Ind AS 12, Income Taxes, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams
Question 1 –
A’s Ltd. profit before tax according to Ind AS for Year 20X1-20X2 is Rs. 100 thousand and taxable profit for year 20X1-20X2 is Rs. 104 thousand. The difference between these amounts arose as follows:
On 1st February, 20X2, it acquired a machine for Rs. 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. In the year 20X1-20X2, expenses of Rs. 8 thousand were incurred for charitable donations. These are not deductible for tax purposes.
You are required to 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 = Rs.104 thousand x 25% = Rs.26 thousand.
Computation of Taxable Profit:
| Rs. in thousand | |
| Accounting profit | 100 |
| Add: Donation not deductible | 8 |
| Less: Excess Depreciation | (4) |
| Total Taxable profit | 104 |
| Rs. in thousand | Rs. in thousand | |
| Profit & loss A/c | 26 |
26 |
|
To Current Tax |
Deferred tax:
Machine’s carrying amount according to Ind AS is Rs. 118 thousand (Rs. 120 thousand – Rs. 2 thousand)
Machine’s carrying amount for taxation purpose = Rs. 114 thousand (Rs. 120 thousand – Rs. 6 thousand)
Deferred Tax Liability = Rs. 4 thousand x 25%
| Rs. in thousand | ||
| Profit & loss A/c | 1 | |
| To Deferred Tax Liability | 1 | |
Tax reconciliation in absolute numbers:
| Rs. in thousand | |
| Profit before tax according to Ind AS | 100 |
| Applicable tax rate | 25% |
| Tax | 25 |
| Expenses not deductible for tax purposes (Rs. 8 thousand x 25%) | 2 |
| Tax expense (Current and deferred) | 27 |
Tax rate reconciliation
| Applicable tax rate | 25% |
| Expenses not deductible for tax purposes | 2% |
| Average effective tax rate | 27% |
Question 2 –
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 Rs. 9,000. These are expected to reverse equally over next 3 years.
(b) Deductible temporary differences of Rs. 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.
Solution –
The year-wise anticipated reversal of temporary differences is as under:
|
Particulars |
Year ending on 31st March, 20X2 | Year ending on 31st March, 20X3 | Year ending on 31st March, 20X4 | Year ending on 31st March, 20X5 |
| Reversal of taxable temporary difference relating to accelerated depreciation over next 3 years (Rs. 9,000/3) | 3,000 | 3,000 | 3,000 | Nil |
| Reversal of deductible temporary difference relating to preliminary expenses over next 4 years (Rs. 4,000/4) | 1,000 | 1,000 | 1,000 | 1,000 |
B Limited will recognise a deferred tax liability of Rs. 2,700 on taxable temporary difference relating to accelerated depreciation of Rs. 9,000 @ 30%.
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 31st March, 20X4 amounting to Rs. 900 (Rs. 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 Rs. 1,000 (Rs. 4,000 – Rs. 3,000) of deductible temporary difference could be recognised at the 30% tax rate.
Question 3 –
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 Rs. 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 Rs. 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 Rs. 20,00,000. On 31st March, 2018, X Ltd. had taxable temporary differences from other sources which were greater than Rs. 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 Rs. 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 Rs. 1,00,00,000. The cost to X Ltd. of arranging the borrowing was Rs. 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 Rs. 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 Rs. 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 X Ltd. group at 31st March, 2018 as per Ind AS. Assume the rate of corporate income tax is 20%.
Solution –
(i) The tax loss creates a potential deferred tax asset for the group since its carrying value is nil and its tax base is Rs. 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 Rs. 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 Rs. 20,00,000 in the year to 31st March, 2019.
The amount of the deferred tax asset will be Rs. 4,00,000 (Rs. 20,00,000 x 20%).
This asset will be presented as a deduction from the deferred tax liabilities cause d by the (larger) taxable temporary differences.
(iii) The development costs have a carrying value of Rs. 15,20,000 (Rs. 16,00,000 – (Rs. 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 Rs. 3,04,000 (Rs. 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 Rs. 1,07,80,000 (Rs. 1,00,00,000 – Rs. 2,00,000 + (Rs. 98,00,000 x 10%)).
The tax base of the loan is Rs. 1,00,00,000.
This creates a deductible temporary difference of Rs. 7,80,000 (Rs. 1,07,80,000 – Rs. 1,00,00,000) and a potential deferred tax asset of Rs. 1,56,000 (Rs. 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.
Question 4 –
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 Rs.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 Rs.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 Rs.1,00,00,000. The cost to PQR Ltd. of arranging the borrowing was Rs.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 Rs.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 Rs.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%.
Solution –
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 Rs.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.
- The development costs have a carrying value of Rs.15,20,000 (Rs.16,00,000 – (Rs.16,00,000 × 1/5 × 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 Rs.4,56,000 (Rs.15,20,000 × 30%). All deferred tax liabilities are shown as non-current.
- The carrying value of the loan at 31st March, 2018 is Rs.1,07,80,000 (Rs.1,00,00,000 – Rs.200,000 + (Rs.98,00,000 × 10%)). The tax base of the loan is 1,00,00,000. This creates a deductible temporary difference of Rs.7,80,000 and a potential deferred tax asset of Rs.2,34,000 (Rs.7,80,000 × 30%).
Question 5 –
An entity is finalising its financial statements for the year ended 31st 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 30 th 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:
|
Deferred tax asset |
Rs. 80,000 |
| Deferred tax liability | Rs. 60,000 |
Of the deferred tax asset balance, Rs. 28,000 related to a temporary difference. This deferred tax asset had previously been recognized 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.
Solution –
Calculation of Deductible temporary differences:
| Deferred tax asset | = | Rs. 80,000 |
| Existing tax rate | = | 40 % |
| Deductible temporary differences | = | 80,000/40% |
| = | Rs. 2,00,000 |
Calculation of Taxable temporary differences:
| Deferred tax liability | = | Rs. 60,000 |
| Existing tax rate | = | 40% |
| Deductible temporary differences | = | 60,000 / 40% |
| = | Rs. 1,50,000 |
Of the total deferred tax asset balance of Rs. 80,000, Rs. 28,000 is recognized in OCI
Hence, Deferred tax asset balance of Profit & Loss is Rs. 80,000 – Rs. 28,000 = Rs. 52,000
Deductible temporary difference recognized in Profit & Loss is Rs. 1,30,000 (52,000 / 40%)
Deductible temporary difference recognized in OCI is Rs. 70,000 (28,000 / 40%)
The adjusted balances of the deferred tax accounts under the new tax rate are:
|
Deferred tax asset |
Rs. | |
| Previously credited to OCI-equity | Rs. 70,000 x 0.45 | 31,500 |
| Previously recognised as Income | Rs. 1,30,000 x 0.45 | 58,500 |
| Deferred tax liability | 90,000 | |
| Previously recognized as expense | Rs. 1,50,000 x 0.45 | 67,500 |
The net adjustment to deferred tax expense is a reduction of Rs. 2,500. Of this amount, Rs. 3,500 is recognised in OCl and Rs. 1,000 is charged to P&L.
The amounts are calculated as follows:
|
|
Carrying amount at 45% | Carrying amount at 40% | Increase (decrease) in deferred tax 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) |
| Deferred tax liability | 90,000 | 80,000 | (10,000) |
| Previously recognized as expense | 67,500 | 60,000 | 7,500 |
| Net adjustment | (2,500) |
An alternative method of calculation is:
| Rs. | ||
| DTA shown in OCI | Rs. 70,000 x (0.45 – 0.40) | 3,500 |
| DTA shown in Profit or Loss | Rs. 1,30,000 x (0.45-0.40) | 6,500 |
| DTL shown in Profit or Loss | Rs. 1,50,000 x (0.45 -0.40) | 7,500 |
Journal Entries
| Rs. | Rs. | |
| Deferred tax asset | 3,500 | |
|
To OCI –revaluation surplus |
3,500 | |
| Deferred tax asset | 6,500 | |
|
To Deferred tax expense |
6,500 | |
| Deferred tax expense | 7,500 | |
|
To Deferred tax liability |
7,500 |
Alternatively, a combined journal entry may be passed as follows:
| Rs. | Rs. | |
| Deferred tax asset Dr. | 10,000 | |
| Deferred tax expense Dr. | 1,000 | |
|
To OCI –revaluation surplus |
3,500 | |
|
To Deferred tax liability |
7,500 |
Question 6 –
A company had purchased an asset at Rs. 1,00,000. Estimated useful life of the asset is 5 years and depreciation rate is 20%. Depreciation rate for tax purposes is 25%. The operating profit is Rs. 1,00,000 for all the 5 years. Tax rate is 30% for the next 5 years. Calculate the Book Value as per financial and tax purposes and then DTL.
Solution –
Calculation of the Book Value as per financial and tax purposes.
Financial Accounting:
| Rs. 000’s | |||||
| Year | 1 | 2 | 3 | 4 | 5 |
| Gross Block
Accumulated Depreciation |
100
20 |
100
40 |
100
60 |
100
80 |
100
100 |
| Carrying Amount | 80 | 60 | 40 | 20 | 0 |
Tax Accounting:
| Rs. 000’s | |||||
| Year | 1 | 2 | 3 | 4 | 5 |
| Gross Block
Accumulated Depreciation |
100
25 |
100
50 |
100
75 |
100
100 |
100
100 |
| Carrying Amount | 75 | 50 | 25 | 0 | 0 |
Calculation of DTL:
|
Rs. 000’s |
|||||
| Year | 1 | 2 | 3 | 4 | 5 |
| Carrying Amount
Tax Base |
80
75 |
60
50 |
40
25 |
20
0 |
0
0 |
| Difference | 5 | 10 | 15 | 20 | 0 |
| Deferred Tax Liability (Difference x 30%) | 1.5 | 3 | 4.5 | 6 | 0 |