INDIAN ACCOUNTING STANDARD 12 10.

31

• 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;
(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

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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?
• 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 1
The directors of H wish to recognise a material deferred tax asset in relation to ` 250 Cr of
unused trading losses which have accumulated as at 31st March 20X1. H has budgeted
profits for ` 80 Cr for the year ended 31st March 20X2. The directors have forecast that
profits will grow by 20% each year thereafter. However, the improvement in trading results
may occur after the next couple of years to come at the position of breakeven. 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. H 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 for
the year ended 31st March 20X1?

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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. 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 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 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 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
31st 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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(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 2
On 1st 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 31st March 20X2. The tax law permits
tax deduction on the basis of payment of rent.

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Assuming tax rate of 30%, you are required to explain the deferred tax consequences for the above
transaction for the year ended 31st 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 31st 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 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 3
On 1 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 April 20X1 can be used for this purpose. On 1 April 20X1, the market value of a
B Ltd. share was ` 2.00

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On 1 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 April 20X1. The following matters emerged:
– Property having a carrying value of ` 15 Cr at 1 April 20X1 had an estimated market
value of ` 18 Cr at that date.
– Plant and equipment having a carrying value of ` 1 Cr at 1 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%.
Calculate the deferred tax impact on above and calculate the goodwill arising on acquisition
of B Ltd.
Solution
Purchase Consideration: ` 25 Cr
Non-Controlling Interest [{(12 Cr x (20% / 80%)} x ` 2 per share] ` 6 Cr
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

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 INDIAN ACCOUNTING STANDARD 12 10.47

Add: Non-Controlling Interest ` 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.
♦ 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

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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 4
On 1st April 20X1, P Ltd. had granted 1 Cr share options worth ` 4 Cr subject 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 31st March 20X2 was ` 1.60 Cr and at 31st March 20X3
was ` 4.60 Cr. The increase in the fair value of the options on 31st March 20X3 was not foreseeable
at 31st March 20X2. The options were exercised at 31st March 20X3.
Give the accounting for the above transaction for deferred tax for period ending 31st March, 20X2
and 31st 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 31st March 20X2:
The tax benefit is calculated as under:
Carrying amount of Share based payment ` 0.00 Cr

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 INDIAN ACCOUNTING STANDARD 12 10.49

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 31st 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.
(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.

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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).
(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: `
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
Illustration 5
A’s Ltd. 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 1st 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.

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Prepare necessary entries as at 31st 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)
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

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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.
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.

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Discuss the treatment of deferred tax in case the reporting date of A Limited’s financial statement is
31st December, 20X1 and these are approved for issued on 31st 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 December 31, 20X1.
It will not recognise the deferred tax liability @ 30% because as on December 31, 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 8
A Ltd prepares financial statements to 31 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 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.
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 March 20X1 and ` 75 Cr on 31 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 March. On 31 March 20X1, carrying value of the building (after revaluation)
was ` 40 Cr and its tax base was ` 22 Cr. During the year ended 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 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 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 March 20X2

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Solution:
(A) Deferred Tax Liability as at 31st 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 31st of 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 31st March 20X2:
Investment in L Ltd.
Particulars Carrying amount Tax Base Temporary Difference
Opening Balance (1st April 20X1) ` 70 Cr ` 45 Cr ` 25 Cr
Closing Balance (31st 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)

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Head Office Building:

The deferred tax liability at 31 March 20X1 is ` 3.6 Cr (20% x {` 40 Cr – ` 22 Cr}).
At 31 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 9
K Ltd prepares consolidated financial statements to 31st March each year. During the year ended
31st March 20X2, K Ltd entered into the following transactions:
(a) On 1st April 20X1, K Ltd purchased an equity investment for ` 2,00,000. The investment was
designated as fair value through other comprehensive income. On 31st 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
taxable unless the investment is sold. K Ltd has no intention of selling the investment in the
foreseeable future.
(b) On 1st 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
31st March 20X2, A Ltd had sold 40% of these goods, selling the remaining during next year.
(c) On 31st 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 1st November 20X1 to 31st July 20X2. K Ltd recognised
revenue of ` 1,20,000 in respect of this transaction in the year ended 31st March 20X2 and will
recognise the remainder in the year ended 31st March 20X3. Under the tax jurisdiction in which
K Ltd operates, ` 2,00,000 received on 31st October 20X1 was included in the taxable profits
of K Ltd for the year ended 31st 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
31st March 20X2. Assume tax rate to be 25%.

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 10.62 FINANCIAL REPORTING

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 1st October 20X1 would create a current tax liability of
` 50,000 (` 200,000 x 25%) as at 31st March 20X2. The carrying value of the revenue received
in advance at 31st 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 creating Ind AS 12 is based on balance AS 22 is based on income
Deferred Tax sheet approach. statement approach.
It requires recognition of tax
consequences of differences It requires recognition of tax
between the carrying amounts consequences of differences
between taxable income and
accounting income. For this

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 10.66 FINANCIAL REPORTING

6. B Limited is a newly incorporated entity. Its first financial period ends on 31st 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 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 31st March, 20X1.
7. X Ltd. prepares consolidated financial statements to 31st March each year. During the year
ended 31st March 2018, 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 31st March, 2018, 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 31st March,
2018. Income-tax Act allows tax deductions for closure costs only when the closure
actually takes place. In the year ended 31st March 2019, X Ltd. expects to make taxable
profits which are well in excess of ` 20,00,000. On 31st March, 2018, X Ltd. had taxable
temporary differences from other sources which were greater than ` 20,00,000.
(iii) During the year ended 31st March, 2017, 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 1st January, 2018. 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 31st March,
2018.
(iv) On 1st April, 2017, 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 1st April, 2017.
The loan was for a three-year period. No interest was payable on the loan but the amount
repayable on 31st March, 2020 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 31st March, 2020.

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 INDIAN ACCOUNTING STANDARD 12 10.67

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, 2018 as per Ind AS. Assume the
rate of corporate income tax is 20%.
8. PQR Ltd., a manufacturing company, prepares consolidated financial statements to
31st March each year. During the year ended 31st March, 2018, 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 31st March, 2018, 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 1st January, 2018. 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 31st March, 2018.
• On 1st April, 2017, 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 1st April 2017.
The loan was for a three-year period. No interest was payable on the loan but the amount
repayable on 31st March 2020 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 31st March, 2020.
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 31st March, 2018 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 31st
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 30th 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:

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 10.68 FINANCIAL REPORTING

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.
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 therefore exists between the carrying value of the
investment in XYZ at the reporting date of ` 4,378 (` 4,373 + ` 5) and its tax base of ` 4,373.
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 therefore exists between the carrying value of the
investment in PQR at the reporting date of ` 1,050 (` 1,000 + ` 50) and its tax base of
` 1,000. 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 joint
venture (50 x 15%).
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

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 10.70 FINANCIAL REPORTING

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 31st 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 31st 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 31st March, 2019.
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 31st March, 2018 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 31st March, 2018
• 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

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 INDIAN ACCOUNTING STANDARD 12 10.71

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 31st March, 2018 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:
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.

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 10.72 FINANCIAL REPORTING

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 3,500
OCI –revaluation surplus 3,500
Deferred tax asset 6,500
Deferred tax expense 6,500
Deferred tax expense 7,500
Deferred tax liability 7,500

Alternatively, a combined journal entry may be passed as follows:

` `
Deferred tax asset Dr. 10,000
Deferred tax expense Dr. 1,000
To OCI –revaluation surplus 3,500
To Deferred tax liability 7,500

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