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

On 1 April, Omkar Ltd had an unused tax loss of Rs 5,00,000 for which no deferred tax asset was recognised. In the current year, it becomes probable that future taxable profit will be available to use the entire loss. The tax rate is 20%. How is the position treated?

When it becomes probable that future taxable profit will absorb the loss, the previously unrecognised deferred tax asset is recognised. At 20% on Rs 5,00,000 this is Rs 1,00,000, credited as deferred tax income in profit or loss.

  1. ARecognise a deferred tax asset of Rs 1,00,000 with credit to profit or lossCorrect
  2. BRecognise a deferred tax asset of Rs 1,00,000 with credit to retained earnings directly
  3. CContinue to ignore the loss until it is actually used
  4. DRecognise Rs 5,00,000 as a deferred tax asset

Explanation

Previously unrecognised deferred tax assets are recognised when it becomes probable that taxable profit will be available. DTA = 20% x 5,00,000 = 1,00,000, credited to deferred tax income in profit or loss (the item is not in OCI or equity). Booking Rs 5,00,000 confuses the loss with the tax effect.

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