CA Final · Financial Reporting

Ind AS 12 Income Taxes: formula sheet

Full chapter guide

Key formulas

Taxable profit: Taxable profit = Accounting profit ± Permanent adjustments ± Timing adjustments Permanent adjustments (never reverse): - + Expenses permanently disallowed by tax law - − Income exempt or not taxable Timing adjustments (reverse in later periods): - + Add back accounting depreciation and provisions, because tax does not allow them until paid or in this form - − Deduct tax depreciation and expenses that tax allows only on payment - + Add income taxed earlier than it is recognised in accounts (e.g. advances received) - − Deduct income recognised in accounts now but taxed in a later period; Start from accounting profit. Make the permanent adjustments first: add disallowed expenses and deduct exempt income. These create no deferred tax. Then make the timing adjustments. Add back accounting charges that tax does not allow in the period. Deduct what tax allows in the period but accounts have not charged. Add income taxed earlier than it is recognised. Deduct income recognised now but taxed later. Timing items give rise to temporary differences.
Current tax: Current tax = Taxable profit × Enacted or substantively enacted tax rate; Use the rate applicable to the period's taxable profit at the reporting date.
Current tax liability or asset: Net position = Current tax for the period − Tax already paid (advance tax, TDS, TCS); A positive result is a liability. A negative result is a current tax asset.
Temporary difference (asset): Temporary difference = Carrying amount − Tax base; For liabilities the sign logic is reversed: Tax base − Carrying amount.
Tax base of a liability: Tax base = Carrying amount − Amount deductible for tax in future periods; For revenue received in advance: carrying amount − revenue that will not be taxable in future.
Offsetting current tax: Offset only if legally enforceable right exists AND intention to settle net or realise asset and settle liability simultaneously; Both conditions must hold.
Temporary difference: Temporary difference = Carrying amount − Tax base; Use this one definition for assets and liabilities. Then classify as taxable or deductible using the asset and liability rules below.
Tax base of an asset: Tax base of an asset = Amount deductible for tax against taxable economic benefits when the carrying amount is recovered; If the economic benefits are not taxable, the tax base equals the carrying amount. A derived form is: Tax base = Carrying amount − Future taxable amounts + Future deductible amounts. Future taxable amounts are the taxable economic benefits you will recover. Future deductible amounts are the tax deductions you will get against them.
Tax base of a liability: Tax base = Carrying amount − Amount deductible for tax in future; For revenue received in advance: Carrying amount − Revenue not taxable in future.
Asset classification: Asset: Carrying amount > Tax base → taxable difference → DTL; Carrying amount < Tax base → deductible difference → DTA; Typical case: accounting depreciation slower than tax depreciation gives a DTL.
Liability classification: Liability: Carrying amount > Tax base → deductible difference → DTA; Carrying amount < Tax base → taxable difference → DTL; Typical case: provisions deductible only when paid give a DTA.
Deferred tax amount: Deferred tax = Temporary difference × Tax rate expected to apply when the asset is realised or liability settled; Use rates enacted or substantively enacted at the end of the reporting period.
Deferred tax movement: Deferred tax expense/(income) = Closing net DTL − Opening net DTL (adjusted for items taken to OCI or equity); The balance sheet figure drives the profit and loss charge.
Deferred tax liability / asset: Deferred tax = Temporary difference × Tax rate expected to apply on reversal; Use enacted or substantively enacted rate at the reporting date and the rate for the expected manner of recovery.
Effect of rate change: Adjustment = Opening temporary difference × (New rate − Old rate); Increase in rate raises a DTL or DTA; a cut lowers both. Recognise in profit or loss unless the original item was in OCI or equity.
Discounting rule: Deferred tax is not discounted; Applies to both assets and liabilities, whatever the reversal period.
Review of DTA: Carrying amount of DTA reduced to the extent that sufficient taxable profit is no longer probable; Reduction is reversed if sufficient taxable profit becomes probable again.
Revalued asset: Deferred tax on revaluation = (Revalued carrying amount − Tax base) × Rate for expected manner of recovery; Where the revaluation is in OCI, the related deferred tax is also recognised in OCI (revaluation surplus).
Core allocation rule: Tax is recognised in the same place as the underlying item: P&L, OCI or equity; Apply to both current tax and deferred tax. P&L is the default.
Revaluation surplus: Deferred tax in OCI = Revaluation surplus × Tax rate; Surplus is shown net of this deferred tax. A gain on revaluation increases the deferred tax liability. Any remaining movement in deferred tax, such as from depreciation differences, goes to P&L.
Share-based payment, estimated deduction: Estimated future tax deduction = (Intrinsic value at reporting date ÷ Total vesting period) × Service period elapsed; Use the share price at the reporting date. The carrying amount of the services received is nil, so this estimated deduction is the tax base and also the deductible temporary difference. It differs from the Ind AS 102 expense.
Share-based payment, deferred tax asset: DTA = Estimated future tax deduction × Tax rate (subject to recoverability); DTA is recognised only if taxable profit is probable. The amount through P&L is capped at cumulative expense × tax rate, with the excess to equity.
Split of the tax income: Tax to P&L = lower of (Estimated deduction, Cumulative expense) × Tax rate; Tax to equity = excess of Estimated deduction over Cumulative expense, × Tax rate; If the estimated deduction is lower than or equal to the cumulative expense, nothing goes to equity and the whole tax effect goes to P&L.
Business combination: Deferred tax on fair value adjustments is recognised at acquisition: a DTL increases goodwill (or reduces the bargain purchase gain); a DTA reduces goodwill; Changes in the acquirer's own deferred tax asset recoverability due to the combination are not part of acquisition accounting. They go to P&L.
Dividend-related tax (Ind AS 12): Income tax consequences of dividends are recognised where the past transactions or events that generated the distributable profits were recognised; Usually P&L, unless those profits came from items in OCI or equity.
Current tax offset test: Offset only if: legally enforceable right to set off AND intention to settle net (or realise asset and settle liability simultaneously); Both conditions must be met. Missing either one means present gross.
Deferred tax offset test: Offset only if: legally enforceable right to set off current tax assets against current tax liabilities AND the deferred balances relate to income taxes levied by the same authority on (i) the same taxable entity, or (ii) different taxable entities that intend to settle current tax net, or realise and settle simultaneously, in each future period in which significant deferred tax is expected to be settled or recovered; Different tax authorities means no offset. Different entities, such as group entities, need the intention condition in each future period in which significant deferred tax is expected to be settled or recovered.
Tax expense (income): Tax expense = Current tax + Deferred tax expense (less deferred tax income); Includes only the tax recognised in profit or loss. Tax on OCI or equity items is shown with those items.
Rate reconciliation, method 1: Accounting profit × applicable tax rate = Notional tax; Notional tax ± reconciling items = Tax expense; Numerical reconciliation between tax expense and the product of accounting profit and applicable tax rate.
Rate reconciliation, method 2: Applicable tax rate ± effect of reconciling items = Effective tax rate (Tax expense ÷ Accounting profit); Numerical reconciliation between average effective tax rate and applicable tax rate. Disclose the basis of the applicable rate.
Effective tax rate: Effective tax rate = Tax expense ÷ Accounting profit before tax × 100; Use total tax expense in profit or loss, not just current tax.
Acceptance test: Probable (more likely than not) acceptance → recognise tax as per filing; not probable → reflect uncertainty; Assume the authority examines the treatment and has full knowledge of all relevant information.
Most likely amount: Tax = the single most likely outcome from the range of possible outcomes; Best when the outcome is binary or sits in a few discrete outcomes.
Expected value: Tax = Σ (probability of each outcome × amount of that outcome); Best when there is a range of many possible outcomes. Probabilities must total 100%.
Uncertain tax liability (uncertainty effect): Extra tax = Tax under chosen method − Tax computed on the filed return (with the full deduction claimed); The baseline is the tax computed on the filed return. The extra amount is the additional liability recognised for the uncertainty. Show it within current tax (or deferred tax if it affects tax bases or temporary differences).
Reassessment: Change in facts or circumstances → revise judgement or estimate; Treated as a change in estimate under Ind AS 8, not as a prior period error unless it is an error.
Core rule of Appendix A: Tax effect of change in status → profit or loss, unless it relates to items recognised in OCI or equity; Items outside profit or loss carry their tax effect to the same place (OCI or equity). This is backward tracing.
Deferred tax on remeasurement: Deferred tax = Temporary difference × Tax rate applicable under the new status; The temporary difference is the carrying amount less the tax base, measured at the date of change. If the new status brings no tax on recovery, the balance is derecognised.
Split of the adjustment: Total change in deferred tax = Portion to profit or loss + Portion to OCI + Portion to equity; Split by where the underlying item was originally recognised. Check that the parts add up to the total.
Recoverability of deferred tax assets: Reassess DTA at the date of change: recognise only if taxable profit is probable under the new status; A change in status can create or remove the taxable profit against which a DTA is used.
Ind AS 12 vs IAS 12: Quote only the differences listed in ICAI's Appendix 1 comparison; Do not add differences from memory that you cannot place in Appendix 1.

Quick revision

Current tax is the tax payable or recoverable on taxable profit or loss for the period.
Deferred tax uses the balance sheet approach: carrying amount compared with tax base.
Taxable temporary difference gives a DTL; deductible temporary difference gives a DTA.
For an asset, a carrying amount above the tax base gives a taxable temporary difference.
For a liability, a carrying amount above the tax base gives a deductible temporary difference.
A DTA is recognised only to the extent that future taxable profit is probable.
Deferred tax is measured at the enacted or substantively enacted rate expected to apply, and is never discounted.
Deferred tax follows the underlying item: P&L, OCI or directly in equity.
A rate change is generally recognised in P&L, unless it relates to items recognised outside P&L.
Offset current tax assets and liabilities only with a legally enforceable right and an intention to settle net or simultaneously.
Offset deferred tax balances only if there is a legally enforceable right to offset current tax assets against current tax liabilities, and the balances relate to income taxes levied by the same taxation authority on the same taxable entity (or on different entities that intend to settle net or simultaneously).
Ind AS 1 requires deferred tax assets and liabilities to be classified as non-current; do not show them as current.

Common mistakes

Applying the tax rate to accounting profit instead of taxable profit. Fix: Always show the adjustment table first. Current tax is computed only on taxable profit.
Treating every difference as a temporary difference. Fix: Ask whether the difference reverses. Disallowed fines and exempt income never reverse, so they are permanent.
Computing deferred tax on the profit difference instead of the balance sheet difference. Fix: Always start with carrying amount and tax base. The profit effect is only the movement in the balance.
Reversing the classification for liabilities. Fix: For a liability, carrying amount greater than tax base is a deductible difference and gives a DTA. Write the rule at the top of your answer.
Using a rate announced in a Budget speech or draft bill. Fix: Use only enacted or substantively enacted rates at the reporting date. A tax rate change enacted after the reporting date is a non-adjusting event under Ind AS 10, to be disclosed if material.
Discounting a deferred tax liability that reverses in 10 years. Fix: Ind AS 12 prohibits discounting of deferred tax. State this explicitly in the answer.
Booking all deferred tax on revaluation surplus in profit or loss. Fix: If the surplus is credited to OCI, debit the revaluation surplus (OCI) with the deferred tax on the surplus and credit the deferred tax liability.
Taking the whole temporary difference on a revalued asset, less the opening deferred tax, to OCI. Fix: Send only revaluation surplus × tax rate to OCI. Other movements, such as depreciation differences, go to P&L.
Offsetting current tax and deferred tax balances against each other. Fix: Offset current with current and deferred with deferred. Deferred offset is tested separately, and the two categories stay separate on the balance sheet.
Offsetting deferred tax assets and liabilities only because they relate to the same entity. Fix: Always check the legal right to set off current tax assets against current tax liabilities along with the same-authority condition.

Exam tips

Show the reconciliation from accounting profit to taxable profit as a table. Marks are given for each correct adjustment.
Label each item as permanent or temporary. Examiners often test this distinction in case scenarios.
Read the reporting date and the tax rate carefully, and use only enacted or substantively enacted rates.
In MCQs, check whether the question asks for current tax, the amount payable after payments, or the temporary difference, as the answers differ.
For theory questions, quote the definitions in the standard's wording and then apply them to the facts given.
Write the tax base working as a separate line. Examiners give marks for the tax base even when the final figure goes wrong.
State the asset or liability rule in one line before classifying. It signals that you know the logic.
In case scenarios, check whether the item is initially recognised, a business combination or goodwill, since exceptions may apply.