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CMA Final · Corporate Financial Reporting · Income Taxes (Ind AS 12)

Kaveri Ltd's carrying amount of a trade receivable balance is Rs 9,00,000 after recognising a Rs 1,00,000 provision for doubtful debts. Under tax law, the bad debt deduction is allowed only when the debt is actually written off. The tax rate is 25%. Ignoring other items, what is the deferred tax position on this provision under Ind AS 12?

A deferred tax asset of Rs 25,000 arises. The provision is not yet deductible, so the receivable's tax base exceeds its carrying amount by Rs 1,00,000, a deductible temporary difference. At 25% the asset is recognised if future taxable profit is probable.

  1. ADeferred tax asset of Rs 25,000, subject to probable future taxable profitCorrect
  2. BDeferred tax liability of Rs 25,000
  3. CDeferred tax asset of Rs 22,500
  4. DNo deferred tax, because it is a permanent difference

Explanation

Tax base of the receivable is Rs 10,00,000 and carrying amount is Rs 9,00,000, giving a deductible temporary difference of Rs 1,00,000. At 25% this is a DTA of Rs 25,000, recognised only to the extent that taxable profit is probable. A liability would arise only for a taxable difference, and 22,500 wrongly applies the rate to the carrying amount net of the provision.

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