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