CMA Final · Corporate Financial Reporting

Income Taxes (Ind AS 12) for CMA Final Paper 18

Ind AS 12 prescribes how to account for income taxes. You recognise current tax on the year's taxable profit, and deferred tax on temporary differences between an asset's or liability's carrying amount and its tax base. Taxable differences give deferred tax liabilities. Deductible differences and unused losses or credits give deferred tax assets, subject to recognition criteria.

What this chapter covers

This chapter covers how a company accounts for income taxes under Ind AS 12. The standard's objective is to account for the current and future tax consequences of two things: the future recovery or settlement of the carrying amount of assets and liabilities in the balance sheet, and the transactions and events of the current period.

The core idea is simple. If recovering an asset or settling a liability will make future tax payments larger than they would otherwise be, you recognise a deferred tax liability. If it will make them smaller, you recognise a deferred tax asset, with certain limited exceptions. The standard also deals with unused tax losses and unused tax credits, presentation and disclosure.

The chapter links to many other parts of Paper 18. Deferred tax arises from business combinations (Ind AS 103), revaluations, government grants, and investments in subsidiaries and associates. Tax effects follow the item itself: if a transaction goes through profit or loss, its tax goes there too. If it goes through other comprehensive income or directly in equity, so does its tax. You will meet this idea again in consolidation and in the presentation of financial statements.

Ind AS 12 is a numerical, rule-driven chapter, so it rewards practice. A clean deferred tax working, with a clear table of carrying amount, tax base, temporary difference and tax effect, earns marks step by step even if one figure slips. The same concepts also feed into questions on business combinations, consolidation and other standards, and the definitions are easy to test as 2-mark objective questions. Students who learn the logic once can solve most variations, which makes this one of the better chapters to spend effort on.

Income Taxes (Ind AS 12): topics in the order to study them

1Ind AS 12 Scope, Definitions and Key ConceptsTerms like temporary difference, tax base, deferred tax asset and liability are used in every later topic, so fix them first.
2Current Tax Recognition and MeasurementCurrent tax is the simpler half of the standard and gives the base on which deferred tax is built.
3Deferred Tax Liabilities and Taxable Temporary DifferencesTaxable temporary differences are the most common source of deferred tax, and the logic carries over to assets.
4Deferred Tax Assets and Unused Tax LossesOnce liabilities are clear, assets are their mirror, with the extra test of whether future taxable profit will be available.
5Deferred Tax Computation ProblemsPractise the full working only after you know the rules for both liabilities and assets.
6Deferred Tax in Business Combinations and Equity ItemsThis applies the rules to fair value adjustments, goodwill and items outside profit or loss, and needs a firm base first.
7Presentation and Disclosure under Ind AS 12Disclosure is the last step and is easier to remember once you know what the numbers represent.

How to prepare Income Taxes (Ind AS 12)

Build the concepts first, then drill the working until it becomes a routine. Use short sessions, which suit phone study, and keep one worked layout you repeat in every problem.

Learn the definitions: deferred tax assets are income taxes recoverable in future periods, and deferred tax liabilities are income taxes payable in future periods in respect of taxable temporary differences.
Write the standard's logic in your own words: carrying amount versus tax base, then the difference, then the tax effect.
Make a list of the situations that create taxable temporary differences, such as fair value adjustments in a business combination, revaluations with no tax adjustment, and government grants related to assets.
Study the recognition test for assets. For unused tax losses, the criteria are the same as for deductible temporary differences, but a history of recent losses is strong evidence against future taxable profit.
Solve problems using one fixed table: item, carrying amount, tax base, difference, type, deferred tax. Then post the movement to profit or loss, OCI or equity as the item requires.
Revise with a list of disclosure and presentation points, then attempt a mixed set of objective questions on the whole chapter.

Common mistakes in Income Taxes (Ind AS 12)

Mixing up taxable and deductible temporary differences, so the deferred tax shows as an asset instead of a liability or the reverse.
Fix: Ask one question: will recovering or settling this item make future tax larger or smaller? Larger means liability, smaller means asset.
Recognising a deferred tax asset on unused losses without checking the evidence.
Fix: Check for a history of recent losses. If there is one, recognise the asset only to the extent of taxable temporary differences or convincing other evidence of future taxable profit.
Posting the tax effect of every item to profit or loss.
Fix: Follow the underlying item. OCI or equity items carry their tax in OCI or equity.
Recognising a deferred tax liability on the initial recognition of goodwill.
Fix: Remember the exception: no deferred tax liability arises from the initial recognition of goodwill, though deferred tax on other acquired items affects goodwill.
Ignoring the deferred tax on fair value adjustments in acquisition problems.
Fix: Compare the fair value with the unchanged tax base for each acquired asset, book the deferred tax, and then compute goodwill.
Using inconsistent judgements for current and deferred tax on an uncertain treatment.
Fix: Where one uncertain treatment affects both, make the same judgements and estimates for both.

Last-day revision: Income Taxes (Ind AS 12)

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.

Income Taxes (Ind AS 12) practice questions

Income Taxes (Ind AS 12) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Income Taxes (Ind AS 12): frequently asked questions

What is the objective of Ind AS 12?

It prescribes the accounting treatment for income taxes. It deals with the current and future tax consequences of recovering or settling the carrying amounts of assets and liabilities, and of the current period's transactions and events.

How do I decide between a deferred tax asset and a liability?

Look at the effect on future tax payments. Taxable temporary differences give deferred tax liabilities. Deductible temporary differences, unused tax losses and unused tax credits give deferred tax assets.

Can I always recognise a deferred tax asset on unused tax losses?

No. The criteria are the same as for deductible temporary differences, but a history of recent losses is strong evidence that future taxable profit may not be available. You then recognise the asset only to the extent of taxable temporary differences or convincing other evidence.

How does Ind AS 12 affect goodwill in a business combination?

Deferred tax assets and liabilities recognised at the acquisition date affect the amount of goodwill or the bargain purchase gain. However, you do not recognise a deferred tax liability from the initial recognition of goodwill itself.

Where should I record the tax on items in OCI?

Record it in OCI. Tax on items recognised directly in equity goes directly to equity, and tax on profit or loss items goes to profit or loss.