Calculate taxes under Ind AS 12. Describe the recognition criteria for deferred tax liabilities and assets. Explain the deferred tax effects on

Transcription

1 Ind AS 12 Income Taxes

2 Objectives Calculate taxes under Ind AS 12. Describe the recognition criteria for deferred tax liabilities and assets. Explain the deferred tax effects on business combinations. Detail the recognition of deferred tax assets arising from unused tax losses or credits. Detail presentation and disclosure requirements of income taxes

3 Scope Ind AS 12 defines income taxes as including all domestic and foreign taxes, which are based on taxable profits. Included in scope withholding tax (tax payable by components on distributions to parent) Excluded from scope Other taxes (e.g. VAT, Business Tax) that are levied on another basis (e.g. on gross revenue) Methods of Accounting for Government grants

4 Question How should interest and penalties on income tax deficiencies be presented?

5 Answer Interest and penalties assessed on income tax deficiencies should be presented based on their nature (i.e., either as a finance cost (interest) or operating expense (penalties)) because those items do not meet the definition of current or deferred income tax expense as defined in Ind AS 12.

6 Some Definitions Accounting Profit Profit or loss for a period per the books of account. Taxable Profit The profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable) Tax expense The aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax Current tax The amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.

7 Some Definitions (contd.) Tax base It is the amount attributable to that asset or liability for tax purposes. Deferred tax assets The amounts of income taxes recoverable in future periods in respect of; Deductible temporary differences The carryforward of unused tax losses and credits Deferred tax liabilities The amounts of income taxes payable in future periods in respect of taxable temporary differences.

8 Measurement of Current and Deferred Tax Current tax Measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantially enacted by the end of the reporting period. Deferred tax Measured at the tax rates that are expected to apply to the period when the assets is realized or the liability is settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. DTA/ DTL should not be discounted.

9 Current Tax Current tax for current and prior period, to the extent unpaid, should be recognized as a liability. Payment in excess of the amount due should be recognized as an asset. The benefit relating to a tax loss that can be carried The benefit relating to a tax loss that can be carried back to recover current tax of a previous period should be recognized as an asset.

10 Deferred tax General Principle Balance sheet liability method Deferred taxes are recognized for temporary differences: Differences between the carrying amount of an asset or liability in the balance sheet and its tax base.

11 Temporary differences Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base - Taxable temporary differences - Deductible temporary differences

12 Accounting for deferred tax a five- step approach 1.Calculate tax base 2.Calculate temporary difference 3.Identify the temporary differences that give rise to deferred tax assets or liabilities 4.Calculate deferred tax balances using appropriate tax rate 5.Recognise deferred tax in income, equity or as an adjustment to goodwill

13 Tax Base 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 economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount. Tax base of an liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods.

14 Deferred tax calculationculation arising from temporary differences: Carrying amount Tax - = base Temporary difference Temporary Tax Deferred tax X = difference rate asset/liability arising from carried forward tax losses/credits: Unused tax loss/credits Tax X = rate Deferred tax asset

15 Tax Base - Example Interest receivable has a carrying amount of Rs 100. The related interest revenue will be taxed on cash basis. - Tax Base Nil Dividend receivable has carrying amount of Rs 100. The dividend is tax free. - Tax Base 100 Accrued exp of Rs 100. Expenses deducted for tax purpose - Tax base - 100

16 Recognition of deferred tax liabilities A deferred tax liability must be recognized for all taxable temporary differences, unless the deferred tax liability arises from: the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction which: is not a business combination, and at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss) (Ind AS 12.15). There are special recognition exceptions for investments in subsidiaries, branches and associates, and interests in joint ventures for both deferred tax liabilities and assets.

17 Consolidated Financial Statements In consolidated financial statements (CFS), temporary differences are determined by comparing the carrying amounts of assets and liabilities in the CFS with the appropriate tax base. The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a return is filed. In other jurisdictions, the tax base is determined by reference to the tax returns of each entity in the group.

18 Goodwill Many tax authorities do not allow goodwill as a deductible expense. In such jurisdictions, goodwill has 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, Ind AS does not permit the recognition of the resulting deferred tax liability Since goodwill is measured as a residual and the recognition of the deferred tax liability would increase the carrying amount of goodwill.

19 Goodwill contd. Deferred tax liabilities for taxable temporary differences relating to goodwill are, however, recognised in certain cases. For example, if goodwill acquired Rs 100 in a business combination has a cost of Rs 100 that is deductible for tax purposes at a rate of 20% p.a. 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 per the books 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.

20 Recognition of deferred tax assets Deferred tax assets must be recognized only to the extent that it is probable that future taxable profits will be available. Probable not defined, Ind AS 12 contains guidance Factors to consider for recognition of DTA arising from unused losses: Existence of sufficient taxable temporary difference Convincing other evidence that sufficient taxable profits will be available Losses resulted from identifiable causes, which are unlikely to recur Availability of tax planning opportunities At the end of each reporting period, an entity should reassess unrecognized DTAs. The entity should recognize a previously unrecognized DTA to the extent that it has become probable that future taxable profit will allow the DTA to be recovered.

21 Tax Planning Opportunities When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognized to the extent that tax planning opportunities are available to the entity that will create taxable profit in appropriate periods. Tax planning opportunities are actions that the entity would take in order to create or increase taxable income in a particular period before the expiry of a tax loss or tax credit carryforward.

22 Question When assessing the recoverability of deferred tax assets arising from the carry forward of unused tax losses and unused tax credits, should a deferred tax asset be recognised where the amount of probable future taxable profit available is sufficient only for a portion, rather than the total, of the unused tax losses or unused tax credits?

23 Answer Yes. Ind AS states the following: A deferred tax asset shall be recognised for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. When assessing the probability that taxable profit will be available against which unused tax losses or unused tax credits can be utilised, an entity assesses whether it is probable that it will have any taxable profits before any portion of the unused tax losses or unused tax credits expire.

24 Business combinations Assets acquired and liabilities assumed are recognised at fair values at the acquisition date. However: The tax bases of individual assets and liabilities may not be affected. changing the carrying amount (to fair value) affects temporary differences and accordingly deferred taxes. These tax consequences impact goodwill and are recognised when accounting for the business combination. However, no deferred tax liability is recognised on the initial recognition of goodwill itself

25 Business combinations Example 1 Facts Company A acquires Company B in a business combination for Rs 2,000. At the time of acquisition, the fair value of B s net assets and contingent liabilities is Rs 1,800. The net book value and aggregate tax base are equal to Rs 1,000. The tax rate is 30% Analysis The difference between fair value (Rs 1,800) and tax base (Rs 1,000) gives rise to taxable temporary difference of Rs 800. A deferred tax liability of Rs 240 (Rs 800 x 30%) recognized.

26 Business combinations Example 1 (cont.) Accounting for the business combination Fair value of assets 1,800 Deferred tax liability (240) Goodwill 440 Total consideration 2,000

27 Post-acquisition recognition of DTA of acquiree Recognizes DTA s of acquiree once the probability criterion is met, even post acquisition. No time limit. If within the measurement period and resulting from new information about facts and circumstances that existed at the acquisition date - Adjust goodwill and reassess impairment for goodwill If goodwill is nil recognise the deferred tax benefits in profit or loss If not - Recognised in profit or loss.

28 Investments in components DTL: An entity shall recognise a DTL for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that both of the following conditions are satisfied: the parent, investor or venturer is able to control the timing of the reversal of the temporary difference; and it is probable that the temporary difference will not reverse in the foreseeable future.

29 Investments in components (contd.) DTA: An entity shall recognise a DTA for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint ventures 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.

30 Question A deferred tax liability is not required for an excess of the amount for financial reporting over the tax basis of an investment in a subsidiary, branch, associate or interest in a joint venture when the investor is able to control the timing of the reversal of the temporary difference, and it is probable that the temporary difference will not reverse in the foreseeable future. In the circumstance where such an exception relates to undistributed profits and an entity requires its subsidiary to remit only a portion of undistributed earnings, would the entity be required to recognise a deferred tax liability only for a portion of the undistributed earnings to be remitted in the future?

31 Answer Yes. Ind AS is not an "all-or-nothing" requirement. If circumstances change and it becomes probable that some or all of the undistributed earnings of a subsidiary will be remitted in the foreseeable future but income taxes have not been recognised, the investor should accrue as an expense of the current period, income taxes attributable to that remittance.

32 Current and Deferred Tax Recognized outside P&L If the underlying item is recognized outside profit or loss, the current and deferred tax is also recognized outside the profit or loss If the underlying item is recognized in: Other comprehensive income, the current and deferred tax is also recognized in other comprehensive income Directly in equity, the current and deferred tax is also recognized directly in equity

33 Current and Deferred Tax Recognized outside P&L(contd.) Example of items recognized in other comprehensive income a change in carrying amount arising from the revaluation of property, plant and equipment Example of items recognized directly in equity an adjustment to the opening balance of retained earnings resulting from either a change in accounting policy that is applied retrospectively or the correction of an error

34 Presentation Tax expense Tax Expense (Income) related to profit or loss from ordinary activities shall be presented in the statement of profit and loss. Exchange differences on deferred foreign tax liabilities or assets Where exchange differences on deferred foreign tax liabilities or assets are recognised in the statement of profit and loss, such differences may be classified as deferred tax expense (income) if that presentation is considered to be the most useful to financial statement users.

35 Presentation Offset current tax assets and current tax liabilities Offset if, and only if, the entity: has a legally enforceable right to set off the recognised amounts; and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously An entity will normally have a legally enforceable right to set off a current tax asset against a current tax liability when they relate to income taxes levied by the same taxation authority and the taxation authority permits the entity to make or receive a single net payment. In consolidated financial statements, a current tax asset of one entity in a group is offset against a current tax liability of another entity in the group if, and only if, the entities concerned have a legally enforceable right to make or receive a single net payment and the entities intend to make or receive such a net payment.

36 Presentation (contd.) deferred tax assets and liabilities Offset 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 liabilities relate to income taxes levied by the same taxation authority on either:» the same taxable entity; or» different taxable entities which intend either to settle current tax liabilities and assets on a net basis or to realise the asset and settle the liability simultaneously.

37 Certain Disclosures The major components of tax expense (income) need to be disclosed separately. Major Components of tax expense (income) may include: current tax expense (income); prior period adjustments; deferred tax expense (income); amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce current tax or deferred tax expense; Aggregate current and deferred tax relating to items charged or credited directly to equity;

38 Certain Disclosures (contd.) Income tax relating to each component of other comprehensive income; An explanation of the relationship between tax expense (income) and accounting profit in either or both of the following forms: a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed; or a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed; An explanation of changes in the applicable tax rate compared to the previous accounting period;

39 Certain Disclosures 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; 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; In respect of discontinued operations, the tax expense relating to: the gain or loss on discontinuance; and the profit or loss from the ordinary activities of the discontinued operation for the period, and corresponding amounts for each prior period presented;

40 Certain Disclosures (contd.) Change in the amount recognised for pre-acquisition deferred tax asset Description of the event or change in circumstances that cause deferred tax benefits to be recognised after the acquisition date Amount of deferred tax asset recognised and evidence supporting its recognition, when: the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and the entity has suffered a loss in either the current or preceding period

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