IAS-12 Income Taxes

Md Mashiur Rahaman
By completing the module you will able to
know:
1) Describe the scope of IAS 12
2) Explain how to recognise and measure current taxes
3) Explain how to recognise and measure deferred taxes
4) Describe the interaction of specific topics with IAS 12
5) Evaluate the quality of disclosures
Agenda

Overview and scope

Taxable income Vs accounting income
Current taxes
Deferred taxes
Specific application issues
The closing
Overview
Incomes taxes payable / recoverable in
Current tax respect of the current period’s taxable
profit / loss

Deferred tax Income taxes payable / recoverable in

respect of future periods

Income tax
Scope of IAS 12

Taxes within the scope of IAS 12

Taxes based on Other taxes,

“taxable profits” e.g. withholding taxes

Delay
interest/
penalties?
Agenda

Taxable income & accounting income

 Accounting Income & Taxable Income
Reasons for differences
Deferred tax
not Deferred tax
recognized recognized

Permanent Differences Timing/ Temporary differences

 Transferring export quota. (Section-19(07)).
 Deduction not admissible in certain
circumstances (Section-30).
 Payments not complying with TDS and TIN
 Perquisites above certain limit
 Paid in cash above 50,000 to suppliers or
15,000 to employees etc.
 Entertainment, foreign travels,
advertisement, distribution of free sample,
Head office expense, royalty, technical know
how etc. above certain limits
 Commission or discount paid to shareholder
director etc.
 Payment to Un-approved funds.
 Motor car exceeding 2,500,000
 Dividend when received (Section-19(07))
 Bad debt. Expense Vs. Provision (Section-
19(15a))
 Trading liability not paid within three years
(Section-19(15c))
 Depreciation and amortization as per Third
Schedule (Section- 29(viii))
 Carry forwarded losses (Section-38)
 Construction of School/medical for employee’s
children
 Cost of Land Development in Tea Garden
 Gratuity provision
 Foreign Currency Translation gain/loss etc. &
 Any incomes or expenses shown in OCI
Agenda

Current taxes
What is current tax?
Current tax is income tax payable / recoverable in
respect of current period’s taxable profit / loss

Payable = Liability Paid in excess of amount due = Asset*

* Tax assets may also arise from tax loss carry backs
Recognising current tax

Current tax is recognised in the same place as the

underlying transaction or event (i.e. item) to which it relates

Item recognised in Item recognised in

profit or loss OCI / equity

Current tax Current tax

recognised in recognised in
profit or loss OCI / equity

OCI = other comprehensive income

Measure current tax using tax rates that are…

…applicable for that type of income

Enacted or substantively
Based on
enacted by end of
undistributed profits
reporting period

In Bangladesh, Tax rate is fixed in the end June, which is applicable for the next
assessment year i.e previous income year which means there is retrospective application as
per Taxation law. So to calculate the correct tax expense the tax rate enacted by end of
reporting period but has retrospective implication may be considered as adjusting event
although It is against IAS-10 and IAS-12.

For example: A Private Ltd. Company who are yet to prepare FSs whose reporting date is
31 March may use tax rate @30% instead of 32.5%.

There is no specific guideline by FRC or ICAB.

Settlement of previous year return in current year

Excess/Lower amount settle against provision made in

“Previous Year”

Item recognised in profit or loss as tax expense(excess)/

income(lower)

Is taxation
estimate?

Retrospective
or prospective
implication?
Steps in Calculation of Tax expenses and liability
Particulars Section Reference
Step-01 Profit as per FSs Section-35
Step-02 Add: Inadmissible expenses and deemed income Section-30, 19(08,16,18,20, 23) and 16 F,G
Step-03 Add: Transfer pricing adjustments Section 107A to 107J
Step-04 Add: Expenses for separate consideration 3rd schedule & Rule 65 to Rule 65C
Step-05 Less: Admissible expense 3rd schedule & Rule 65- Rule 65C
Step-06 Less: Nonbusiness income
Step-07 Less: Set off & Carry forwarded losses if any and then get Section-37 to 42
Income from business
Step-08 Add: Non-business income
Step-09 Add: Foreign Income and get Total income 7th Schedule Sec 144(4) Sec -43
Step-10 Finance Act enacted in reporting period and
Computation of Tax liability on total income
82C 2(d)-Final settlement).
Step-11 Income added under Section 30 in step-02 will be taxed at Section 30A
regular rate (no exemption or reduced rate) and which is not
be adjusted with any losses
Step-12 Less: Rebate on CSR SRO 229/2011
Step-13 as per Sec. 73 and delay interest for filing
Add: interest on deficiency of advance tax
return after Tax Day as per Sec.73A
Step-14 Computation of Minimum Tax on Gross Receipt Section 82C(5)
Step-15 In case of income subject to reduced rate or exemption, section 82C (4) will be calculated
minimum tax under proportionately as per section 82C4(b)
Step-16 Compare with Total tax expense calculated in Step-10 with Higher one will be the Actual Tax Expense.
Minimum tax calculated in step 14
Step-17 Deduct total of tax deducted at sources and advance tax paid Sec. 48 to 68B and section 74.
and get net tax liability
Agenda
Deferred taxes
Accounting for deferred tax

Step 1: Determine the tax base of assets / liabilities

Step 2: Identify temporary differences
Step 3: Measure deferred taxes using the enacted or substantively enacted tax
rates / laws expected to apply
Step 4: Recognise deferred taxes
Step 5: Determine where to recognise deferred tax: in profit/loss, OCI / equity,
goodwill
Determine the tax base and identification of
temporary differences
Tax base of an asset/liabilities is amount attributed
to that asset/liabilities for tax purposes

Amount adjustable when If economic benefits are

asset recovered/ liability not taxable, tax base is
paid equal to carrying amount

Items not recognised as assets may have a tax base (For

example carry forwarded loss)
 Deferred tax: Matching of Tax with IFRSs profit (IFRSs Tax=CT+DTE(DTI))
(How the mechanism works over the life of an asset)
Assumptions
IFRS Depreciation - 10% on Cost
Tax Depreciation - 20% on Carrying Value(CV)
Tax Rate- 35%
1 2 3 4 5 6 7 8 9 10 11 12 13 14
IFRSs Tax base Deferred tax Reconciliation
DTA/ Tax on IFRS
Acc. TD (DTL) DTE/ CT Total tax Dep
Year Cost Dep Acc. Dep CV Dep Dep CV (8-5) (9*35%) (DTI) (6*35%) (11+12) (3*35%)
1 100.00 10.00 10.00 90.00 20.00 20.00 80.00 (10.00) (3.50) 3.50 (7.00) (3.50) (3.50)
2 100.00 10.00 20.00 80.00 16.00 36.00 64.00 (16.00) (5.60) 2.10 (5.60) (3.50) (3.50)
3 100.00 10.00 30.00 70.00 12.80 48.80 51.20 (18.80) (6.58) 0.98 (4.48) (3.50) (3.50)
4 100.00 10.00 40.00 60.00 10.24 59.04 40.96 (19.04) (6.66) 0.08 (3.58) (3.50) (3.50)
5 100.00 10.00 50.00 50.00 8.19 67.23 32.77 (17.23) (6.03) (0.63) (2.87) (3.50) (3.50)
6 100.00 10.00 60.00 40.00 6.55 73.79 26.21 (13.79) (4.82) (1.21) (2.29) (3.50) (3.50)
7 100.00 10.00 70.00 30.00 5.24 79.03 20.97 (9.03) (3.16) (1.66) (1.84) (3.50) (3.50)
8 100.00 10.00 80.00 20.00 4.19 83.22 16.78 (3.22) (1.13) (2.03) (1.47) (3.50) (3.50)
9 100.00 10.00 90.00 10.00 3.36 86.58 13.42 3.42 1.20 (2.33) (1.17) (3.50) (3.50)
10 100.00 10.00 100.00 - 13.42 100.00 - - 1.20 (4.70) (3.50) (3.50)

CV= Carrying Value Dep=Depreciation Acc. Dep=Accumulated Depreciation

TD= Temporary difference DTA=Deferred tax assets DTL=Deferred tax Liability
DTE=Deferred tax expense DTI=Deferred tax income CT=Current Tax
Summary of recognizing deferred tax against temporary
differences
Nature of Deferred tax Deferred tax
Items difference Asset/ Liability expense/ Income Justification with example
In case of PPE higher depreciation is
Deferred tax Deferred tax charged in tax which reduces the current
Accounting > Tax
liability expense tax expense and to match this, deferred
Asset
tax expense will be recognized.
Deferred tax
Accounting < Tax Deferred tax income Vice versa
Assets
In case of gratuity provision we charged
gratuity expense in accounting but add
Deferred tax back in taxation. Resultantly current tax
Accounting > Tax Deferred tax income
Assets expense is increased. not in taxation so
to match this deferred tax income will be
recognized.
Because of Foreign Exchange
Liability
Translation, Accounting Liability
decrease for which translation gain is
Deferred tax Deferred tax recognized. But the translation gain is
Accounting < Tax
liability expense add back at the time of calculating
taxable income. To match the gain with
tax deferred tax expense will be
recognized.
Temporary differences –For easy remember
Carrying amount of an asset is Carrying amount of an asset is
higher than its tax base lower than its tax base
or or
Carrying amount of a liability is Carrying amount of a liability is
lower than its tax base higher than its tax base

Taxable differences Deductible differences

Deferred tax liability Deferred tax asset

Sources of deferred tax
Timing/ Temporary differences
 Dividend when received (Section-19(07))
 Bad debt. Expense Vs. Provision (Section-19(15a))
 Trading liability not paid within three years (Section-
19(15c))
 Depreciation and amortization as per Third Schedule
(Section- 29(viii))
 Carry forwarded losses (Section-38)
 Construction of School/medical for employee’s children
 Cost of Land Development in Tea Garden
 Gratuity provision
 Foreign Currency Translation gain/loss
 Fair value gain/loss
 Any incomes or expenses shown in OCI etc.
 A simple example of deferred tax calculation
Deferred tax liability
2019
Opening balance 914,721,723
Provided/(adjusted) during the year:
Property, plant and equipment 180,722,410
Intangible assets (Software) (5,024,603)
Provision for gratuity (918,838,565)
Unabsorbed depreciation 52,124,663
Closing balance 223,705,629

Reconciliation of Deferred tax liabilities/(assets)

Taxable/ (Deductible) Deferred tax
Rate applied Carrying amount Tax base temporary difference Liability/ (Asset)
As on 30 June 2019
Property, plant and equipment 25% 8,876,983,664 3,934,797,603 4,942,186,061 1,235,546,515
Intangible assets (Software) 25% 43,646 14,895,034 (14,851,388) (3,712,847)
Provision for gratuity 25% 3,871,516,258 - (3,871,516,258) (967,879,065)
Unabsorbed depreciation 25% 160,995,900 - (160,995,900) (40,248,975)
Deferred tax liability 223,705,629
As on 30 June 2018
Property, plant and equipment 25% 8,876,983,664 4,657,687,245 4,219,296,419 1,054,824,105
Intangible assets (Software) 25% 21,797,061 16,550,038 5,247,023 1,311,756
Provision for gratuity 25% 196,162,000 - (196,162,000) (49,040,500)
Unabsorbed depreciation 25% 369,494,553 - (369,494,553) (92,373,638)
Deferred tax liability 914,721,723
Measure deferred taxes

Measurement should reflect the type of income and the manner in

which the asset will be recovered or the liability settled

Enacted or substantively Rate expected to apply

enacted rates and laws when assets are realised /
by the reporting date liabilities are settled

Deferred taxes are not discounted

Recognise deferred taxes

Deferred tax liabilities Deferred tax assets

Recognise to extent
probable that future
taxable profit will be
Recognise in full available against
which deductible
temporary differences
can be used
Where to recognise deferred tax
Deferred tax is recognised in the same place as the
underlying transaction or events (i.e. item) to which it relates

Item recognised in Item recognised in Item recognised in a

profit or loss OCI / equity business combination

Deferred tax Deferred tax Generally, deferred

recognised in recognised in tax recognised
profit or loss OCI / equity in goodwill
Deferred tax recognised in OCI / equity
♦ Revaluation of property, plant and equipment, intangible
assets, available-for-sale securities

OCI
♦ Foreign exchange differences on translation of a foreign
entity

♦ Cash flow hedge

♦ Compound financial instruments

Equity

♦ Adjustments to opening balance of retained earnings

♦ Share-based payment
Agenda

Specific application issues

Business combination: Initial accounting

Deferred taxes are recognised arising from

temporary differences on identifiable assets acquired
and liabilities assumed

Goodwill
Business combination: Subsequent accounting

Measurement period Post-measurement period

adjustments adjustments

Usual
Goodwill requirements

Subsequent changes in
deferred tax are
recognised
in profit or loss or OCI /
equity
Intra-group transactions
Temporary differences can arise both on
a stand-alone and consolidated basis

Elimination of
unrealised profits

Analyse all consolidation adjustments to determine

whether new temporary differences arise
Investments: In Bangladesh
Consolidated vs separate financial statements
Section 19(7) of ITO: Any dividend declared or distributed by a company shall be deemed to be the income od the income
year in which it is received and shall be included in the total income of the Assessee of that year.
Tax rate on dividend income
Resident/non-resident Bangladeshi company 20%
Resident/non-resident Bangladeshi person other than company 10% and 15%
Non-resident company 20%
DTA Non-resident any other person, not being a company 30%
Branch remitting profit to HO 20%
Any distribution from mutual fund or alternative investment fund would be subject to tax like dividend
declared by a company.

Tax rate on capital gain

A. Sales of listed company stocks and shares
Resident companies and firms 10%
Resident individuals holding more that 10% of share capital of the company 5%
General shareholders (Tax exempted) 0%
Sponsor shareholders and shareholders director 5%
Non-resident (Exempted if non-residents are exempted in own country) 15%

B. Other than sale of shares of listed companies

Company 15%
Other than company
Within 5 years Slab rate
Lower of slab and
After 5 years 15%

C. Collection of tax on transfer, etc. of property (u/s 53H and rule 17II) 1% to 4%
D. Compensation against acquisition of property by Govt. (u/s 52C) 1% to 2%
Investments: In Bangladesh
Consolidated vs separate financial statements
Temporary differences can arise both on
Accounting Taxable
a stand-alone and consolidated basis VS.
Income Income

Accrual Cash
Recognition of post acquisition Basis Basis
profit/Loss
Temporary
difference
Analyse all consolidation adjustments to
determine whether new temporary
differences arise Deferred tax

Recognize deferred tax

Liability/ asset
 Investments: Outside Bangladesh
Consolidated vs separate financial statements
Temporary differences can arise both on
a stand-alone and consolidated basis Accounting Taxable
VS. Income
Income

Recognition of post acquisition Accrual Cash

profit/Loss Basis Basis

Temporary
difference
Analyse all consolidation adjustments to
determine whether new temporary
differences arise
Deferred tax
Consider DTA
and exemption on the
amount remitted
through banking Recognize deferred tax
channel (individual) Liability/ asset
Offsetting

Current taxes
Legally enforceable right

&

Intention to settle on a net basis or simultaneously

Deferred taxes

Legally enforceable right

&
Income taxes related to same taxation authority, and from
same taxable entity or different taxable entities intending to
settle / realise net or simultaneously
 1) Deferred tax arises from temporary
differences
2) Measure current and deferred tax
using enacted or substantively
enacted tax rates and laws by the
reporting date
3) Two exceptions to recognising
Important points deferred taxes: initial recognition
exemption and investments
to be
4) Deferred tax liabilities recognised in
remembered full
5) Deferred tax assets recognised to
extent probable that future taxable
profits available
6) Account for current and deferred tax
in same place as underlying
transaction / event
Thank you

Md Mashiur Rahaman
CA Advanced Level
Former associate, KPMG Bangladesh
Assistant manager, Abul Khair Group

Cell: 01830-034856
mashiurrahamanctg90@gmail.com