Decoding Indian Accounting Standard (Ind AS) - 12 - Part III

This article is a continuation of Part II of Decoding Indian Accounting Standard (Ind AS) - 12 which can be accessed here.

Recognition of current and deferred tax

Accounting for the current and deferred tax effects of a transaction is consistent with the accounting for the transaction itself.

• If a transaction pertains to Profit or Loss, current and deferred tax should be recognised in Profit or Loss. (Example - 
• If a transaction pertains to Other Comprehensive Income, current and deferred tax should be recognised in Other Comprehensive Income.
• If a transaction is directly recognised in Equity, current and deferred tax should be recognised in Equity.

Offsetting deferred tax liability and deferred tax asset is allowed only if the entity has a legally enforceable right to set off, and DTA & DTL relate to income taxes levied by the same taxation authority.

Special Aspects

• Business Combinations : The identifiable assets acquired and liabilities assumed in a business combination are recognised at their fair values at the acquisition date. Temporary differences arise when the tax bases of the identifiable assets acquired and liabilities assumed are not affected by the business combination or are affected differently.

For example, when the carrying amount of an asset is increased to fair value but the tax base of the asset remains at cost to the previous owner, a taxable temporary difference 745 arises which results in a deferred tax liability. The resulting deferred tax liability affects goodwill.

If Goodwill has a tax base of nil, and any difference between the carrying amount of goodwill and its tax base of nil is a taxable temporary difference, then recognise deferred tax on Goodwill.

• Share-based Payment : An entity may recognise an expense for the consumption of employee services received as consideration for share options granted, in accordance with Ind AS 102, Share-based Payment, but not receive a tax deduction until the share options are exercised.

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.

In such case current and deferred tax should be recognised as income or an expense and included in profit or loss for the period.

• Investments in subsidiaries, branches and associates and interests in joint arrangements : Temporary differences arise when the carrying amount of investments in subsidiaries, branches and associates or interests in joint arrangements (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.

An entity shall recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except when:

(a) the parent, investor, joint venturer or joint operator 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 recognise a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, 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 utilised.

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