
are deductible in determining taxable profit (tax loss) offuture periods when the carrying amount
of the asset or liability is recovered or settled.
4. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
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IAS -12 CFAP-1 MAH
Examples
Determine the tax base of the following: -
A machine cost Rs. 1,000. For tax purposes depreciation of Rs. 500 has already been deducted in the
current and prior years and the remaining cost will be deductible in future periods, either as
depreciation or through a deduction on disposal.
A machine cost Rs. 1,000. The tax depreciation of Rs. 500 has already been used for determination of
tax but accounting depreciation of Rs. 300 has been charged on the asset.
Interest receivable has a carrying value of Rs. 100,000. The related interest revenue will be taxed on
cash receipt basis.
Trade receivables have a carrying value of Rs. 100,000. The related revenue has already been included
in the taxable profit (loss) for the year.
Dividend receivable from a subsidiary has a carrying value of Rs. 200,000. The dividends are not taxable.
A loan receivable has a carrying value of Rs. 50,000. The repayment of loan will have no tax
consequences.
B. The tax base of a liability
The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in
respect of that liability in future periods. [Tax base = Carrying amount – future deductible amount]
In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying
amount, less any amount of the revenue that will not be taxable in future periods. [Tax base = Carrying
amount – revenue not taxable in future]
Examples
Current liabilities include expenses with a carrying value of Rs.100. The related expenses will be
deducted for tax purposes on a cash basis.
Current liabilities include interest revenue in advance, with a carrying amount of 100. The related
interest revenue was taxed on a cash basis.
Current liabilities include accrued expenses with a carrying amount of Rs. 500. The related expense has
already been deducted for tax purposes.
Current liabilities include accrued fines and penalties with a carrying amount of Rs.100. Fines and
penalties are not deductible for tax purposes.
A loan repayment has carrying amount of Rs. 100. The repayment of loan will have no tax
consequences.
C. Tax base of assets/liabilities having carrying value NIL
Some items have a tax base but are not recognized as assets and liabilities in the balance sheet. For example,
research costs are recognized as an expense in determining accounting profit in the period in which they are
incurred but may not be permitted as a deduction in determining taxable profit (tax loss) until a later period.
The difference between the tax base of the research costs, being the amount the taxation authorities will
permit as a deduction in future periods, and the carrying. Where amount of nil is a deductible temporary
difference that results in a deferred tax asset
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IAS -12 CFAP-1 MAH
The benefit relating to a tax loss that can be carried back to recover current tax of' a previous period
shall be recognized as an asset
6. Recognition of Deferred Tax Liabilities and Deferred Tax Assets
A. Taxable Temporary Differences
deferred tax liability shall be recognized for all taxable temporary differences, except to the extent that the
deferred tax liability arises from:
(a) The initial recognition of goodwill; or
(b) The initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
However, for taxable temporary differences associated with investments in subsidiaries, branches and
associates, and interests in joint ventures, a deferred tax liability shall be recognized in accordance with this
IAS.
Example
An asset which cost 150 has a carrying amount of 100. Cumulative depreciation for tax purposes is 90 and the
tax rate is 25%?
Some temporary differences arise when income or expense is included in accounting profit in one period but
are included in taxable profit in a different period. Such temporary differences are often described as timing
differences. The following are the examples:
(a) Interest revenue is included in accounting profit on a time proportion basis but may, in some
jurisdictions, included in taxable profit when cash is collected;
(b) Depreciation used in determining taxable profit (tax loss) may differ from that used in determining
accounting profit. A taxable temporary difference arises, and results in a deferred tax liability, when
tax depreciation is accelerated; and
(c) Development costs may be capitalized and amortized over future periods in determining accounting
profit but deducted in determining taxable profit in the period in which they are incurred. The
temporary difference is the difference between the carrying amount of the development costs and
their tax base of nil.
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IAS -12 CFAP-1 MAH
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IAS -12 CFAP-1 MAH
(c) selling, and perhaps leasing back, assets that have appreciated but for which the tax base has
not been adjusted to reflect such appreciation; and
(d) selling an asset that generates non-taxable income (such as, in some jurisdictions, a
government bond) in order to purchase another investment that generates taxable income.
Where tax planning opportunities advance taxable profit from a later period to an earlier period, the
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IAS -12 CFAP-1 MAH
utilization of a tax loss or tax credit carry forward still depends on the existence of future taxable
profit from sources other than future originating temporary differences.
To the extent that it is not probable that taxable profit will be available against which the unused tax losses or
unused tax credits can be utilized, the deferred tax asset is not recognized.
B. Goodwill
If the carrying amount of goodwill arising in a business combination is less than its tax base, the difference
gives rise to a deferred tax asset. The deferred tax asset arising from the initial recognition of goodwill shall be
recognized as part of the accounting for a business combination to the extent that it is probable that taxable
profit will be available against which the deductible temporary difference could be utilized.
C. Re-assessment of Unrecognized Deferred Tax Assets
At each balance sheet date, an entity re-assesses un-recognized deferred tax assets. The entity recognizes a
previously unrecognized deferred tax asset to the extent that it has become probable that future taxable
profit will allow the deferred tax asset to be recovered.
D. Investments in Subsidiaries, Branches and Associates and Interests in Joint Ventures Temporary
differences arise when the carrying amount of investments in subsidiaries, branches and associates or
interests in joint ventures (namely the parent or investor’s share of the net assets of the subsidiary, branch,
associate or investee, including the carrying amount of goodwill) becomes different from the tax base
(which is often cost) of the investment or interest. Such differences may arise in a number of different
circumstances, for example:
(a) the existence of undistributed profits of subsidiaries, branches, associates and joint ventures;
(b) changes in foreign exchange rates when a parent and its subsidiary are based in different countries;
and
(c) a reduction in the carrying amount of an investment in an associate to its recoverable amount.
In consolidated financial statements, the temporary difference may be different from the temporary
difference associated with that investment in the parent’s separate financial statements if the parent carries
the investment in its separate financial statements at cost or revalued amount.
An entity shall recognize a deferred tax liability for all taxable temporary differences associated with
investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that
both of the following conditions are satisfied:
(a) the parent, investor or venturer is able to control the timing of the reversal of the temporary
difference; and
(b) it is probable that the temporary difference will not reverse in the foreseeable future.
An entity shall recognize a deferred tax asset for all deductible temporary differences arising from
investments in subsidiaries, branches and associates, and interests in joint ventures, to the extent
that, and only to the extent that, it is probable that:
a. the temporary difference will reverse in the foreseeable future; and
b. Taxable profit will be available against which the temporary difference can be utilized.
8. Measurement
Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected
to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have
been enacted or substantively enacted by the balance sheet date.
Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the
period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have
been enacted or substantively enacted by the balance sheet date.
The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences
that would follow from the manner in which the entity expects, at the balance sheet date, to recover or
settle the carrying amount of itsassets and liabilities.
9. Deferred tax assets and liabilities shall not be discounted.
The Standard does not require or permit the discounting of deferred tax assets and liabilities.
Temporary differences are determined by reference to the carrying amount of an asset or liability.
This applies even where that carrying amount is itself determined on a discounted basis.
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IAS -12 CFAP-1 MAH
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DTL / DTA
- b/d (DTA) - b/d (DTL)
- Reduction in open. DTL - Reduction in open. DTA
(due to rate change) (due to rate change)
- Increase in open. DTA - Increase in open. DTL
(due to rate change) (due to rate change)
- DT on Rev. surplus
- DT income - DT expense
(balancing figure) (balancing figure)
- c/d (DTL) - c/d (DTA)
Discosure - Notes
Disclosure: Notes
Relationship between tax expense and accounting profit
Accouting profit 1,000
Tax @ applicable rate 350
Add/Less: tax effect of:
- Exempt income (35)
- Permanently inadmissable expense 17.50
- Prior year adjustment 8
- Change in DT due to rate change 10
- Tax at lower rate -
350.00
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AAFR IAS-12 Revaluation Reserve
CFAP-1
Example
A company has been following cost model under IAS 16 for number of years and now January 01, 2015
decided to change from cost model to revaluation model. The cost of the asset was Rs. 450,000 and
accounting depreciation on this asset was Rs. 150,000 while tax allowance was Rs. 290,000. The asset
revalued at the start of year to Rs. 350,000 with remaining useful life of 10 years. The tax rate of depreciation
has been 25% on reducing balance basis while in accounting asset is depreciated on straight line basis.
The tax rate has been 33% for 2014 and 32% for current year.
Required:
Prepare note of deferred tax expense and deferred tax liability for/at December 31, 2015 to financial statements
in comparatives?
Solution
2015 2014
Rs. Rs.
Taxable temporary differences
Accelerated depreciation
2014 (290,000 – 150,000)x33% 46,200
2015 (330,000 – 180,000)x32% 48,000
Revaluation surplus
2015 (50,000 – 5,000)x32% 14,400 --
62,400 46,200
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6.1.1 Circumstances that give rise to taxable temporary differences
The carrying amount of an asset is increased to fair value in a business combination that is an
acquisition and no equivalent adjustment is made for tax purposes.
Unrealised losses resulting from intragroup transactions are eliminated by inclusion in the
carrying amount of inventory or property, plant and equipment.
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.
Investments in foreign subsidiaries, branches or associates or interests in foreign joint ventures
are affected by changes in foreign exchange rates.
An entity accounts in its own currency for the cost of the non-monetary assets of a foreign
operation that is integral to the reporting entity's operations but the taxable profit or tax loss of
the foreign operation is determined in the foreign currency.
Answer
(a) Fair value adjustment
On initial recognition, the resulting deferred tax liability increases goodwill or decreases negative
goodwill.
(b) Unrealised losses
The tax bases of the assets are unaltered.
(c) Consolidated earnings
IAS 12 does not allow recognition of the resulting deferred tax liability if the parent, investor or
venturer is able to control the timing of the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable future.
(d) Changes in exchange rates: investments
There may be either a taxable temporary difference or a deductible temporary difference in this
situation. IAS 12 does not allow recognition of the resulting deferred tax liability if the parent,
investor or venturer is able to control the timing of the reversal of the temporary difference and it is
probable that the temporary difference will not reverse in the foreseeable future.
(e) Changes in exchange rates: use of own currency
Again, there may be either a taxable temporary difference or a deductible temporary difference.
Where there is a taxable temporary difference, the resulting deferred tax liability is recognised,
because it relates to the foreign operation's own assets and liabilities, rather than to the reporting
entity's investment in that foreign operation. The deferred tax is charged to profit or loss.
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Investments in foreign subsidiaries, branches or associates or interests in foreign joint ventures
are affected by changes in foreign exchange rates
A foreign operation accounts for its non-monetary assets in its own (functional) currency. If its
taxable profit or loss is determined in a different currency (under the presentation currency
method) changes in the exchange rate result in temporary differences. The resulting deferred tax is
charged or credited to profit or loss.
Answer
(a) Fair value of liabilities
The resulting deferred tax asset decreases goodwill or increases negative goodwill.
(b) Unrealised profits
As in above.
(c) Changes in exchange rates: investments
As noted in the question before this, there may be a taxable temporary difference or a deductible
temporary difference. IAS 12 requires recognition of the resulting deferred tax asset to the extent,
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.
(d) Changes in exchange rates: use of own currency
As noted in the question before this, there may be either a taxable temporary difference or a
deductible temporary difference. Where there is a deductible temporary difference, the resulting
deferred tax asset is recognised to the extent that it is probable that sufficient taxable profit will be
available, because the deferred tax asset relates to the foreign operation's own assets and
liabilities, rather than to the reporting entity's investment in that foreign operation. The deferred tax
is charged to profit or loss.
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AAFR IAS-12 Examples
CFAP-1
Ex-1
On 1 January 20X5 entity A acquired 100 per cent of the shares of entity B at a cost of 600. At the
acquisition date, the tax base in A’s tax jurisdiction of A’s investment in B is 600. Reductions in the carrying
amount of goodwill are not deductible for tax purposes, and the cost of the goodwill would also not be
deductible if B were to dispose of its underlying business. The tax rate in A’s tax jurisdiction is 30 per cent
and the tax rate in B’s tax jurisdiction is 40 per cent.
The fair value of the identifiable assets acquired and liabilities assumed (excluding deferred tax assets
and liabilities) by A is set out in the following table, together with their tax bases in B’s tax jurisdiction.
Cost of Tax base
acquisition
Property, plant and equipment 270 155
Ex-3
Identify the tax base of the following: -
A machine cost Rs. 5,000. For tax purposes depreciation of Rs. 5000 has already been deducted in
the current and prior years.
A machine cost Rs. 1,000. The tax depreciation of Rs. 700 has already been used for determination
of tax but accounting depreciation of Rs. 600 has been charged on the asset.
Interest receivable has a carrying value of Rs. 100,000. The related interest revenue has been
taxed on accrual basis.
Trade receivables have a carrying value of Rs. 100,000. This amount is arrived at after deducting
provision for doubtful debts of Rs. 5,000.The related revenue has already been included in the
taxable profit (loss) for the year.
The research expense having carrying value of nil already charged in the profit and loss account can
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AAFR IAS-12 Examples
CFAP-1
Ex-4
The taxable differences at the end of the year 2006 amounting to Rs. 5,000,000 which will reverse in the
following years as under: -
Rs. Tax rate
2007 2,500,000 35%
2008 1,500,000 38%
2009 1,000,000 40%
Ex-5
An asset has a carrying amount of 100 and a tax base of 60. A tax rate of 20% would apply if the assets
were sold and a tax rate of 30% would apply to other income.
What will be deferred tax implications in both circumstances?
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AAFR IAS-12 Examples
CFAP-1
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AAFR IAS-12 Past Papers
CFAP-1
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AAFR IAS-12 Past Papers
CFAP-1
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AAFR IAS-12 Past Papers
CFAP-1
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AAFR IAS-12 Past Papers
CFAP-1
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