07 - Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22) - Income Taxes

[IND-AS]

Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes

(This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraph s in bold type indicate the main principles.)

[IND-AS]

Objective of Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes

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 recognised in an entity’s balance sheet; and
(b) transactions and other events of the current period that are recognised in an entity’s financial statements.

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), with certain limited exceptions.

This Standard requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognised in profit or loss, any related tax effects ar e also recognised in profit or loss. For transactions and other events recognised outside profit or loss (either in other comprehensive income or directly in equity), any related tax effects are also recognised outside profit or loss (either in other comprehensive income or directly in equity, respectively). Similarly, the recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill arising in that business combination or the amount of the bargain purchase gain recognised.

This Standard also deals with 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 .

[IND-AS]

Scope of Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes

Scope

1. This Standard shall be applied in accounting for income taxes.

2. For the purposes of this Standard, 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.

3. [Refer to Appendix 1]

4. This Standard does not deal with the methods of accounting for government grants (see Ind AS 20, Accounting for Government Grant s and Disclosure of Government Assistance) 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.

[IND-AS]

Definitions of Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes

Definitions

5. The following terms are used in t his Standard with the meanings specified:

Accounting profit is profit or loss for a period before deducting tax expense.

Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by the 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 carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.

Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences may be either:

(a) taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or

(b) deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.

The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

6. Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income).

[IND-AS]

Tax base of Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes

Tax base

7. The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those econo mic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.

Examples

1. A machine cost Rs 100. For tax purposes, depreciation of Rs 30 has already been deducted in the current and prior periods and the remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal. Revenue generated by using the machine is taxable, any gain on disposal of the machine will be taxable and any loss on disposal will be deductible for tax purposes. The tax base of the machine is Rs 70.

2. Interest receivable has a carrying amount of Rs 100. The related interest revenue will be taxed on a cash basis. The tax base of the interest receivable is nil.

3. Trade receivables have a carrying amount of Rs 100. The related revenue has already been included in taxable profit (tax loss). The tax base of the trade receivables is Rs 100.

4. Dividends receivable from a subsidiary have a carrying amount of Rs 100. The dividends are not taxable. In substance, the entire carrying amount of the asset is deductible against the economic benefits. Consequently, the tax base of the dividends receivable is Rs 100.(a)

5. A loan receivable has a carrying amount of Rs 100. The repayment of the loan will have no tax consequences. The tax base of the loan is Rs 100.

(a) Under this analysis, there is no taxable temporary difference. An alternative analysis is that the accrued dividends receivable have a tax base of nil and that a tax rate of nil is applied to the resulting taxable temporary difference of Rs 100. Under both analyses, there is no deferred tax liability.

8. 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. 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.

Examples

1. Current liabilities include accrued expenses with a carrying amou nt of Rs 100. The related expense will be deducted for tax purposes on a cash basis. The tax base of the accrued expenses is nil.

2. Current liabilities include interest revenue received in advance, with a carrying amount of Rs 100. The related interest revenue was taxed on a cash basis. The tax base of the interest received in advance is nil .

3. Current liabilities include accrued expenses with a carrying amount of Rs 100. The related expense has already been deducted for tax purposes. The tax base of the accrued expenses is Rs 100.

4. Current liabilities include accrued fines and penalties with a carrying amount of Rs 100. Fines and penalties are not deductible for tax purposes. The tax base of the accrued fines and penalties is Rs 100.(b)

5. A loan payable has a carrying amount of Rs 100. The repayment of the loan will have no tax consequences. The tax base of the loan is Rs 100.

(b) Under this analysis, there is no deductible temporary difference. An alternative analysis is that the accrued fines and penalt ies payable have a tax base of nil and that a tax rate of nil is applied to the resulting deductible temporary difference of Rs 100. Under both analyses, there is no deferred tax asset.

9. Some items have a tax base but are not recognised as assets and liab ilities in the balance sheet. For example, preliminary expenses are recognised 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(s). The difference between the tax base of the preliminary expenses, 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.

10. Where the tax base of an asset or liability is not immediately apparent, it is helpful to consider the fundamental principle upon which this Standard is based: that an entity shall, with certain limited exceptions, recognise a deferred tax l iability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences. Example C following paragraph 52 illustrates circumstances when it may be helpful to consider this fundamental principle, for example, when the tax base of an asset or liability depends on the expected manner of recovery or settlement.

11. The tax base is determined by reference to the tax returns of each entity in the group. In some jurisdictions, in consolidated financial statements, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the approp riate tax base.

The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a return is filed.

[IND-AS]

Recognition of current tax liabilities and current tax assets of Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes

Recognition of current tax liabilities and current tax assets

12. Current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognised as an asset.

13. The benefit relating to a tax loss that can be car ried back to recover current tax of a previous period shall be recognised as an asset.

14. When a tax loss is used to recover current tax of a previous period, an entity recognises the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the entity and the benefit can be reliably measured.

[IND-AS]

Taxable temporary differences of Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes

Recognition of deferred tax liabilities and deferred tax assets

Taxable temporary differences

15. A deferred tax liability shall be recognised for all taxable te mporary 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.

16. It is inherent in the recognition of an asset that its carrying amount will be recovered in the form of economic benefits that flow to the entity in future periods. When the carrying amount of the asset e xceeds its tax base, the amount of taxable economic benefits will exceed the amount that will be allowed as a deduction for tax purposes. This difference is a taxable temporary difference and the obligation to pay the resulting income taxes in future perio ds is a deferred tax liability. As the entity recovers the carrying amount of the asset, the taxable temporary difference will reverse and the entity will have taxable profit. This makes it probable that economic benefits will flow from the entity in the f orm of tax payments. Therefore, this Standard requires the recognition of all deferred tax
liabilities, except in certain circumstances described in paragraphs 15 and 39.


Example

An asset which cost Rs 150 has a carrying amount of Rs 100. Cumulative depreciation for tax purposes is Rs 90 and the tax rate is 25%.

The tax base of the asset is Rs 60 (cost of Rs 150 less cumulative tax depreciation of Rs 90). To recover the carrying amount of Rs 100, the entity must earn taxable income of Rs 100, but will only be able to deduct tax depreciation of Rs 60. Consequently, the entity will pay income taxes of Rs 10 (Rs 40 at 25%) when it recovers the carrying amount of the asset. The difference between the carrying amount of Rs 100 and the tax base of Rs 60 is a taxable temporary difference of Rs 40. Therefore, the entity recognises a deferred tax liability of Rs 10 (Rs 40 at 25%) representing the income taxes that it will pay when it recovers the carrying amount of the asset.

17. Some temporary differences arise whe n income or expense is included in accounting profit in one period but is included in taxable profit in a different period. Such temporary differences are often described as timing differences. The following are examples of temporary differences of this ki nd which are taxable temporary differences and which therefore result in deferred tax liabilities :


(a) interest revenue is included in accounting profit on a time proportion basis but may, in some jurisdictions, be included in taxable profit when cash is collected. The tax base of any receivable recognised in the balance sheet with respect to such revenues is nil because the revenues do not affect taxable profit until cash is collected;

(b) depreciation used in determining taxable profit (tax loss) may differ from that used in determining accounting profit. The temporary difference is the difference between the carrying amount of the asset and its tax base which is the original cost of the asset less all deductions in respect of that asset permitted under taxation laws in determining taxable profit of the current and prior periods. A taxable temporary difference arises, and results in a deferred tax liability, when tax depreciation is accelerated (if tax depreciation is less rapid than accounting depreciation, a deductible temporary difference arises, and results in a deferred tax asset); and

(c) development costs may be capitalised and amortised over future periods in determining accounting profit but deducted in determining taxable profit in the period in which they are incurred. Such development costs have a tax base of nil as they have already been deducted from taxable profit. The temporary difference is the difference between the carrying amount of the development costs and their tax base of nil.

18. Temporary differences also arise when:

(a) 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 (see paragraph 19);

(b) assets are revalued and no equivalent adjustment is made for tax purposes (see paragraph 20);
(c) goodwill arises in a business combination (see paragraph 21);
(d) the tax base of an asset or liability on initial recognition differs from its initial carrying amount, for example when an entity benefits from non - taxable government grants related to assets (see paragraphs 22 and 33); or
(e) the carrying amount of investments in subsidiaries, branches and associates or interests in joint ventures become s different from the tax base of the investment or interest (see paragraphs 38 –45).

[IND-AS]

Business combinations of Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes


Recognition of deferred tax liabilities and deferred tax assets

Business combinations

19. With limited exceptions, the identifiable assets acquired and liabilities assumed in a business combination are recognised at their fair values at t he acquisition date. Temporary differences arise when the tax bases of the identifiable assets acquired and liabilities assumed are not affected by the business combination or are affected differently. For example, when the carrying amount of an asset is increased to fair value but the tax base of the asset remains at cost to the previous owner, a taxable temporary difference arises which results in a deferred tax liability. The resulting deferred tax liability affects goodwill (see paragraph 66).

[IND-AS]

Assets carried at fair value of Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes


Recognition of deferred tax liabilities and deferred tax assets

Assets carried at fair value

20. 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 and Ind AS 39 Financial Instruments: Recognition and Measurement.). 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 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 a nd 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.

[IND-AS]

Goodwill of Indian Accounting Standard (Ind AS) 12 - Earlier Accounting standard (22)

Income Taxes


Recognition of deferred tax liabilities and deferred tax assets

Goodwill

21. 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 wit h Ind AS 103, which generally requires acquisition-date fair value;
(ii) the amount of any non-controlling interest in the acquiree recognised 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.

Many jurisdictions do not allow reductions in the carrying amount of goodwill as a deductible expense in determining taxable profit. Moreover, in such jurisdictions, the cost of goodwill is often not deductible when a subsidiary disposes of its underlying business. In such jurisdictions, goodwill h as a tax base of nil. Any difference between the carrying amount of goodwill and its tax base of nil is a taxable temporary difference. However, this Standard does not permit the recognition of the resulting deferred tax liability because goodwill is measured as a residual and the recognition of the deferred tax liability would increase the carrying amount of goodwill.

21A. Subsequent reductions in a deferred tax liability that is unrecognised because it arises from the initial recognition of goodwill are a lso regarded as arising from the initial recognition of goodwill and are therefore not recognised under paragraph 15(a). For example, if in a business combination an entity recognises goodwill of Rs 100 that has a tax base of nil, paragraph 15(a) prohibits the entity from recognising the resulting deferred tax liability. If the entity subsequently recognises an impairment loss of Rs 20 for that goodwill, the amount of the taxable temporary difference relating to the goodwill is reduced from Rs 100 to Rs 80, 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 fr om being recognised under paragraph 15(a).

21B. Deferred tax liabilities for taxable temporary differences relating to goodwill are, however, recognised to the extent they do not arise from the initial recognition of goodwill. For example, if in a business combination an entity recognises goodwill of Rs 100 that is deductible for tax purposes at a rate of 20 per cent per year starting in the year of acquisition, the tax base of the goodwill is Rs 100 on initial recognition and Rs 80 at the end of the year of acquisition. If the carrying amount of goodwill at the end of the year of acquisition remains unchanged at Rs 100, a taxable temporary difference of Rs 20 arises at the end of that year. Because that taxable temporary difference does not relate to the initial recognition of the goodwill, the resulting deferred tax liability is recognised.