INDAS: 12 Income Tax

Ind AS 12 - Income Taxes

?? ?????????????? ???? ???????????????? ??????: The concept arises due to #temporarydifferences between the carrying amount of an asset or liability in the balance sheet and its tax base. These differences emerge because of disparities in the recognition of income and expenses under accounting standards and tax laws.

Under Ind AS 12, deferred tax assets and liabilities are recognized for all temporary differences, except for certain exceptions, such as initial recognition of goodwill, the initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit, and differences related to investments in subsidiaries, branches, and associates when the timing of the reversal of the temporary difference is controlled by the entity and it is probable that the temporary difference will not reverse in the foreseeable future.

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1. Accounting Treatment for Income Taxes:

Ind AS 12 establishes guidelines for the accounting treatment of income taxes. It encompasses both domestic and foreign taxes based on taxable profits. This includes taxes payable by subsidiaries, associates, or joint ventures on distributions to the reporting entity.

2. Scope of Income Taxes:

Income taxes cover all taxes related to taxable profits, including withholding taxes. These may impact entities both at present and in the future.

3. Principal Issues in Accounting for Income Taxes:

The core accounting issue revolves around addressing the current and future tax consequences of:

(a) The future recovery or settlement of the carrying amount of assets or liabilities in an entity's balance sheet.

(b) Transactions and events of the current period recognized in the financial statements.

4. Deferred Tax Liabilities and Assets:

The standard requires entities to recognize deferred tax liabilities or assets if the recovery or settlement of carrying amounts is expected to result in larger or smaller future tax payments compared to scenarios with no tax consequences. Limited exceptions apply.

Example: If an entity expects to recover an asset in the future, and this recovery would lead to higher tax payments than if there were no tax consequences, a deferred tax liability is recognized.

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Assets

IF CA> TB to bring CA to TB you shall need to reduce it, hence create Liability DTL

CA<TB to bring CA to TB you shall need to increase it, hence create asset - DTA ?

Liabilities

IF CA> TB to bring CA to TB you shall need to reduce it, hence create assets DTA

CA<TB to bring CA to TB you shall need to increase it, hence create liabilities - DTL ?

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5. Recognition of Deferred Tax Assets from Tax Losses or Credits:

Ind AS 12 addresses the recognition of deferred tax assets arising from unused tax losses or credits. This ensures that potential future benefits are appropriately reflected in the financial statements.

6. Presentation and Disclosure:

The standard outlines how income taxes should be presented in financial statements and mandates disclosure of relevant information pertaining to income taxes.

7. Balance Sheet Approach:

Ind AS 12 adopts a balance sheet approach, requiring the recognition of tax consequences arising from differences between the carrying amounts of assets and liabilities and their respective tax bases.

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Recognition of Current Tax Liabilities and Current Tax Assets:

Current Tax Liability:

Current tax for the ongoing and prior periods that remain unpaid is recognized as a liability.

Example: If a company's taxable income for the current year is assessed, and taxes calculated exceed the amount paid, the difference is recognized as a current tax liability.

Current Tax Asset:

If the amount already paid for current and prior periods surpasses the tax obligation for those periods, the excess is recognized as a current tax asset.

Example: If a company overestimates its tax liability and pays more taxes than required, the excess payment is recognized as a current tax asset.

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Recognition of Deferred Tax Liabilities and Deferred Tax Assets:

Taxable Temporary Differences: 3. Definition:

Taxable temporary differences are temporary differences between carrying amounts of assets or liabilities and their tax bases. They result in taxable amounts in determining future taxable profit or loss.

Example: ?A limited has interest income receivable of Rs 1000. In income tax, interest income is taxable on a cash basis. It means we need to pay tax in the future ?

Recognition of Deferred Tax Liability:

A deferred tax liability is recognized for all taxable temporary differences unless specific conditions exempt it, such as the initial recognition of goodwill or an asset/liability in a non-business combination.

Example: If the carrying amount of an asset exceeds its tax base, resulting in higher taxable benefits in the future, a deferred tax liability is recognized.

Reasoning:

It is inherent in recognizing an asset that it is carrying amount will be recovered in future, and if this exceeds the tax base, it creates a taxable temporary difference.

The obligation to pay more income taxes in the future periods due to this difference results in deferred tax liability.

Example: A Ltd purchased a PPE costing Rs 5000. Depreciation is charged @ 20 % p.a on SLM basis in books. Depreciation is charged @ 25%? p.a on SLM basis in income tax . Tax rate is 30% ?

?Year 1?? PPE (Asset)

Carrying Amount à 5000 -1000 = 4000

Tax Base à 5000- 1250 = 3750

Taxable temporary Difference = 4000-3750 = 250 (DTL will be created on this @ 30%

DTL = 250 * 30% = 75

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Deductible Temporary Differences and Recognition of Deferred Tax Assets:

1. Definition of Deductible Temporary Differences:

Deductible temporary differences are temporary differences between the carrying amounts of assets or liabilities and their tax bases. These differences will lead to amounts that are deductible when determining taxable profit or loss in future periods.

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2. Recognition of Deferred Tax Assets for Deductible Temporary Differences:

A deferred tax asset is recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized.

Example: If an entity has an asset with a carrying amount as per books is less than as compared of Tax base of asset, creating a future deductible amount, a deferred tax asset is recognized.

A Ltd has made provision for Division closure cost of Rs 1000. In Income tax closure cost is allowed only when it is actually paid. Tax rate is 30% ?

Carrying amount as per books: 1000

Carrying amount as per Tax base: ?0

DTD = 1000- 0 =1000

DTA = 1000*30% = 300

3. Conditions for Recognition:

The recognition of a deferred tax asset for deductible temporary differences is subject to certain conditions.

The deferred tax asset should be probably to be utilized against future taxable profit.

Exemptions apply if the deferred tax asset arises from the initial recognition of an asset or liability in a transaction not classified as a business combination.

4. Temporary Differences in Liabilities:

When a liability is recognized, and future outflows are deductible in a later period, a temporary difference exists between the carrying amount of the liability and its tax base.

Example: In the case of a lease commencement, where a liability is recognized, and outflows are deductible in future periods, a temporary difference arises.

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5. Consideration of Tax Law Restrictions:

When assessing the availability of taxable profits against which deductible temporary differences can be utilized, consideration is given to whether tax law restricts sources of taxable profits for deductions on reversal.

Example: If tax law restricts losses to deduction against a specific income type, a deductible temporary difference is assessed in combination with other deductible temporary differences of the appropriate type.

6. Recognition of Deferred Tax Assets for Unused Tax Losses and Credits:

A deferred tax asset is recognized for the carry forward of unused tax losses and credits, provided it is probable that future taxable profit will be available against which they can be utilized.

Example: If a company has incurred tax losses in previous years, a deferred tax asset is recognized if future taxable profits are expected.

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Measurement

Current Tax Liabilities (Assets):

Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities. This uses tax rates and laws enacted or substantively enacted by the end of the reporting period.

Example: If a company has a current tax liability of $10,000 for the current year, it is measured based on the applicable tax rate for that year.

Deferred Tax Assets and Liabilities:

Deferred tax assets and liabilities are measured at the tax rates expected to apply when the asset is realized, or the liability is settled. This is based on the tax rates and laws enacted or substantively enacted by the end of the reporting period.

Example: If an entity has a deferred tax liability due to taxable temporary differences, it is measured using the expected future tax rate.

Reflecting Expected Recovery/Settlement:

The measurement of deferred tax liabilities and assets reflects the expected tax consequences of how the entity plans to recover or settle the carrying amount of its assets and liabilities at the end of the reporting period.

Example: If an entity plans to recover an asset through sale, the deferred tax liability is measured considering the tax consequences of the expected sale.

No Discounting:

Deferred tax assets and liabilities shall not be discounted.

Review of Deferred Tax Asset:

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period. If it is no longer probable that sufficient taxable profit will be available, the carrying amount is reduced. This reduction is reversed if it becomes probable that sufficient taxable profit will be available.

Example: If an entity had a deferred tax asset for unused tax credits, but it is unlikely to have sufficient taxable profit, the carrying amount is reduced.

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Presentation:

Offsetting Current Tax Assets and Liabilities:

Current tax assets and liabilities can be offset if the entity has a legally enforceable right to set off recognized amounts. It must also either intend to settle on a net basis or realize the asset and settle the liability simultaneously.

Offsetting Deferred Tax Assets and Liabilities:

Deferred tax assets and liabilities can be offset if the entity has a legally enforceable right to set off current tax assets against current tax liabilities. It applies when they relate to income taxes levied by the same taxation authority on the same or different taxable entities intending to settle on a net basis or realize the assets and settle the liabilities simultaneously.

Example: If an entity has deferred tax assets and liabilities, and it intends to settle them on a net basis in future periods, they can be offset.

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1. Disclosure:

Major components of tax expense (income) should be disclosed separately.

Example: If a company reports a tax expense of $100, the disclosure would specify the components, such as current tax, deferred tax, and any adjustments.

2. Allocation:

Tax consequences of transactions and events are accounted for in the same way as the transactions and events themselves. Tax effects related to items recognized in profit or loss are also recognized in profit or loss. Similarly, tax effects related to items recognized outside profit or loss are recognized outside profit or loss.

Example: If a company recognizes a gain in other comprehensive income, the related tax effect on that gain is also recognized in other comprehensive income.

Recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill arising or the bargain purchase gain recognized.

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3. Change in Tax Status:

A change in the tax status of an entity or its shareholders does not give rise to increases or decreases in amounts recognized outside profit or loss. Consequences are included in profit or loss, unless related to transactions resulting in direct credit or charge to equity or in other comprehensive income.

Example: If there's a change in tax status, and it directly impacts equity, the tax consequences are charged or credited directly to equity.