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

Subsidiary Sagar Ltd has undistributed profits of Rs 40,00,000 since acquisition. The parent Ganga Ltd controls the dividend policy and has decided that the profits will not be distributed in the foreseeable future. Tax payable on distribution would be 10%. What deferred tax liability should Ganga Ltd recognise on these undistributed profits in consolidated statements?

No deferred tax liability is recognised. The parent controls the timing of reversal and it is probable the undistributed profits will not be distributed in the foreseeable future, so the Ind AS 12 exception applies. The Rs 4,00,000 tax on distribution would arise only if payout were expected.

  1. ARs 4,00,000
  2. BRs 40,00,000
  3. CRs 2,00,000
  4. DNilCorrect

Explanation

Ind AS 12 requires a DTL on taxable temporary differences from subsidiaries unless the parent can control the timing of reversal and it is probable the difference will not reverse in the foreseeable future. Both conditions are met here, so no liability is recognised. The 10% on Rs 40,00,000 (Rs 4,00,000) would apply only if distribution were probable.

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