Measurement of deferred tax assets and liabilities – Ind AS 12
- Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
- Deferred tax assets and liabilities shall not be discounted.
- When different tax rates apply to different levels/ slabs of taxable income, deferred tax assets and liabilities are measured using the average rates that are expected to apply to the taxable profit (tax loss) of the periods in which the temporary differences are expected to reverse.
- The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
- An item of property, plant and equipment has a carrying amount of Rs. 100 and a tax base of Rs. 60. A tax rate of 20% would apply if the item were sold and a tax rate of 30% would apply to other income.
- The entity recognises a deferred tax liability of Rs. 8 (Rs. 40 at 20%) if it expects to sell the item without further use and a deferred tax liability of Rs. 12 (Rs. 40 at 30%) if it expects to retain the item and recover its carrying amount through use.
- In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In some other jurisdictions, income taxes may be refundable or payable if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In these circumstances, current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits.
- The following example deals with the measurement of current and deferred tax assets and liabilities for an entity in a jurisdiction where income taxes are payable at a higher rate on undistributed profits (50%) with an amount being refundable when profits are distributed. The tax rate on distributed profits is 35%.
- At the end of the reporting period, 31 December 20X1, the entity does not recognise a liability for dividends proposed or declared after the reporting period. As a result, no dividends are recognised in the year 20X1. Taxable income for 20X1 is Rs. 100,000. The net taxable temporary difference for the year 20X1 is Rs. 40,000.
- The entity recognises a current tax liability and a current income tax expense of Rs. 50,000. No asset is recognised for the amount potentially recoverable as a result of future dividends. The entity also recognises a deferred tax liability and deferred tax expense of Rs. 20,000 (Rs. 40,000 at 50%) representing the income taxes that the entity will pay when it recovers or settles the carrying amounts of its assets and liabilities based on the tax rate applicable to undistributed profits. Subsequently, on 15 March 20X2 the entity recognises dividends of Rs. 10,000 from previous operating profits as a liability. On 15 March 20X2, the entity recognises the recovery of income taxes of Rs. 1,500 (15% of the dividends recognised as a liability) as a current tax asset and as a reduction of current income tax expense for 20X2.
- The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.
Items recognised in profit or loss
- Current and deferred tax shall be recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from:
- a transaction or event which is recognised, in the same or a different period, outside profit or loss, either in other comprehensive income or directly in equity; or
- a business combination
- The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related temporary differences. This can result, for example, from:
- a change in tax rates or tax laws;
- a reassessment of the recoverability of deferred tax assets; or
- a change in the expected manner of recovery of an asset.
- The resulting deferred tax is recognised in profit or loss, except to the extent that it relates to items previously recognised outside profit or loss.
Items recognised outside profit or loss
- Current tax and deferred tax shall be recognised outside profit or loss if the tax relates to items that are recognised outside profit or loss. Therefore, current tax and deferred tax that relates to items that are recognised, in the same or a different period:
- in other comprehensive income, shall be recognised in other comprehensive income
- a change in carrying amount arising from the revaluation of property, plant and equipment (see Ind AS 16); and
- exchange differences arising on the translation of the financial statements of a foreign operation (see Ind AS 21)
- directly in equity, shall be recognised directly in equity
- an adjustment to the opening balance of retained earnings resulting from either a change in accounting policy that is applied retrospectively or the correction of an error (see Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors); and
- amounts arising on initial recognition of the equity component of a compound financial instrument
Dividend Distribution Tax – Ind AS 12
- An entity shall recognise the income tax consequences of dividends as defined in Ind AS 109 when it recognises a liability to pay a dividend.
- The income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity shall recognise the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events
- When an entity pays dividends to its shareholders, it may be required to pay a portion of the dividends to taxation authorities on behalf of shareholders. In many jurisdictions, this amount is referred to as a withholding tax. Such an amount paid or payable to taxation authorities is charged to equity as a part of the dividends.
- In India, dividends are not taxable in the hands of shareholders considering that DDT is paid by the company that paid the dividend. Had there been no DDT mechanism, dividend would have been taxable in the hands of recipients, though recently it has been made taxable if the amount of dividend exceeds a specified limit.
- Therefore, DDT is, in substance, of the nature of withholding tax. Presentation of DDT paid on the dividends should be consistent with the presentation of the transaction that creates those income tax consequences.
- Therefore, DDT should be charged to profit or loss if the dividend itself is charged to profit or loss. If the dividend is recognised in equity, the presentation of DDT should be consistent with the presentation of the dividend, i.e., to be recognised in equity.
- Accordingly, in case of combined financial instruments, bifurcated into debt and equity, the portion if DDT related to dividend/interest to the debt component should be recognised in profit or loss and that related to equity component should be recognised in equity.
(Based on FAQ issued by ICAI)