Ind AS 21: Tax Effects, Disclosures and Differences from IAS 21

Understand Tax Effects, Disclosures and Differences from IAS 21

Key rules to remember

Tax follows the item

Tax on an exchange difference is recognised where the exchange difference is recognised

Profit or loss item gives profit or loss tax. OCI item gives OCI tax. Applied through Ind AS 12.

Deferred tax on timing difference

Deferred tax = Exchange difference × Applicable tax rate

Use it when tax is allowed or charged only on settlement. A deferred tax asset needs probable future taxable profit.

Exchange difference on a monetary item

Foreign currency amount × (Closing rate − Rate at initial recognition or last reporting date)

Use the rate at initial recognition, or the rate at the last reporting date if the item existed then. Taken to profit or loss for monetary items. For a liability, a rise in rate is a loss.

FCTR reconciliation

Closing reserve = Opening reserve ± Net exchange difference in OCI for the year

Disclosure requires opening and closing balances of the separate component of equity. Show the reconciliation. The cumulative amount is reclassified to profit or loss on disposal of the foreign operation.

Exchange difference disclosure in profit or loss

Disclose exchange differences recognised in profit or loss, other than those arising on financial instruments measured at FVTPL under Ind AS 109

Differences on instruments at fair value through profit or loss are outside this disclosure, as para 52(a) of Ind AS 21 provides.

Currency disclosures

Disclose: presentation currency differs from functional currency, reason, and any change in functional currency with reason

Also disclose convenience translations as supplementary information with the currency and the method of translation.

How to solve Tax Effects, Disclosures and Differences from IAS 21 questions

1. 1Identify the item: a monetary item in a transaction, or the translation of a foreign operation. This decides profit or loss versus OCI.
2. 2Compute the exchange difference using foreign currency amount multiplied by the change in rate. Mark it gain or loss.
3. 3Check the tax law treatment: is the difference taxed or allowed on accrual or only on settlement? A mismatch creates a temporary difference.
4. 4Compute deferred tax at the enacted or substantively enacted rate. Check recoverability before recognising a deferred tax asset.
5. 5Place the tax with the item. Profit or loss exchange difference gives profit or loss tax. OCI exchange difference gives OCI tax. Apply the subsidiary exemption in Ind AS 12 only if its conditions are met.
6. 6List the disclosures: exchange differences in profit or loss other than those on FVTPL instruments, OCI differences with reserve reconciliation, and currency facts.
7. 7If the question asks about IAS 21, state it in one line: Ind AS 21 largely follows IAS 21 and takes monetary item differences to profit or loss, but retains para 46A as a carve-out for long-term foreign currency monetary items (accumulated in FCMITDA and amortised). Mention separately that Ind AS 101 para D13AA is the first-time adoption exemption on the same subject.
8. 8Write the conclusion with the amount and the account affected.

Quickest way: Three-line check for tax and disclosure questions

Common mistakes in Tax Effects, Disclosures and Differences from IAS 21

• Taking tax on an OCI exchange difference to profit or loss.

  Students treat tax as always a profit or loss item.

  Fix: Apply tax follows the item. If the exchange difference is in OCI, the related tax is in OCI.

• Recognising a deferred tax asset on an exchange loss without checking future taxable profit.

  Students stop after multiplying the loss by the tax rate.

  Fix: State that the asset is recognised only to the extent that future taxable profit is probable, and say so in the answer.

• Including exchange differences on FVTPL financial instruments in the profit or loss disclosure of exchange differences.

  Students read the disclosure as total exchange differences.

  Fix: Disclose exchange differences recognised in profit or loss other than those arising on instruments measured at fair value through profit or loss under Ind AS 109.

• Leaving out Ind AS 21 para 46A when asked for the key difference from IAS 21, or mixing it up with Ind AS 101 para D13AA.

  Students assume Ind AS 21 is identical to IAS 21, or treat the two paragraphs as one rule.

  Fix: Say Ind AS 21 retains para 46A as a carve-out from IAS 21 for long-term foreign currency monetary items (accumulated in FCMITDA and amortised). Then distinguish it from Ind AS 101 para D13AA, the first-time adoption exemption.

• Forgetting the reconciliation of the foreign currency translation reserve.

  Students give only the year's OCI amount.

  Fix: Always show opening balance, movement for the year, and closing balance.

• Recognising deferred tax on translation differences of a subsidiary without testing the exemption.

  Students apply deferred tax mechanically to every temporary difference.

  Fix: Check whether the parent controls the timing of reversal and reversal is not probable in the foreseeable future. If so, no deferred tax liability.

Worked examples