CMA Final · Corporate Financial Reporting

Income Taxes (Ind AS 12): formula sheet

Full chapter guide

Key formulas

Temporary difference: Temporary difference = Carrying amount − Tax base; For an asset, a positive result is a taxable temporary difference and a negative result is deductible. For a liability, the logic is reversed.
Tax base of a depreciable asset: Tax base = Original cost − Cumulative tax deductions allowed; This is the wording of paragraph 17(b), so use tax depreciation, not book depreciation.
Deferred tax liability (DTL): DTL = Taxable temporary difference × Tax rate; Para 15 requires a DTL for all taxable temporary differences, except goodwill initial recognition and certain initial recognitions that are not business combinations and affect neither profit.
Deferred tax asset (DTA): DTA = Deductible temporary difference × Tax rate; Recognised only if it is probable that sufficient taxable profit will be available to use the benefit.
Tax base of a liability: Tax base = Carrying amount − Amount deductible for tax in future periods; For a provision that is deductible only when paid, the tax base is nil.
Current tax: Current tax = Taxable profit × Enacted or substantively enacted rate; Taxable profit is computed under the tax law, not taken from the books.
Taxable profit: Taxable profit = Accounting profit ± permanent differences (including exempt income) ± timing differences (originating and reversing) − brought-forward losses set off; Exempt income is one of the permanent differences, so deduct it there and do not deduct it again. Sign convention: add back expenses the tax law disallows permanently. Add a timing difference when the expense is booked earlier than the tax deduction, and deduct it when the tax deduction comes earlier. A reversing timing difference takes the opposite sign to when it originated. Use the tax law, not the books, for every adjustment.
Net current tax balance: Net balance = Current tax for the period − Advance tax and TDS paid; Positive means liability (para 12). Negative means excess paid, shown as an asset.
Rate to use: Rate at reporting date = enacted or substantively enacted (paras 46 and 48); Later changes are not applied. Disclose significant effects.
Carry-back of tax loss: Asset = Tax loss × Rate, limited to tax recoverable for the earlier period; Recognised in the period of loss (paras 13 and 14).
Taxable temporary difference (asset): Carrying amount of asset − Tax base of asset > 0; A positive result means a taxable temporary difference, subject to the exceptions.
Deferred tax liability: DTL = Taxable temporary difference × Tax rate; Use the rate expected to apply when the liability is settled, based on rates enacted or substantively enacted by the reporting date.
General rule (para 15): Recognise a DTL for all taxable temporary differences, except goodwill initial recognition and the three-condition initial recognition exception; The three conditions: not a business combination; affects neither accounting nor taxable profit; no equal taxable and deductible differences.
Investments in subsidiaries, branches, associates, joint arrangements (para 39): No DTL only if (a) investor controls timing of reversal AND (b) reversal is not probable in the foreseeable future; Both conditions must be met. If either fails, recognise the DTL.
Associates (para 42): DTL recognised unless an agreement requires that the associate's profits will not be distributed in the foreseeable future; The investor does not control the associate's dividend policy.
Deferred tax asset definition: DTA = amounts of income taxes recoverable in future periods on (a) deductible temporary differences, (b) unused tax losses, (c) unused tax credits; Paragraph 5. All three heads qualify as DTA.
DTA computation: DTA = Deductible temporary difference (or unused loss) × Tax rate expected to apply when the asset is realised; Use the rate enacted or substantively enacted at the end of the reporting period. The rate rule is stated here without a paragraph number.
Recognition test (losses and credits): Recognise DTA to the extent it is probable that future taxable profit will be available to use the losses or credits; Paragraph 34. Same criteria as deductible temporary differences.
History of recent losses: Recognise only to the extent of (i) sufficient taxable temporary differences, or (ii) convincing other evidence of sufficient taxable profit; Paragraph 35. Disclose the amount and the nature of the evidence (paragraph 82).
Criteria for assessing probability: (a) taxable temporary differences, same authority and same taxable entity, reversing before expiry; (b) probable taxable profits before expiry; (c) losses from identifiable causes unlikely to recur; (d) tax planning opportunities; Paragraph 36. If profit is not probable, the DTA is not recognised.
Reassessment: At each reporting date, recognise a previously unrecognised DTA to the extent it has become probable that future taxable profit will allow recovery; Paragraph 37. An improvement in trading conditions is an example.
Tax planning limit: Tax planning only advances profit from a later period to an earlier one; use of losses still needs future profit from sources other than future originating temporary differences; Paragraph 30.
Temporary difference: Temporary difference = Carrying amount − Tax base (for an asset); Tax base − Carrying amount (for a liability); Ind AS 12 defines it as the difference between the carrying amount in the balance sheet and the tax base. Check which side is larger before deciding if it is taxable or deductible.
Tax base of a depreciable asset: Tax base = Cost − Cumulative tax depreciation; This is the amount deductible against future taxable income as the asset is recovered.
Tax base of a liability (provision): Tax base = Carrying amount − Amount deductible in future periods; If the full amount is deductible only on payment, the tax base is nil.
Taxable temporary difference: Asset: Carrying amount > Tax base. Liability: Carrying amount < Tax base. Result: DTL; Example: tax depreciation faster than book depreciation.
Deductible temporary difference: Asset: Carrying amount < Tax base. Liability: Carrying amount > Tax base. Result: DTA; Example: provision not yet allowed for tax. A DTA is recognised only if future taxable profit is probable.
Deferred tax balance: Deferred tax = Temporary difference × Enacted or substantively enacted tax rate; Use the rate expected to apply when the asset is recovered or the liability settled. The rate and tax base may depend on the expected manner of recovery (for example, sale or use).
Deferred tax for the year: Deferred tax charge or income = Closing net DTL (or DTA) − Opening net DTL (or DTA); Total tax expense = Current tax + Deferred tax charge (or − deferred tax income).
General rule (para 58): Tax goes to P&L unless the underlying item is outside P&L or arises from a business combination; Start every question with where the underlying item was recognised.
OCI and equity rule (para 61A): Item in OCI → tax in OCI; item directly in equity → tax directly in equity; Applies to current and deferred tax, in the same or a different period.
Deferred tax on revaluation: Deferred tax = (Revalued carrying amount − Tax base) × Tax rate; Charged to OCI (reduces the revaluation surplus) when the tax base is not adjusted. Applies when the tax base is not adjusted by the revaluation.
Deferred tax on fair value uplift in acquisition: DTL = (Fair value − Tax base) × Tax rate; Recognised at acquisition date as a liability of the acquiree. It increases goodwill.
Goodwill (para 21): Goodwill = (Consideration + NCI + Fair value of previously held interest) − Net identifiable assets at acquisition-date amounts; Net assets are after deferred tax recognised under para 66. No deferred tax on goodwill itself.
Transfer from revaluation surplus (para 64): Transfer to retained earnings = (Depreciation on revalued carrying amount − Depreciation on cost), net of related deferred tax; Para 64 says that if an entity makes such a transfer, the amount transferred is net of any related deferred tax. It gives no formula. As an illustration only, with a flat tax rate and deferred tax measured at that rate, the net amount works out as excess depreciation × (1 − tax rate).
Share-based payment excess (para 68C): If (estimated future) tax deduction > cumulative remuneration expense, the excess of the associated current or deferred tax is recognised directly in equity; The excess deduction indicates it relates partly to an equity item, so the tax on that excess goes to equity (para 68C).
Average effective tax rate: Average effective tax rate = Tax expense (income) ÷ Accounting profit; Defined in paragraph 86. Used in the second form of reconciliation under paragraph 81(c)(ii).
Numerical reconciliation (form i): Tax at applicable rate = Accounting profit × Applicable rate; then add or deduct reconciling items to reach tax expense; Paragraph 81(c)(i). Disclose the basis on which the applicable rate is computed.
Choice of applicable rate: Usually the domestic rate of the entity's country, with national and local taxes on a similar profit base aggregated; Paragraph 85. For multi-jurisdiction entities, aggregating separate reconciliations at each domestic rate may be more meaningful.
Typical reconciling items: Exempt revenue, non-deductible expenses, tax losses and foreign tax rates; Paragraph 84 lists these as factors that affect the tax expense and profit relationship.
Separate disclosures list: Paragraph 81(a) to (k); Includes tax on equity items, OCI tax, rate changes, unrecognised items, investment differences, deferred tax by type, discontinued operations, dividends and business combination effects.

Quick revision

Deferred tax liability: income taxes payable in future periods on taxable temporary differences.
Deferred tax asset: income taxes recoverable in future periods on deductible temporary differences, unused tax losses and unused tax credits.
Tax effects follow the item: profit or loss items give tax in profit or loss, OCI or equity items give tax in OCI or equity.
Recognition criteria for assets from unused losses and credits are the same as for deductible temporary differences.
A history of recent losses means you recognise the asset only if there are enough taxable temporary differences or convincing other evidence of future taxable profit.
With a recent loss history, disclose the asset amount and the nature of the supporting evidence.
In a business combination, assets are taken at fair value; if the tax base stays at the previous owner's cost, a taxable temporary difference and a deferred tax liability arise.
Deferred tax from a business combination affects goodwill or the bargain purchase gain.
No deferred tax liability is recognised on the initial recognition of goodwill.
Revaluation without an equivalent tax adjustment creates a taxable temporary difference.
For uncertain tax treatments, if the authority is probable to accept the treatment, use the one in your tax filings, and keep current and deferred tax judgements consistent.
Exchange differences on deferred foreign tax balances may be shown as deferred tax expense if that is the most useful presentation.

Common mistakes

Treating all differences between accounting profit and taxable profit as temporary differences. Fix: Ask if the item reverses. Items never allowed or never taxed are permanent and give no deferred tax.
Using book depreciation to compute the tax base. Fix: Tax base is cost less cumulative deductions allowed under tax law. Carrying amount is cost less book depreciation.
Applying the tax rate to accounting profit instead of taxable profit. Fix: Always prepare a short reconciliation from book profit to taxable profit first.
Using a rate announced after the reporting date. Fix: Use only rates enacted or substantively enacted by the reporting date. Mention the later change as a disclosure under para 88.
Recognising a DTL on goodwill at the time of acquisition. Fix: Paragraph 15(a) bars a DTL on initial recognition of goodwill. Recognise a DTL only on later differences that do not arise from initial recognition, as in paragraph 21B.
Applying the initial recognition exception to a business combination. Fix: The exception requires a transaction that is not a business combination. In a business combination, deferred taxes are recognised and affect goodwill (paragraph 66).
Recognising DTA on all unused losses because they will be carried forward anyway. Fix: Recovery needs future taxable profit. Apply the probability test in paragraphs 34 to 36 before recognising anything.
Using the phrases "virtual certainty" or "reasonable certainty" in an Ind AS 12 answer. Fix: Write that recognition requires it to be probable that future taxable profit will be available. Where there is a loss history, convincing other evidence is needed.
Treating a permanent disallowance such as a penalty as a temporary difference and creating a DTA Fix: Ask one question: will this amount ever be allowed as a deduction later? If never, there is no deferred tax.
Mixing up DTA and DTL, for example calling excess tax depreciation a DTA Fix: Compare carrying amount with tax base. For an asset, carrying amount above tax base is a taxable difference and a DTL.

Exam tips

Show the tax base working in a separate line. Marks are often given for it.
State the classification (taxable or deductible) in words, not only the number.
Quote the para 15 exceptions when goodwill appears in a case.
Use the rate given in the question and say so.
Label items as permanent when they never reverse, and exclude them from deferred tax.
Always show the reconciliation from book profit to taxable profit. Marks are given for each adjustment.
Write the reporting date next to the rate you choose. Examiners test whether you ignore later changes.
State the paragraph in plain words, such as unpaid tax is a liability and excess paid is an asset.