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Workshop on Deferred Taxation. Tahmeen Ahmad (ACA). Understanding Deferred Tax. - PowerPoint PPT Presentation
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Workshop on Workshop on Deferred TaxationDeferred Taxation
Tahmeen Ahmad (ACA)Tahmeen Ahmad (ACA)
Understanding Deferred Understanding Deferred TaxTax
An entity shall, with certain limited An entity shall, with certain limited exceptions, recognize a deferred tax exceptions, recognize a deferred tax liability (asset) whenever recovery or liability (asset) whenever recovery or settlement of the carrying amount of the settlement of the carrying amount of the asset or liability will make the future tax asset or liability will make the future tax payments larger (smaller) than they payments larger (smaller) than they would be if such recovery or settlement would be if such recovery or settlement were to have no tax consequences.were to have no tax consequences.
Understanding Deferred Understanding Deferred Tax (contd.)Tax (contd.)
Accounting profit versus taxable profitAccounting profit versus taxable profit The temporary differenceThe temporary difference Why calculate deferred tax assets or Why calculate deferred tax assets or
liabilities?liabilities? The balance sheet liability methodThe balance sheet liability method
Identifying temporary Identifying temporary differencesdifferences
The carrying amountThe carrying amount The tax base of:The tax base of:
An asset-future tax deductible amountsAn asset-future tax deductible amounts A liability- carrying amount less future tax deductible A liability- carrying amount less future tax deductible
amountsamounts Revenue received in advance- carrying amount less Revenue received in advance- carrying amount less
any future non taxable amountany future non taxable amount
Two kinds of temporary differences : taxable Two kinds of temporary differences : taxable and deductibleand deductible
Identifying temporary Identifying temporary differences (contd.)differences (contd.)
B/s itemB/s item Taxable Taxable Temporary Temporary differencedifference
Deductible Deductible temporary temporary differencedifference
AssetAsset Carrying Carrying amount greater amount greater than tax basethan tax base
Tax base Tax base greater than greater than carrying carrying amountamount
LiabilityLiability Tax base Tax base greater than greater than carrying carrying amountamount
Carrying Carrying amount greater amount greater than tax basethan tax base
Identifying temporary Identifying temporary differences (contd.)differences (contd.)
ExamplesExamples Group A to identify tax base and carrying Group A to identify tax base and carrying
amountamount Group B to identify taxable temporary Group B to identify taxable temporary
differencesdifferences Group C to identify deductible temporary Group C to identify deductible temporary
differencesdifferences
Recognition criteria DTLRecognition criteria DTL
““Deferred tax liability shall be recognized on all taxable Deferred tax liability shall be recognized on all taxable temporary differences except to the extent that it arises temporary differences except to the extent that it arises fromfrom Initial recognition of GoodwillInitial recognition of Goodwill Initial recognition of an asset or liability in a transaction that :Initial recognition of an asset or liability in a transaction that :
Is not a Business combination; andIs not a Business combination; and At the time of the transaction, affects neither accounting nor At the time of the transaction, affects neither accounting nor
taxable profit (tax loss)taxable profit (tax loss)
However, for taxable temporary differences associated However, for taxable temporary differences associated with investment in subsidiaries, branches, associates with investment in subsidiaries, branches, associates and interests in joint ventures, a deferred tax liability and interests in joint ventures, a deferred tax liability shall be recognized with exceptions.”shall be recognized with exceptions.”
Recognition criteria DTARecognition criteria DTA
““a deferred tax asset shall be recognized for all a deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is deductible temporary differences to the extent that it is probable that taxable profit will be available against probable that taxable profit will be available against which the deductible temporary difference can be which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction initial recognition of an asset or liability in a transaction that:that: Is not a business combinationIs not a business combination At the time of the transaction affects neither accounting profit At the time of the transaction affects neither accounting profit
not taxable profit (tax loss)not taxable profit (tax loss) However for deductible temporary differences However for deductible temporary differences
associated with investment in subsidiaries, associates, associated with investment in subsidiaries, associates, branches and interests in joint ventures, a deferred tax branches and interests in joint ventures, a deferred tax asset shall be recognized subject to conditions asset shall be recognized subject to conditions
Specific guidance on Specific guidance on Deferred tax RecognitionDeferred tax Recognition
GoodwillGoodwill business combinationsbusiness combinations Assets at fair valueAssets at fair value Initial recognition of assets and liabilitiesInitial recognition of assets and liabilities Share based paymentsShare based payments
I. Goodwill I. Goodwill
Initial recognition –deferred tax not Initial recognition –deferred tax not recognized as goodwill is a residualrecognized as goodwill is a residual
Subsequent reductions in unrecognized Subsequent reductions in unrecognized DTL that arose from the initial recognition DTL that arose from the initial recognition of goodwill- deferred tax liability not of goodwill- deferred tax liability not recognizedrecognized
Subsequent tax allowable differences – Subsequent tax allowable differences – deferred tax liability recognizeddeferred tax liability recognized
II. Business combinationsII. Business combinations
Identifiable assets and liabilities are valued at fair value Identifiable assets and liabilities are valued at fair value at acquisition dateat acquisition date
Tax base may be differentTax base may be different Temporary differences ariseTemporary differences arise Deferred tax calculated and corresponding effect Deferred tax calculated and corresponding effect
adjusted in goodwill or negative goodwill*adjusted in goodwill or negative goodwill* Case : Acquirer’s own deferred tax asset not Case : Acquirer’s own deferred tax asset not
recognized in a business combination due to recognized in a business combination due to unavailable taxable profitsunavailable taxable profits
Case: Acquiree’s deferred tax asset not recognized Case: Acquiree’s deferred tax asset not recognized due to non satisfaction of separate recognition criteriadue to non satisfaction of separate recognition criteria
III. Assets at fair valueIII. Assets at fair value
Revaluations as per IASsRevaluations as per IASs Different tax base and carrying amountDifferent tax base and carrying amount Temporary difference arises and a Temporary difference arises and a
deferred tax asset/ liability is calculated deferred tax asset/ liability is calculated
IV. Initial recognition of IV. Initial recognition of assets/ liabilitiesassets/ liabilities
where tax base is different carrying amount at initial where tax base is different carrying amount at initial recognition, temporary differences ariserecognition, temporary differences arise
Deferred tax asset/ liability recognized with:Deferred tax asset/ liability recognized with: Adjustment in goodwill (Part of a business combination)Adjustment in goodwill (Part of a business combination) Recognition of deferred tax expense/ income( where the Recognition of deferred tax expense/ income( where the
transaction affects profits)transaction affects profits) Adjustment to equity (for transactions that affect equity)Adjustment to equity (for transactions that affect equity)
Deferred tax asset/liability not recognized if the Deferred tax asset/liability not recognized if the transaction is not a business combination or does not transaction is not a business combination or does not affect accounting or tax profits.affect accounting or tax profits.
V. Investment in V. Investment in subsidiaries etcsubsidiaries etc
When carrying amount of investment in subsidiaries, branches When carrying amount of investment in subsidiaries, branches and associates or interests in joint ventures differs from tax baseand associates or interests in joint ventures differs from tax base
Reason for difference include:Reason for difference include: Undistributed profitsUndistributed profits Change in forex ratesChange in forex rates ImpairmentImpairment
The DTL recognized for taxable temporary differences except The DTL recognized for taxable temporary differences except where the parent can control the timing of reversal andwhere the parent can control the timing of reversal and the differences are not probable to reverse in the foreseeable futurethe differences are not probable to reverse in the foreseeable future
The DTA recognized for all deductible temporary differences The DTA recognized for all deductible temporary differences where:where: The differences are probable to reverse in the foreseeable futureThe differences are probable to reverse in the foreseeable future Taxable profit will be available against which the temporary difference Taxable profit will be available against which the temporary difference
can be utilized. can be utilized.
VI. Share based VI. Share based paymentspayments
Timing of expense allowed in case of Timing of expense allowed in case of share based payments may differshare based payments may differ
Employee remuneration in share optionsEmployee remuneration in share options Tax authorities normally may allow Tax authorities normally may allow
deduction at a different date eg of actual deduction at a different date eg of actual exercise of share rightsexercise of share rights
Deductible temporary difference arises Deductible temporary difference arises on which deferred tax is recognizedon which deferred tax is recognized
Applicable rates and Applicable rates and measurementmeasurement
Rate applicable in the period the differences Rate applicable in the period the differences are expected to reverseare expected to reverse
Average rate applied in case of slab ratesAverage rate applied in case of slab rates Rate depends on intended manner of recovery Rate depends on intended manner of recovery
or settlement of the asset or liabilityor settlement of the asset or liability Tax rate may depend on dividend payout. Tax rate may depend on dividend payout.
(higher for non distribution) deferred tax (higher for non distribution) deferred tax computed at ‘undistributed profit’ ratecomputed at ‘undistributed profit’ rate
DTL and DTA not discountedDTL and DTA not discounted DTA reviewed at each B/s date* DTA reviewed at each B/s date*
Items credited or Items credited or charged directly to equitycharged directly to equity
Deferred tax will be charged or credited directly Deferred tax will be charged or credited directly to equity if the tax relates to items that are to equity if the tax relates to items that are credited or charged, in the same or different credited or charged, in the same or different period, directly to equity.period, directly to equity.
Examples are on:Examples are on: Revaluation surplusRevaluation surplus Adjustment to the opening balance of retained Adjustment to the opening balance of retained
earningsearnings Forex differences on translation of foreign Forex differences on translation of foreign
operation’f f/soperation’f f/s
Unrecognized deferred Unrecognized deferred tax assetstax assets
Reassessed at each b/s dateReassessed at each b/s date Recognized to the extent it is probable Recognized to the extent it is probable
that future taxable profits will be availablethat future taxable profits will be available
Presentation and Presentation and disclosuredisclosure
Offsetting of deferred tax assets and liabilities allowed Offsetting of deferred tax assets and liabilities allowed under certain conditionsunder certain conditions
Tax expense in income statementTax expense in income statement Disclosures of:Disclosures of:
Components of tax expenseComponents of tax expense Aggregate deferred tax on items charged to equityAggregate deferred tax on items charged to equity Reconciliation of tax expense (income) with accounting profitReconciliation of tax expense (income) with accounting profit Unrecognized deferred tax assets- amount of deductible Unrecognized deferred tax assets- amount of deductible
differencesdifferences Changes in tax rates from previous period explainedChanges in tax rates from previous period explained Amt and expiry date of deductible temporary differences, unused Amt and expiry date of deductible temporary differences, unused
tax losses and tax credits for which no deferred tax asset has tax losses and tax credits for which no deferred tax asset has been recognizedbeen recognized
Aggregate amount of temp diff related to inv in subs etc for which Aggregate amount of temp diff related to inv in subs etc for which no deferred tax liabilities have been recognizedno deferred tax liabilities have been recognized
Presentation and Presentation and disclosure (contd.)disclosure (contd.)
For each type of temporary difference (and unused tax For each type of temporary difference (and unused tax loss and tax credit):loss and tax credit): DTL & DTA in b/sDTL & DTA in b/s DTI and DTE in income statementDTI and DTE in income statement
For DTA, supporting evidence for recognition when:For DTA, supporting evidence for recognition when: The utilization of the DTA will exceed the available taxable The utilization of the DTA will exceed the available taxable
temporary differences in the period of reversaltemporary differences in the period of reversal Losses suffered in the current or prior period to DTALosses suffered in the current or prior period to DTA
Potential income tax consequences of payment of Potential income tax consequences of payment of dividends to shareholdersdividends to shareholders
Illustrations Illustrations
Group C to work out deferred tax assets Group C to work out deferred tax assets and liabilitiesand liabilities
Group B to present the f/s portions as Group B to present the f/s portions as relevantrelevant
Group A to prepare the reconciliationsGroup A to prepare the reconciliations
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