CHAPTER 13

INCOME TAXES (IAS – 12)

Objective
The objective of this Standard is to prescribe the accounting treatment for income
taxes. The principal issue in accounting for income taxes is how to account for the
current and future tax consequences of:
(a) The future recovery (settlement) of the carrying amount of assets (liabilities)
that are recognized in an entity's balance sheet; and
(b) Transactions and other events of the current period that are recognized in an
entity's financial statements
Basic Principle
It is inherent in the recognition of an asset or liability that the reporting entity expects
to recover or settle the carrying amount of that asset or liability. If it is probable that
recovery or settlement of that carrying amount will make future tax payments larger
(smaller) than they would be if such recovery or settlement were to have no tax
consequences, this Standard requires an entity to recognize a deferred tax liability
(deferred tax asset), with certain limited exceptions.
Scope
This Standard shall be applied in accounting for income taxes.
1. Income taxes include all domestic and foreign taxes, which are based on
taxable profits. Income taxes also include taxes, such as withholding taxes,
which are payable by a subsidiary, associate or joint venture on distributions
to the reporting entity.
2. This Standard does not deal with the methods of accounting for government
grants (IAS 20) or investment tax credits. However, this Standard does deal
with the accounting for temporary differences that may arise from such
grants or investment tax credits.
Definitions
Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance
with the rules established by the taxation authorities, upon which income taxes are
payable (recoverable).
Tax expense (tax income) is the aggregate amount included in the determination of
profit or loss for the period in respect of current tax and deferred tax.
Current tax is the amount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period.
Deferred tax liabilities are the amounts of income taxes payable in future periods in
respect of taxable temporary differences.
Deferred tax assets are the amounts of income taxes recoverable in future periods in
respect of:
(a) Deductible temporary differences;
(b) The carry forward of unused tax losses; and
(c) The carry forward of unused tax credits.
Temporary differences are differences between the carrying amount of an asset or
liability in the balance sheet and its tax base. Temporary differences may be either:
(a) taxable temporary differences, which are temporary differences that will
result in taxable amounts in determining taxable profit (tax loss) of future
periods when the carrying amount of the asset or liability is recovered or
settled; or
(b) deductible temporary differences, which are temporary differences that will
result in amounts that are deductible in determining taxable profit (tax loss) of

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 future periods when the carrying amount of the asset or liability is recovered
or settled.
The tax base of an asset or liability is the amount attributed to that asset or liability
for tax purposes.
Tax base
Tax base of an asset
The tax base of an asset is the amount that will be deductible for tax purposes
against any taxable economic benefits that will flow to an entity when it recovers
the carrying amount of the asset. If those economic benefits will not be taxable, the
tax base of the asset is equal to its carrying amount. [Tax base = (Carrying value –
Future taxable benefits + Future deductible amounts)].
Examples
Determine the tax base of the following: -
• A machine cost Rs. 1,000. For tax purposes depreciation of Rs. 500 has already
been deducted in the current and prior years and the remaining cost will be
deductible in future periods, either as depreciation or through a deduction on
disposal.
• A machine cost Rs. 1,000. The tax depreciation of Rs. 500 has already been
used for determination of tax but accounting depreciation of Rs. 300 has been
charged on the asset.
• Interest receivable has a carrying value of Rs. 100,000. The related interest
revenue will be taxed on cash receipt basis.
• Trade receivables have a carrying value of Rs. 100,000. The related revenue
has already been included in the taxable profit (loss) for the year.
• Dividend receivable from a subsidiary has a carrying value of Rs. 200,000. The
dividends are not taxable.
• A loan receivable has a carrying value of Rs. 50,000. The repayment of loan will
have no tax consequences.
The tax base of a liability
The tax base of a liability is its carrying amount, less any amount that will be
deductible for tax purposes in respect of that liability in future periods. [Tax base =
Carrying amount – future deductible amount]
In the case of revenue which is received in advance, the tax base of the resulting
liability is its carrying amount, less any amount of the revenue that will not be
taxable in future periods. [Tax base = Carrying amount – revenue not taxable in
future]
Examples
• Current liabilities include expenses with a carrying value of Rs.100. The related
expenses will be deducted for tax purposes on a cash basis.
• Current liabilities include interest revenue in advance, with a carrying amount
of 100. The related interest revenue was taxed on a cash basis.
• Current liabilities include accrued expenses with a carrying amount of Rs. 500.
The related expense has already been deducted for tax purposes.
• Current liabilities include accrued fines and penalties with a carrying amount of
Rs.100. Fines and penalties are not deductible for tax purposes.
• A loan repayment has carrying amount of Rs. 100. The repayment of loan will
have no tax consequences.
Tax base of assets/liabilities having carrying value NIL
Some items have a tax base but are not recognized as assets and liabilities in the
balance sheet. For example, research costs are recognized as an expense in
determining accounting profit in the period in which they are incurred but may not

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be permitted as a deduction in determining taxable profit (tax loss) until a later
period. The difference between the tax base of the research costs, being the
amount the taxation authorities will permit as a deduction in future periods, and the
carrying. Where amount of nil is a deductible temporary difference that results in a
deferred tax asset

Tax base in group financial statements

In consolidated financial statements, temporary differences are determined by
comparing the carrying amounts of assets and liabilities in the consolidated financial
statements with the appropriate tax base. The tax base is determined by reference
to a consolidated tax return in those jurisdictions in which such a return is filed. In
other jurisdictions, the tax base is determined by reference to the tax returns of each
entity in the group.
Recognition of Current Tax Liabilities and Current Tax Assets
• Current tax for current and prior periods shall, to the extent unpaid, be
recognized as a liability. If the amount already paid in respect of current and
prior periods exceeds the amount due for those periods, the excess shall be
recognized as an asset.
• The benefit relating to a tax loss that can be carried back to recover current
tax of' a previous period shall be recognized as an asset
Recognition of Deferred Tax Liabilities and Deferred Tax Assets
Taxable Temporary Differences
A deferred tax liability shall be recognized for all taxable temporary differences,
except to the extent that the deferred tax liability arises from:
(a) The initial recognition of goodwill; or
(b) The initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss).
However, for taxable temporary differences associated with investments in
subsidiaries, branches and associates, and interests in joint ventures, a deferred tax
liability shall be recognized in accordance with this IAS.
Example
An asset which cost 150 has a carrying amount of 100. Cumulative depreciation for
tax purposes is 90 and the tax rate is 25%?
Some temporary differences arise when income or expense is included in
accounting profit in one period but are included in taxable profit in a different
period. Such temporary differences are often described as timing differences. The
following are the examples:
(a) Interest revenue is included in accounting profit on a time proportion basis
but may, in some jurisdictions, included in taxable profit when cash is
collected;
(b) Depreciation used in determining taxable profit (tax loss) may differ from that
used in determining accounting profit. A taxable temporary difference arises,
and results in a deferred tax liability, when tax depreciation is accelerated;
and
(c) Development costs may be capitalized and amortized over future periods in
determining accounting profit but deducted in determining taxable profit in
the period in which they are incurred. The temporary difference is the
difference between the carrying amount of the development costs and their
tax base of nil.

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Temporary differences also arise when:
(a) The cost of a business combination is allocated by recognizing the identifiable
assets acquired and liabilities assumed at their fair values, but no equivalent
adjustment is made for tax purposes;
(b) Assets are revalued and no equivalent adjustment is made for tax purposes
(c) Goodwill arises in a business combination
(d) the tax base of an asset or liability on initial recognition differs from its initial
carrying amount, for example when an entity benefits from non-taxable
government grants related to assets; or
(e) the carrying amount of investments in subsidiaries, branches and associates
or interests in joint ventures becomes different from the tax base of the
investment or interest.
Business Combinations
The cost of a business combination is allocated by recognizing the identifiable assets
acquired and liabilities assumed at their fair values at the acquisition date.
Temporary differences arise when the tax bases of the identifiable assets acquired
and liabilities assumed are not affected by the business combination or are affected
differently. For example, when the carrying amount of an asset is increased to fair
value but the tax base of the asset remains at cost to the previous owner, a taxable
temporary difference arises which results in a deferred tax liability. The resulting
deferred tax liability affects goodwill.
Assets Carried at Fair Value
IFRSs permit or require certain assets to be carried at fair value or to be revalued for
example, IAS 16, IAS 38, IAS 39 and IAS 40. In those jurisdictions, where the
revaluation or restatement of an asset does not affect taxable profit in the period of
the revaluation or restatement and, consequently, the tax base of the asset is not
adjusted. The difference between the carrying amount of a revalued asset and its
tax base is a temporary difference and gives rise to a deferred tax liability or asset.
Goodwill
• Many taxation authorities do not allow reductions in the carrying amount of
goodwill as a deductible expense in determining taxable profit. Moreover, in
such jurisdictions, the cost of goodwill is often not deductible when a
subsidiary disposes of its underlying business. In such jurisdictions, goodwill has
a tax base of nil. Any difference between the carrying amount of goodwill
and its tax base of nil is a taxable temporary difference. However, this
Standard does not permit the recognition of the resulting deferred tax liability
because goodwill is measured as a residual and the recognition of the
deferred tax liability would increase the carrying amount of goodwill.
• Subsequent reductions in a deferred tax liability that is un-recognized
because it arises from the initial recognition of goodwill are also regarded as
arising from the initial recognition of goodwill and are therefore not
recognized under.
• Deferred tax liabilities for taxable temporary differences relating to goodwill
are, however, recognized to the extent they do not arise from the initial
recognition of goodwill. For example, if goodwill acquired in a business
combination has a cost of 100 that is deductible for tax purposes at a rate of
20 per cent per year starting in the year of acquisition, the tax base of the
goodwill is 100 on initial recognition and 80 at the end of the year of
acquisition. If the carrying amount of goodwill at the end of the year of
acquisition remains unchanged at 100, a taxable temporary difference of 20
arises at the end of that year. Because that taxable temporary difference

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 does not relate to the initial recognition of the goodwill, the resulting deferred
tax liability is recognized.
Initial Recognition of an Asset or Liability
A temporary difference may arise on initial recognition of an asset or liability, for
example if part or all of the cost of an asset will not be deductible for tax purposes.
The method of accounting for such a temporary difference depends on the nature
of the transaction which led to the initial recognition of the asset:
(a) in a business combination, an entity recognizes any deferred tax liability or
asset and this affects the amount of goodwill or the amount of any excess
over the cost of the combination of the acquirer’s interest in the net fair value
of the acquiree’s identifiable assets, liabilities and contingent
liabilities;
(b) if the transaction affects either accounting profit or taxable profit, an entity
recognizes any deferred tax liability or asset and recognizes the resulting
deferred tax expense or income in the income statement;
(c) if the transaction is not a business combination, and affects neither
accounting profit nor taxable profit, an entity would, in the absence of the
exemption, recognize the resulting deferred tax liability or asset and adjust
the carrying amount of the asset or liability by the same amount. Such
adjustments would make the financial statements less transparent. Therefore,
this Standard does not permit an entity to recognize the resulting deferred
tax liability or asset, either on initial recognition or subsequently.
Furthermore, an entity does not recognize subsequent changes in the un-
recognized deferred tax liability or asset as the asset is depreciated.
(d) In accordance with IAS 32 Financial Instruments: the issuer of a compound
financial instrument (for example, a convertible bond) classifies the
instrument’s liability component as a liability and the equity component
as equity. In some jurisdictions, the tax base of the liability component on
initial recognition is equal to the initial carrying amount of the sum of the
liability and equity components. The resulting taxable temporary difference
arises from the initial recognition of the equity component separately from the
liability component. Therefore, the exception set out above does not apply.
Consequently, an entity recognizes the resulting deferred tax liability. The
deferred tax is charged directly to the carrying amount of the equity
component. Subsequent changes in the deferred tax liability are recognized
in the income statement as deferred tax expense (income).
Example
An entity intends to use an asset which cost 1,000 throughout its useful life of five
years and then dispose of it for a residual value of nil. The tax rate is 40%.
Depreciation of the asset is not deductible for tax purposes. On disposal, any
capital gain would not be taxable and any capital loss would not be deductible.
Deductible Temporary Differences
A deferred tax asset shall be recognized for all deductible temporary differences to
the extent that it is probable that taxable profit will be available against which the
deductible temporary difference can be utilized, unless the deferred tax asset arises
from the initial recognition of an asset or liability in a transaction that:
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor taxable
profit (tax loss).
However, for deductible temporary differences associated with investments in
subsidiaries, branches and associates, and interests in joint ventures, a deferred tax

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asset shall be recognized in accordance with this IAS.
Example
An entity recognizes a liability of 100 for accrued product warranty costs. For tax
purposes, the product warranty costs will not be deductible until the entity pays
claims.
The following are examples of deductible temporary differences, which result in
deferred tax assets:
(a) Retirement benefit costs may be deducted in determining accounting profit
as service is provided by the employee, but deducted in determining taxable
profit either when contributions are paid to a fund by the entity or when
retirement benefits are paid by the entity;
(b) Research costs are recognized as an expense in determining accounting
profit in the period in which they are incurred but may not be permitted as a
deduction in determining taxable profit (tax loss) until a later period.;
(c) The cost of a business combination is allocated by recognizing the identifiable
assets acquired and liabilities assumed at their fair values at the acquisition
date. When a liability assumed is recognized at the acquisition date but the
related costs are not deducted in determining taxable profits until a later
period, a deductible temporary difference arises which results in a deferred
tax asset. A deferred tax asset also arises when the fair value of an identifiable
asset acquired is less than its tax base. In both cases, the resulting deferred
tax asset affects goodwill; and certain assets may be carried at fair value, or
may be revalued, without an equivalent adjustment being made for tax
purposes.
Un-used Tax Losses and Unused Tax Credits
A deferred tax asset shall be recognized for the carry forward of unused tax losses
and unused tax credits to the extent that it is probable that future taxable profit will
be available against which the unused tax losses and unused tax credits can be
utilized.
An entity considers the following criteria in assessing the probability that taxable
profit will be available against which the unused tax losses or unused tax credits can
be utilized:
(a) whether the entity has sufficient taxable temporary differences relating to the
same taxation authority and the same taxable entity, which will result in
taxable amounts against which the unused tax losses or unused tax credits
can be utilized before they expire;
(b) Whether it is probable that the entity will have taxable profits before the
unused tax losses or unused tax credits expire;
(c) whether the unused tax losses result from identifiable causes which are
unlikely to recur; and
(d) Whether tax planning opportunities (see paragraph 30) are available to the
entity that will create taxable profit in the period in which the unused tax
losses or unused tax credits can be utilized.
Tax planning opportunities are actions that the entity would take in order to
create or increase taxable income in a particular period before the expiry of
a tax loss or tax credit carry forward. For example, in some jurisdictions,
taxable profit may be created or increased by:
(a) electing to have interest income taxed on either a received or
receivable basis;
(b) deferring the claim for certain deductions from taxable profit;

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 (c) selling, and perhaps leasing back, assets that have appreciated but
for which the tax base has not been adjusted to reflect such
appreciation; and
(d) selling an asset that generates non-taxable income (such as, in some
jurisdictions, a government bond) in order to purchase another
investment that generates taxable income.
Where tax planning opportunities advance taxable profit from a later period
to an earlier period, the utilization of a tax loss or tax credit carry forward still
depends on the existence of future taxable profit from sources other than
future originating temporary differences.
To the extent that it is not probable that taxable profit will be available against
which the unused tax losses or unused tax credits can be utilized, the deferred tax
asset is not recognized.
Goodwill
If the carrying amount of goodwill arising in a business combination is less than its tax
base, the difference gives rise to a deferred tax asset. The deferred tax asset arising
from the initial recognition of goodwill shall be recognized as part of the accounting
for a business combination to the extent that it is probable that taxable profit will be
available against which the deductible temporary difference could be utilized.
Re-assessment of Unrecognized Deferred Tax Assets
At each balance sheet date, an entity re-assesses un-recognized deferred tax
assets. The entity recognizes a previously unrecognized deferred tax asset to the
extent that it has become probable that future taxable profit will allow the deferred
tax asset to be recovered.
Investments in Subsidiaries, Branches and Associates and Interests in Joint Ventures
Temporary differences arise when the carrying amount of investments in subsidiaries,
branches and associates or interests in joint ventures (namely the parent or investor’s
share of the net assets of the subsidiary, branch, associate or investee, including the
carrying amount of goodwill) becomes different from the tax base (which is often
cost) of the investment or interest. Such differences may arise in a number of
different circumstances, for example:
(a) the existence of undistributed profits of subsidiaries, branches, associates and
joint ventures;
(b) changes in foreign exchange rates when a parent and its subsidiary are
based in different countries; and
(c) a reduction in the carrying amount of an investment in an associate to its
recoverable amount.
In consolidated financial statements, the temporary difference may be different
from the temporary difference associated with that investment in the parent’s
separate financial statements if the parent carries the investment in its separate
financial statements at cost or revalued amount.
An entity shall recognize a deferred tax liability for all taxable temporary differences
associated with investments in subsidiaries, branches and associates, and interests in
joint ventures, except to the extent that both of the following conditions are
satisfied:
(a) the parent, investor or venturer is able to control the timing of the reversal of
the temporary difference; and
(b) it is probable that the temporary difference will not reverse in the foreseeable
future.
An entity shall recognize a deferred tax asset for all deductible temporary
differences arising from investments in subsidiaries, branches and associates, and

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interests in joint ventures, to the extent that, and only to the extent that, it is
probable that:
o the temporary difference will reverse in the foreseeable future; and
o Taxable profit will be available against which the temporary difference can
be utilized.
Measurement
• Current tax liabilities (assets) for the current and prior periods shall be measured
at the amount expected to be paid to (recovered from) the taxation
authorities, using the tax rates (and tax laws) that have been enacted or
substantively enacted by the balance sheet date.
• Deferred tax assets and liabilities shall be measured at the tax rates that are
expected to apply to the period when the asset is realized or the liability is
settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted by the balance sheet date.
• 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 balance sheet date, to recover or settle the carrying amount of
its assets and liabilities.
Deferred tax assets and liabilities shall not be discounted.
• The Standard does not require or permit the discounting of deferred tax assets
and liabilities.
• Temporary differences are determined by reference to the carrying amount
of an asset or liability. This applies even where that carrying amount is itself
determined on a discounted basis.
Recognition of Current and Deferred Tax
Income Statement
Current and deferred tax shall be recognized as income or expense and included in
profit or loss for the period, except to the extent that the tax arises from:
a) a transaction or event which is recognized, in the same or a different period,
directly in equity; or
b) 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) a change in tax rates or tax laws;
(b) a re-assessment of the recoverability of deferred tax assets; or
(c) a change in the expected manner of recovery of an asset.
The resulting deferred tax is recognized in the income statement, except to the
extent that it relates to items previously charged or credited to equity.
Items recognized outside profit or loss
Current tax and deferred tax shall be charged or credited to outside profit and loss
account if the tax relates to items that are credited or charged, in the same or a
different period, outside profit and loss account.
Deferred Tax Arising from a Business Combination
• In accordance with IFRS 3 Business Combinations, an entity recognizes any
resulting deferred tax assets (to the extent that they meet the recognition
criteria) or deferred tax liabilities as identifiable assets and liabilities at the
acquisition date. Consequently, those deferred tax assets and liabilities affect
goodwill or the amount of any excess of the acquirer’s interest in the net fair
value of the acquiree’s identifiable assets, liabilities and contingent liabilities
over the cost of the combination. However, an entity does not recognize

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 deferred tax liabilities arising from the initial recognition of goodwill.
• As a result of a business combination, an acquirer may consider it probable
that it will recover its own deferred tax asset that was not recognized before
the business combination. For example, the acquirer may be able to utilize
the benefit of its unused tax losses against the future taxable profit of the
acquirer. In such cases, the acquirer recognizes a deferred tax asset, but
does not include it as part of the accounting for the business combination,
and therefore does not take it into account in determining the goodwill or the
amount of any excess of the acquirer’s interest in the net fair value of the
acquiree’s identifiable assets, liabilities and contingent liabilities over the cost
of the combination.
• If the potential benefit of the acquiree’s income tax loss carry-forwards or
other deferred tax assets did not satisfy the criteria in IFRS 3 for separate
recognition when a business combination is initially accounted for but is
subsequently realized, the acquirer shall recognize the resulting deferred tax
as follows: -
(a) acquired deferred tax asset recognized within the measurement
period and relates new information obtained for the conditions existing
at the date of acquisition shall be applied to reduce the carrying
amount of goodwill if goodwill is zero then charged to income
statement.
(b) all other deferred tax assets realized shall be recognized in profit and
loss account.
Presentation
Tax Assets and Tax Liabilities
An entity shall offset current tax assets and current tax liabilities if, and only if, the
entity:
a) has a legally enforceable right to set off the recognized amounts; and
b) intends either to settle on a net basis, or to realize the asset and settle the
liability simultaneously.
An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
a) the entity has a legally enforceable right to set off current tax assets against
current tax liabilities; and
b) the deferred tax assets and the deferred tax liabilities relate to income taxes
levied by the same taxation authority on either:
a. the same taxable entity; or
b. different taxable entities which intend either to settle current tax liabilities
and assets on a net basis, or to realize the assets and settle the liabilities
simultaneously, in each future period in which significant amounts of
deferred tax liabilities or assets are expected to be settled or recovered.
Tax Expense
Tax Expense (Income) Related to Profit or Loss from Ordinary Activities
The tax expense (income) related to profit or loss from ordinary activities shall be
presented on the face of the income statement.
Disclosure
The major components of tax expense (income) shall be disclosed separately:
Components of tax expense (income) may include:
(a) current tax expense (income);
(b) any adjustments recognized in the period for current tax of prior periods;
(c) the amount of deferred tax expense (income) relating to the origination and
reversal of temporary differences;

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(d) the amount of deferred tax expense (income) relating to changes in tax rates
or the imposition of new taxes;
(e) the amount of the benefit arising from a previously unrecognized tax loss, tax
credit or temporary difference of a prior period that is used to reduce current
tax expense;
(f) the amount of the benefit from a previously unrecognized tax loss, tax credit
or temporary difference of a prior period that is used to reduce deferred tax
expense;
(g) deferred tax expense arising from the write-down, or reversal of a previous
write-down, of a deferred tax asset; and
(h) the amount of tax expense (income) relating to those changes in accounting
policies and errors that are included in profit or loss in accordance with IAS 8,
because they cannot be accounted for retrospectively.
SIC Interpretation 25
Income Taxes—Changes in the Tax Status of an Entity or its Shareholders
Issue
1 A change in the tax status of an entity or of its shareholders may have
consequences for an entity by increasing or decreasing its tax liabilities or
assets. This may, for example, occur upon the public listing of an entity’s
equity instruments or upon the restructuring of an entity’s equity. It may also
occur upon a controlling shareholder’s move to a foreign country. As a result
of such an event, an entity may be taxed differently; it may for example gain
or lose tax incentives or become subject to a different rate of tax in the future.
2 A change in the tax status of an entity or its shareholders may have an
immediate effect on the entity’s current tax liabilities or assets. The change
may also increase or decrease the deferred tax liabilities and assets
recognized by the entity, depending on the effect the change in tax status
has on the tax consequences that will arise from recovering or settling the
carrying amount of the entity’s assets and liabilities.
3 The issue is how an entity should account for the tax consequences of a
change in its tax status or that of its shareholders.
Consensus
4 A change in the tax status of an entity or its shareholders does not give rise to
increases or decreases in amounts recognized outside profit or loss. The
current and deferred tax consequences of a change in tax status shall be
included in profit or loss for the period, unless those consequences relate to
transactions and events that result, in the same or a different period, in a
direct credit or charge to the recognized amount of equity or in amounts
recognized in other comprehensive income. Those tax consequences that
relate to changes in the recognized amount of equity, in the same or a
different period (not included in profit or loss), shall be charged or credited
directly to equity. Those tax consequences that relate to amounts
recognized in other comprehensive income shall be recognized in other
comprehensive income.
Q-1
XYZ is a listed company engaged in the business of manufacturing of leather goods.
The applicable rate for the Co. is 40% in year 19X5 and 35% in 19X6.
The relevant information for calculation of deferred tax is as under: -
1. Charitable donations are recognized as expenses when they incurred and
are not deductible for tax purposes. (19X5 500, 19X6 350)

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2. In 19X5 the entity was notified by the relevant tax authorities that they intend
to pursue action against the entity with respect to sulphur emissions. Although
as at December 19X6 the action had not yet come to court the entity
recognized a liability of 700 in 19X5 being its best estimate of the fine arising
from the action. Fines and penalties are not deductible for tax purposes.
(19X5 700)
3. In 19X2 the entity incurred 1,250 of costs in relation to the development of
new product. These costs were deducted for tax purposes in 19X2. For
accounting purposes, the entity capitalized this expenditure and amortized it
on the straight-line basis over five years. At 31st December 19X4, the un-
amortized balance of these product development costs was 500.
4. In 19X5 the entity entered into an agreement with its existing employees to
provide health care benefits to retirees. The entity recognizes as an expense
the cost of this plan as employees provide service. No payments to retirees
were made for such benefits in 19X5 and X6. Healthcare costs are deductible
for tax purposes when payments are made to retirees. The entity estimated
that it is probable that taxable profit will be available against which any
resulting deferred tax asset can be utilized. (19X5 2,000 19X6 1,000)
5. Buildings are depreciated for accounting purposes at 5% a year on a straight-
line basis and at 10% a year on a straight-line basis for tax purposes. Motor
vehicles are depreciated for accounting purposes at 20% a year on straight-
line basis and a 25% a year on a straight-line basis for tax purposes. A full
year’s depreciation is charged for accounting purposes in the year that an
asset is acquired.
6. There was an addition to Buildings of 6,000 during the year 19X5 and in
vehicles of 15,000 during the year 19X6.
7. The cost of buildings is 50,000 and vehicles 10,000 at the end of 19X4 and
accumulated depreciation balance on Buildings at the end of 19X4 is 20,000
and on vehicles is 4,000. The tax allowance on the assets already taken is
Building 40,000 and vehicles 5,000.
8. At 1st January 19X6, the building was revalued to 65,000 and the entity
estimated that the remaining useful life of the building was 20 years from the
date of the revaluation. The revaluation did not affect taxable profit in 19X6
and the taxation authorities did not adjust the tax base of the building to
reflect the revaluation. In 19X6 the entity transferred 1,033 from the
revaluation reserve to retained earnings. This represents the difference of
1,590 between the actual depreciation on building (3,250) and equivalent
depreciation based on the cost of the building (1,660 which is the book value
at 1st January 19X6 of 33,200 divided by the remaining useful life of 20 years)
less the related deferred tax of 557.
9. The accounting profit for 19X5 is 8,775 and for 19X6 is 8,740.
The summarized balance sheets for 19X4, 19X5 and 19X6 are as under: -

19X4 19X5 19X6

Carrying Carrying Carrying
amount amount amount
Accounts receivable 500 500 500
Inventory 2,000 2,000 2,000
Product development costs 500 250 -
Investments 33,000 33,000 33,000
Property, plant & equipment 36,000 37,200 75,750

Page 11 of 42
TOTAL ASSETS 72,000 72,950 111,250

Current income taxes payable 3,000 3,570 2,359

Accounts payable 500 500 500
Fines payable - 700 700
Liability for healthcare benefits - 2,000 3,000
Long-term debt 2,000 12,475 12,805
Deferred income taxes 8,600 9,020 19,845
TOTAL LIABILITIES 32,100 28,265 39,209

Share capital 5,000 5,000 5,000

Revaluation surplus - - 19,637
Retained earnings 34,900 39,685 47,404
TOTAL LIABILITIES / EQUITY 72,000 72,950 111,250

Required:
i) Provide the working for Deferred Tax for all the three years
ii) Provide current tax appearing in the balance sheets for 19X5 and 19X6.
iii) Major components of tax expense for 19X5 and 19X6.
iv) The disclosure of calculation of deferred tax liability/asset in the notes to the
accounts.
v) Reconciliation of application of tax rate on Accounting profit and tax expense
for the year for 19X5 and 19X6 and;
vi) Effective tax rate for the years 19X5 and 19X6
Q-2
On 1 January 20X5 entity A acquired 100 per cent of the shares of entity B at a cost
of 600. At the acquisition date, the tax base in A’s tax jurisdiction of A’s investment in
B is 600. Reductions in the carrying amount of goodwill are not deductible for tax
purposes, and the cost of the goodwill would also not be deductible if B were to
dispose of its underlying business. The tax rate in A’s tax jurisdiction is 30 per cent
and the tax rate in B’s tax jurisdiction is 40 per cent.
The fair value of the identifiable assets acquired and liabilities assumed (excluding
deferred tax assets and liabilities) by A is set out in the following table, together with
their tax bases in B’s tax jurisdiction.

Cost of Tax base

acquisition
Property, plant and 270 155
equipment
Accounts receivable 210 210
Inventory 174 124
Accounts payable (120) (120)
Retirement benefit (30)
obligations
504 369
The profit for the year ended 20X5 is 150 out of which there is a dividend payable of
80.
Required: -
Calculate the deferred tax liability/asset at the acquisition date and any movement
thereafter.

Page 12 of 42
Q-3
An entity receives a non-interest-bearing convertible loan of 1,000 on 31 December
X4 repayable at par on 1 January X8. In accordance with IAS 32 Financial
Instruments: Disclosure and Presentation the entity classifies the instrument’s liability
component as a liability and the equity component as equity. The entity assigns an
initial carrying amount of 751 to the liability component of the convertible loan and
249 to the equity component. Subsequently, the entity recognizes imputed discount
as interest expense at an annual rate of 10% on the carrying amount of the liability
component at the beginning of the year. The tax authorities do not allow the entity
to claim any deduction for the imputed discount on the liability component of the
convertible loan. The tax rate is 40%.
Required: -
Prepare the working for temporary differences associated with the liability
component and the resulting deferred tax liability and deferred tax expense and
income?
Q -4
Following is Balance Sheet of XYZ Company as at December 31, 2001 before
incorporation of any taxation.

Rs. in Rs. in
(000) (000)
Share capital 200,000 Fixed Assets – Net 225,000
Accumulated profit
Retained earnings 70,000 Current Assets
Trade receivable 35,500
Loan payable 15,000 Less: provision of 1,500 34,000
doubtful debts
Income in advance 2,000
Creditors and accrued 15,500 Deferred cost 20,000
Liabilities
Deferred tax 2,500
Sundry Receivable 15,000
Cash & bank balance 11,000
305,000 305,000
Other information is as follows (All figures are in thousands)
a) The current year accounting profit is Rs.50,000 before tax.
b) Tax WDV is Rs.200,000.
c) The accounting depreciation is Rs.15,000 while tax allowance is Rs.20,000.
d) Accrued liabilities include Fine & Penalty Rs.2,000 of which provision for the
year is Rs.1,500. The fine and penalties are not allowable expenses under tax
laws.
e) Sundry Receivable include interest receivable Rs.2,000. The related interest
revenue will be taxed on cash basis.
f) The provision for doubtful debts is not allowable expense, only the bad debts
written off can be claimed as expense from taxable profits.
g) Current liabilities include accrued expenses Rs.3,000. The related expense will
be deducted for tax purpose on a cash basis.
h) The income in advance is taxed on receipt basis.
i) The decrease in provision for doubtful debts during the year is Rs.500.

Page 13 of 42
j) The deferred cost represents the development expense. The original expense
was Rs.35,000 to be amortized over seven years. The whole amount as an
expense under tax laws in the year of incurrence.
k) Tax rate of the Company is assumed at 30%.
Required:
a) Calculate the current tax and deferred tax expense/income and related
asset/liability.
b) Redraft the balance sheet after incorporating current and deferred tax
Q-5
Identify the tax base of the following: -
• A machine cost Rs. 5,000. For tax purposes depreciation of Rs. 5000 has already
been deducted in the current and prior years.
• A machine cost Rs. 1,000. The tax depreciation of Rs. 700 has already been
used for determination of tax but accounting depreciation of Rs. 600 has been
charged on the asset.
• Interest receivable has a carrying value of Rs. 100,000. The related interest
revenue has been taxed on accrual basis.
• Trade receivables have a carrying value of Rs. 100,000. This amount is arrived at
after deducting provision for doubtful debts of Rs. 5,000.The related revenue
has already been included in the taxable profit (loss) for the year.
• The research expense having carrying value of nil already charged in the profit
and loss account can be deducted from taxable profit up to Rs. 5,000.
• Current liabilities include expenses with a carrying value of Rs.100. The related
expenses have been deducted for tax purposes on accrual basis.
• Current liabilities include interest revenue in advance, with a carrying amount
of 100. The related interest revenue was taxed on cash basis.
• Warranties with a carrying amount of Rs.100 are not allowable unless paid.
Q-6
The taxable differences at the end of the year 2006 amounting to Rs. 5,000,000
which will reverse in the following years as under: -
Rs. Tax rate
2007 2,500,000 35%
2008 1,500,000 38%
2009 1,000,000 40%

Required: -Determine deferred tax liability at the end of year 2006?

Q-7
A company purchased an asset costing Rs.300,000 on June 30, 2005. The residual
value of the asset is Rs.20,000 and useful life is 10 years. The company follows the
straight line depreciation method for charging depreciation from the date of
purchase (proportionate depreciation policy). While under tax laws a 50% tax
allowance is available in the year of purchase and 25% on reducing balance basis
thereafter. The tax rate is 30%.
Required: -
a) Calculate the deferred tax (asset/liability) at December 31, 2007.
b) Prepare ledger account of deferred tax for all the relevant years.
Q-8
An asset has a carrying amount of 100 and a tax base of 60. A tax rate of 20%
would apply if the assets were sold and a tax rate of 30% would apply to other
income.
What will be deferred tax implications in both circumstances?

Page 14 of 42
Q-9
(i) Panel is leasing plant under a finance lease over a five year period. The asset
was recorded at the present value of the minimum lease payments of Rs.12
million at the inception of the lease which was 1 November 2004. The asset is
depreciated on a straight line basis over the five years and has no residual
value. The annual lease payments are Rs.3 million payable in arrears on 31
October and the effective interest rate is 8% per annum. The directors have
not leased an asset under a finance lease before and are unsure as to its
treatment for deferred taxation. The company can claim a tax deduction for
the annual rental payment as the finance lease does not qualify for tax relief.
(ii) A wholly owned overseas subsidiary, Pins, a limited liability company, sold
goods costing Rs.7 million to Panel on 1 September 2005, and these goods
had not been sold by Panel before the year end. Panel had paid Rs.9 million
for these goods. The directors do not understand how this transaction should
be dealt with in the financial statements of the subsidiary and the group for
taxation purposes. Pins pays tax locally at 30%.
(iii) Nails, a limited liability company, is a wholly owned subsidiary of Panel, and is
a cash generating unit in its own right. The value of the property, plant and
equipment of Nails at 31 October 2005 was Rs.6 million and purchased
goodwill was Rs.1 million before any impairment loss. The company had no
other assets or liabilities. An impairment loss of Rs.1·8 million had occurred at
31 October 2005. The tax base of the property, plant and equipment of Nails
was Rs.4 million as at 31 October 2005. The directors wish to know how the
impairment loss will affect the deferred tax provision for the year. Impairment
losses are not an allowable expense for taxation purposes.
Assume a tax rate of 30%.
Required:
(b) Discuss, with suitable computations, how the situations (i) to (iii) above will
impact on the accounting for deferred tax under IAS12 ‘Income Taxes’ in the
group financial statements of Panel.
Q-10
Cohort is a private limited company and has two 100% owned subsidiaries, Legion
and Air, both themselves private limited companies. Cohort acquired Air on January
01, 20x2 for Rs.5 million when the fair value of the net assets was Rs.4 million, and the
tax base of the net assets was Rs.3.5 million. The acquisition of Air and Legion was
part of business combination strategy whereby Cohort would build up the value of
the group over a three year period and then list its existing share capital on the stock
exchange.
a) The following details relate to the acquisition of Air, which manufactures
electronic goods.
i) Part of the purchase price has been allocated to intangible assets
because it relates to the acquisition of a database of key customers
from Air. The recognition and measurement criteria for an intangible
asset under IFRS 3 do not appear to have been met but the directors
feel that the intangible asset of Rs.0.5 million will be allowed for tax
purposes and have computed the tax provision accordingly. However,
the tax authorities could possibly challenge this opinion.
ii) Air has sold goods worth Rs.3 million to Cohort since acquisition and
made a profit of Rs.1 million on the transaction. The inventory of these
goods recorded in Cohort’s balance sheet at the year end of May 31,
20X 2 was Rs.1.8 million,

Page 15 of 42
 iii) The balance on the retained earnings of Air at acquisition was Rs.2
million. The directors are of Cohort have decided that, during the three
years to the date that they intend to list the shares of the company,
the will realize earning through future dividend payments from the
subsidiary amounting to Rs.500,000 per year. Tax is payable on any
remittance or dividends and no dividends have been declared for the
current year.
b) Legion was acquired on June 01, 20X1 and is a company which undertakes
various projects ranging from debt factoring to investing in property and
commodities. The following details relate to Legion for the year ending May
31, 20X2.
i) Legion has a portfolio of readily marketable government securities
which are held as current assets. These investments are stated at
market value in the balance sheet and any gain or loss is taken to the
income statement. These gains and losses are taxed when the
investments are sold. Currently accumulated unrealized gains are Rs.4
million.
ii) Legion has calculated that it requires a specific allowance of Rs.2
million against loans in its portfolio. Tax relief is available when specific
loan is written off.
iii) When Cohort acquired Legion it had unused tax losses brought
forward. At June 01, 20x1, it appeared that Legion would have
sufficient to realize all the unused tax loss.
The current tax rate for Cohort is 30% and for public companies is 35%.
Required: -
Write a note suitable for presentation to the partner of an accounting firm setting the
deferred tax implications of the above information for Cohort Group of companies.
Q.1
Swat Limited is in the business of manufacturing and selling of biscuits. It sells
biscuits through its authorized partners appointed in all major cities of
Pakistan.

The company accounts for taxation and deferred taxation in accordance

with the provisions of IAS 12. The relevant information relating to accounting
year ended December 31, 2006 is summarized hereunder:
Rupees
in “000”
Accounting income before tax 797,000
Accounting WDV of fixed assets as at December
31, 2006 565,500
Tax WDV of fixed assets as at December 31, 2006 243,000
Dividend income (subject to final tax at 5%) 35,000
Capital gain (exempt from tax) 135,000
Turnover for the year 3,165,500
Total turnover tax paid during the last three years 65,000
Liabilities older than 3 years, disallowed in previous
years. 65,000
Provision for gratuity as at December 31, 2006 138,500
Provision for Gratuity for the year (net of payments) 33,000
Donations to unapproved institutions 5,000

Page 16 of 42
 Effect of prior year’s assessments finalized during
the current year 6,400
Accounting depreciation for the year 103,000
Tax depreciation for the year 85,000
Fixed assets additions during the year 123,000

All the liabilities are less than three years old except for those disclosed in the
above table. No payment was made in respect of liabilities disallowed earlier.
Only one fixed asset (a vehicle) was disposed off during the year 2006 against
Rs 1,000,000. Its accounting WDV was Rs 700,000 while tax WDV was Rs
465,000. No disposal of fixed assets took place in the year 2005.
All expenses (except donations and timing differences) are considered to be
allowable for tax purpose. Applicable tax rate is 35%.
During last three years, the company was in a loss and was paying turnover
tax which is adjustable in future under the provisions of the Income Tax
Ordinance, 2001, within a period of five years. The company had always
believed that such tax credit will be utilized in the near future.
Required:
(a) Compute the amount of deferred tax required to be reported in the balance
sheets for the years 2006 and 2005.
(b) Prepare a note to the Profit and Loss Account for the year 2006, giving
appropriate disclosures related to tax expenses.
Q.2
XYZ is a listed company involved in providing data outsourcing facilities to various
companies. Following is the list of balances before any current and deferred tax
adjustments for the year ended December 31, 2007.
Dr. Cr.
Rs. (Million) Rs. (Million)
Share capital 100
Retained earnings 1-1-2007 50
Property, plant and 70
equipment
Accumulated depreciation 25
Development cost 25
Accumulated amortization 10
Profit before tax 20
Accrued expenses 10
Prepaid expenses 5
Debtors 25
Provision for doubtful debts 5
Closing stocks 40
Deferred tax 10
Cash 20
Bank 20
Vehicles 5
220 220
Notes:
i) The development cost was allowed as an expense in the
year of incurrence of whole amount but being amortized over five years
under IFRS.

Page 17 of 42
 ii) Property, plant and equipment is being depreciated at 10%
per year and 15% allowance is available under the tax laws on WDV basis.
The depreciation claimed under tax laws before current year is Rs. 30
million.
iii) Accrued expenses are allowable only when paid.
iv) Prepaid expenses are allowed in the year of payment.
v) Vehicles were purchased during the year and the
management has not charged any depreciation on vehicles for the year.
The tax consultant of the company informed that no allowance is
available under the tax law.
vi) Provision for doubtful debts is not an allowable expense
only bad debts written off can be claimed as an expense. The opening
balance for provision was Rs. 2 million.
vii) The tax rate is 35% for current year and future years
Required:
a) Compute taxable profit and current tax?
b) Compute deferred tax?
Q.3
The summarized trial balance of Murphy Limited as at June 30, 2009 is as under: -
Debit Credit
Rs. (000) Rs. (000)
Ordinary share capital 50,000
Retained earnings brought forward 15,000
Revenue 150,500
Cost of sales 75,500
Closing stock 15,600
Operating expenses 12,050
Current tax paid in advance 5,000
Property, plant and equipment 136,225
(opening)
Employee benefits payable 4,500
Loan from parent company 15,000
Trade debtors (Net) 15,500
Cash and bank balances 15,125
Trade creditors 40,000
275,000 275,000
The following further information is relevant.
a) The opening tax base of property, plant and equipment was Rs. 100.250
million. The tax rate applicable in the previous year was 30%.
b) The accounting rate of depreciation is 15% p.a. on reducing balance basis
but tax rate of depreciation is 25% p.a. on reducing balance basis.
c) The company has introduced post employment benefit plan during the
current year, the expense is allowable under tax when paid, and no benefit
has been paid during the year.
d) The brought forward tax loss is Rs. 35.5 million.
e) The entity was granted interest- free five year loan from its parent company at
the start of the year. If the entity has applied for loan from the local bank then
loan would have been available at 15%. The entity has recorded the loan at
the amount received. The interest is allowed as an expense only when paid.
f) The debtor figure in the trial balance is net of provision for doubtful debts for
the year of Rs. 2 million. The bad debt expense is only allowable when debtors

Page 18 of 42
 are written off from the books. The closing stock includes Rs. 3.5 million some
slow moving inventory, the NRV of which is only Rs. 1.5 million. The loss on
inventory is allowable only when goods are sold.
g) By mistake the company has not incorporated deferred tax in the prior years.
h) The applicable tax rate for the current year is 35%.
Required: -
Prepare statement of comprehensive income, statement of changes in equity for the
year then ended and statement of financial position as at June 30, 2004 after
incorporating current tax and deferred tax?
Q.4
Jubilee Limited is a non-listed public company primarily engaged in construction of
bridges and roads and is required to prepare financial statements under IFRS. The
detail of temporary differences at July 01, 2009 is as under: -
Carrying Tax
Value Base
Rs. (000) Rs. (000)
Furniture 150 100
Motor Vehicles 270 150
Plant and machinery 250 100
Debtors 120 140
Provision for warranty 300 --
Accrued expenses 50 --
Un-used tax losses carried -- 150
forward
The year 2010 has not been a very successful year and the accountant has
prepared the following summarized trial balance for the year ended June 30, 2010.
Debit Credit
Rs. (000) Rs. (000)
Furniture 150
Motor Vehicles 270
Plant and machinery 400
Debtors 250
Provision for warranty 350
Accrued expenses 40
Ordinary share capital 300
Retained earnings 120
Revaluation surplus 150
Bank loan @ 15% 100
Sales 1,000
Cost of sales 780
Operating expenses 230
Interest income 35
Finance cost 15
2,095 2,095
The following notes are also relevant for the computation of tax for the year ended
June 30, 2010.
a) There has been no addition to any of the fixed assets; however, the plant and
machinery were revalued at the start of the year, the revaluation surplus is not
taxable until the assets are sold. The depreciation expense for the year is not
recognized in above trial balance. The depreciation method under IAS-16

Page 19 of 42
 and tax laws is reducing balance method, however, the rates of depreciation
are different which are as follows: -
IAS-16 Tax law
% %
Furniture 10 15
Motor Vehicles 10 15
Plant and machinery 15 20
b) The expenses are allowable under tax laws when paid and interest income is
chargeable to tax when received, the interest income recognized above is
not received yet by the company.
c) The tax rate has been 35% in the previous year as well as in the current year.
d) The opening provision for doubtful debts was Rs. 20,000 and closing provision
for doubtful debts is Rs. 30,000. The debtors are reported net of provision and
bad debt expense for the year is included in operating expenses.
e) The management is of the opinion that these taxable losses will be recovered
before their expiry and the economic situation will improve in the next year,
the loss was due to high production cost which is coming down to normal in
two year’s time.
f) Ignore minimum tax under Income Tax Ordinance 2001
Required: -
Calculate the amount of provision to be recognized in the current year for current as
well as deferred tax?
Q.5
An entity has the following balances at the start and end of an accounting period.
2011 2010
Carrying Tax Carrying Tax
value base value base
Rs. (000) Rs. (000) Rs. (000) Rs. (000)
Property, plant and equipment (NBV) 74,250 ? 80,000 40,000
Development cost 20,000 -- 25,000 --
Accrued expenses 5,000 ? -- --
Advance income 10,000 ? -- --
Provision for penalty 5,000 ? -- --
Additional information
a) The property, plant and equipment are being depreciated under IAS 16 using
straight line depreciation method. The useful life of the asset was 5 years at
the time of acquisition. However, the tax rate of depreciation is 20% p.a. on
reducing balance basis after taking 50% first year allowance.
b) The property, plant and equipment were revalued at the start of year 2011
and revaluation surplus was Rs. 19 million.
c) The profit before tax for the year but after charging accounting depreciation
was Rs. 250.5 million.
d) The development cost was claimed as an expense in full in 2010, however, is
being amortized under IAS 38 over five years using straight line amortization
method.
e) Advance income is chargeable to tax in the year of receipt, however,
expenses are allowed in the year of payment.
f) The penalty is not allowable expense under the tax laws.
g) The applicable tax rate for both the tax years is 35%.
Required: -
a) Calculate current and deferred tax for the year 2011?

Page 20 of 42
b) Provide reconciliation of tax on accounting profit and tax expense for the
year 2011?
Q.6
Jamshed Limited has recently hired your services for the position of Accountant. The
following summarized trial balance for the year ended December 31, 2008 along
with the CFO’s comments, has been provided to you.
Debit Credit CFO’s Comments
Rs. Rs.
Share capital 75,000,000
Retained earnings (1/1/2008) 54,134,997
Obligation under finance leases 15,436,900
Accounts payable 4,100,000
Owned fixed assets – net 110,187,500
Leased fixed assets – net 17,152,115
Deferred tax asset (1/1/ 2008) 750,000
Stock in trade 31,400,250
Accounts receivable 13,075,000
Provision for bad debts 653,750
Advance tax paid 11,999,247 Including tax of
Rs. 51,250
deducted on
dividend
received.
Cash and bank 1,025,000
Sales 177,633,594
Cost of sales excluding 122,106,875
depreciation
Depreciation expense – owned 9,385,542 Tax depreciation
assets for the year is Rs.
8,501,758.
Depreciation expense – leased 1,815,212
assets
Donations 562,500 Not allowable for
tax purposes.
Financial charges 2,237,500 Includes Rs.
1,750,222 relating
to obligations
under finance
lease.
Other expenses 6,150,000 Includes bad
debt expenses of
Rs. 853,750.
Dividend income 512,500 Taxable under
Final Tax
Regime.
Gain on sale of machines 375,000 Carrying amount
at disposal was
Rs. 650,000.

327,846,741 327,846,741

Page 21 of 42
Following relevant information is also available:
(i) Bad debts written off during the year amounted to Rs. 200,000.
(ii) There was no addition or deletion in the leased assets. The principal
repayment towards obligation under finance lease was Rs. 2,061,359.
(iii) The tax written down value of owned fixed assets as of December 31, 2007
was Rs. 96,550,000.
(iv) During the year, the company purchased fixed assets amounting to Rs.
7,500,000.
(v) The tax written down value of machines sold was Rs. 450,000. There was no
other disposal of property, plant and equipment in the year 2008.
(vi) On account of an apparent mistake in the return relating to year ended
December 31, 2007, a revised return was filed and the taxable income was
reduced by Rs. 1,800,000.
(vii) Up to the year ended December 31, 2007, the company’s assessed brought
forward losses amounted to Rs. 14,251,700.
(viii) Applicable tax rate is 35%.
Required
Prepare a note to the statement of comprehensive income for the year ended
December 31, 2008, giving appropriate disclosure related to current and deferred
tax expenses?
Q.7
You are the Chief Accountant of Rubab Enterprises Limited which is engaged in
manufacturing iron and steel products. The company was set up in August 1998 and
started commercial production in November 1998. The accounting year-end of the
company is June 30.
While analyzing the company’s books of accounts for the year ended June 30, 2005,
you came across the following balances:
Rs.
Provision for taxation-current 2,410,000
Deferred tax liability 4,700,000
The assessments of the past four years although completed by the taxation officer
but are still open due to appeals. The provision for taxation consists of the following:
Accounting Accounting Assessed Tax rate Provision for
year income income % taxation
2002 1,000,000 1,800,000 45 810,000
2003 1,400,000 1,900,000 40 760,000
2004 1,700,000 2,100,000 40 840,000
2005 2,200,000 35 -
2,410,000

The deferred taxation in on account of the following: -

Rs.
Depreciation (4,000,000)
Leasing (2,000,000)
Penalties and fines paid by the company 100,000
Provision for gratuity 1,000,000
Provision for bad debts 200,000
(4,700,000)
The following information is also available:

Page 22 of 42
(a) The accounting depreciation for the year ended June 30, 2005 amounted to
Rs.20.50 million whereas tax depreciation as calculated by one of your
subordinates amounted to Rs. 15.50 million.
(b) The company operates an unfunded gratuity scheme. Gratuity of Rs.100,000
each was paid to two of the employees who had resigned during the year.
The total provision required at year-end amounted to Rs. 3.5 million.
(c) Leased assets consisted of two machines only. In the accounting records of
the company; one of the leases has been treated as operating lease. The
machine under financial lease arrangement was sold during the year at a
profit of Rs.400,000. The lease was cancelled with the consent of the leasing
company.
(d) The company paid Rs. 1,000,000 on account of certain expenses. Your tax
advisor has informed you that only 60% of this will be allowed for tax purposes
and that too, over a period of five years (including the current year).
(e) Receivables of Rs.40,000 which were written off in the year 2002 were
recovered during the year. The same had not been allowed by the tax
authorities in the year in which they were written off.
During the year, the following decisions were made by various tax appellate
authorities:
(a) While assessing the income for the year ended June 30, 2002 the value of
closing stock had been increased by the taxation authorities by Rs. 4.0 million.
Consequential effect on opening stock of next year had however been
allowed. During the current year, add-back was declared invalid by the
appellate authority.
(b) An expense incurred in the year 2003, amounting to Rs.0.5 million, which was
disallowed then, was declared as allowable over a period of four years.
Although the company had filed an appeal, it was of the view that the same
would not be allowed; hence it has ignored it for the purpose of calculating
deferred tax till last year.
Required:
(a) Among the transactions discussed above, identify those which give rise to
permanent timing differences?
(b) Calculate the following:
i) Provision for taxation – current
ii) Provision for taxation – prior years
iii) Deferred tax – current
iv) Deferred tax – prior years
iv) Deferred tax liability
Q.8
You are the auditor on the December 31, 20X8 audit of MNC Limited. 20X8 was the
first year of operations for the Company. The audit is virtually complete and the only
area that needs attention is the calculation of the tax provision. The audit has been
very “clean", and as yet no adjusting entries have been proposed; however, since
no taxes have as yet been provided for, adjusting entries will have to be suggested
to the client.
Based upon the results of your audit, discussions with the company’s chief
accountant and your tax manager, you have identified the following transactions,
which must be considered in the tax calculation:
Rs.
Accounting income before tax 1,000,000
Accounting accumulated depreciation 200,000

Page 23 of 42
Tax accumulated depreciation 400,000
Allowance for doubtful accounts at December 31, 20X8 150,000
Long-term debt financing expenditures 300,000
Book amortization of long-term debt financing costs 60,000
Corporate dividends received 50,000
Accrued management bonus, payable in 20X9 100,000
The tax regulations in the country of MNC Ltd. provide for the following:
• Depreciation of fixed assets using “accelerated” methods. The company uses
the straight-line method of depreciation for accounting purposes. The
estimated useful lives of the fixed assets are 10 years.
• Bad debts are deductible for tax purposes only when the account has
actually been directly written off (no amounts were written off during 20X8).
• Expenses incurred to acquire debt are deductible for tax purposes in the year
in which they are paid. For accounting purposes MNC Ltd. has written off Rs.
300,000 in fees directly against the related finance, and they are being
amortized over the finance period using the effective interest rate method.
• 80% of corporate dividends received are not taxable.
• Based upon the results of the first year of operations, the Company has given
bonuses to its top managers; however they will not be paid until 20X9. Such
amounts are not deductible for tax purposes until they have been paid.
• The statutory tax rate is 50%. Tax losses can be carried forward to 15 years.
Required
a) Identify the temporary differences. Determine the amount of gross temporary
differences at December 31, 20X8.
b) Calculate the net deferred tax liability or asset at December 31, 20X8 and
pass journal entry.
c) Compute the amount of taxes payable that would be reported on the
Company's 20X8 tax return. That is, what is the "current" tax expense?
d) Prepare the recommended journal entry to record the current tax liability
(MNC Ltd. had not made any tax payments on its estimated tax liability for
20X8).
e) Prepare a reconciliation of expected to actual tax expense (IAS 12.81c).
Q-9
Financial statements of Niazi Company Limited (NCL) for the year ended 31
December 2012 are in the process of finalization. In this respect, the following
information has been gathered from the company’s accounting and tax records.
(i) Property, plant and equipment (PPE)
31-12-2012 31-12-2011

Rs. in million

Accounting WDV (at revalued amount) 2,700 2,000

Tax WDV 2,400 1,600

Details of the revaluation are as under:
Revaluation of freehold land and buildings on 31 December 2005 resulted in a
revaluation surplus of Rs. 15 million and Rs. 20 million respectively.
Plant and machinery costing Rs. 150 million was commissioned on 1 January 2010
with an expected useful life of 10 years. It was revalued at Rs. 145 million on 31
December 2012.
(ii) Provision for retirement benefits and doubtful debts

Page 24 of 42
 Rs. in million

Balance on 31 December 2011 50

Write offs during the year 5

Provision for the year, net of payments of Rs. 3 million 6

(iii) Liabilities outstanding for more than three years

NCL’s tax assessment for the year ended 31 December 2010 was finalized on
30 April 2012 in which liabilities outstanding for more than three years and
amounting to Rs. 8 million were added back to income.

A sum of Rs. 2 million included in the above liabilities was paid while a liability
of Rs. 3 million was written back by NCL in 2012.
(iv) Applicable tax rate is 35%.
Required:
Prepare a note related to deferred tax liability/asset for inclusion in NCL’s financial
statements for the year ended 31 December 2012, in accordance with the
International Financial Reporting Standards. (12)
Q-10
Following information pertaining to Moon Light Limited (MLL) is available for
computing tax charge/liability for inclusion in the financial statements for the
year ended 31 December 2013.
Rs.
(m)
Profit before dividend and capital gains 500
Dividend income 25
Capital gains (exempt from tax) 28
Permanent add – backs under the tax laws 35
Actuarial gains for the year on defined benefits plans (Balance
as at December 31, 2012 amounted to Rs. 140 million) 60
Other relevant information is as under:
(i) MLL’s tax assessment for the year ended 31 December 2011 was
finalized in May 2013 raising an additional tax liability of Rs. 4.2 million.
The assessment was not contested and the liability was paid by MLL.
(ii) Following details are available in respect of provision for doubtful debts:
Balance as at 31 December 2012 amounted to Rs. 90 million
Write offs against provision amounted to Rs. 25 million.
Balance as at 31 December 2013 amounted to Rs. 125 million
(iii) Property, plant and equipment:
Rs. (m)
2013 2012
Accounting WDV 1,850 1,800
Tax WDV 1,880 1,750

(iv) Applicable tax rates for 2012 and 2013 are 35% and 10% for business
and dividend income respectively for both years.
Required:
Prepare notes on taxation for inclusion in the financial statements of MLL for the
year ended 31 December 2013, in accordance with the International Financial
Reporting Standards. (16)

Page 25 of 42
A-1
a) Deferred tax
2006 2005
Rs.(000) Rs.(000)
Deferred tax (asset)/liability 41,650 (5,417.75)

b) Tax expense

Current tax
Current year-normal 239,132.25
dividend 1,750
Prior year 6,400
Deferred tax (65,000-41,650- (17,932.25) 229,350
5,417.75)

CV TB TTD DTD
Rs.(000) Rs.(000) Rs.(000) Rs.(000)
W-1 calculation of deferred tax
2006
Fixed assets 565,500 243,000 322,500 --
Provision for gratuity 138,500 -- -- 138,500
Liabilities older than three 65,000 -- -- 65,000
years
322,500 203,500
Net taxable difference 119,000
Deferred tax liability 41,650

2005
Provision for gratuity 105,500 -- -- 105,500
Liabilities older than three 65,000 -- -- 65,000
years
Fixed assets 546,200 205,465 340,735
340,735 170,500
Net taxable temporary 170,235

Page 26 of 42
difference
Net deferred tax liability 59,582.25
Opening un-used tax credit (65,000)
Net deferred tax asset (5,417.75)
W-2 Calculation of current tax Rs.(000) Rs.(000)
Accounting profit before tax 797,000
Add: Provision for gratuity 33,000
Donations 5,000
Accounting 103,000
depreciation
Tax gain 535 141,535

Less: Dividend income 35,000

Capital gain 135,000
Tax depreciation 85,000
Accounting gain 300 255,300
Taxable profit for the year 683,235
Current tax-expense @ 35% 239,132.25

W-3 Turnover tax

Turnover 3,165,500
Turnover tax @ 1% 31,655

W-4 Fixed asset-accounting

B/f 546,200
Accounting depreciation (103,000)
Addition 123,000
Disposal during the year (700)
C/d 565,500

W-5 Fixed asset-tax

B/f 205,465
Tax depreciation (85,000)
Disposal (465)

Page 27 of 42
 Addition 123,000
C/d 243,000

A-2
a) Taxable Profit
Rs. (Million)
Accounting profit 20
Add:
Amortization of development cost 5
Depreciation of property, plant and 7
equipment
Provision for doubtful debts 3
Accrued expenses 10
25
45
Less:
Depreciation of property, plant and 6
equipment
Prepaid expenses 5

11
Taxable profit 34

b) Calculation of deferred tax

CV TB TTD DTD
Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Property, plant and 45 34 11
equipment
Development cost 15 15
Prepaid expenses 5 5
Debtors 20 25 5
Closing stock 40 40
Cash 20 20
Bank 20 20
Vehicles 5 5

Page 28 of 42
 Deferred tax 10 10
180 154
Share capital 100 100
Retained earnings 70 54
Accrued expenses 10 10
180 154 31 15
Net taxable difference 31 -15 = 16

Deferred tax liability 16 X 35% = 5.4

A–3
a) Statement of comprehensive income
Rs. Rs.
(000) (000)
Income statement
Sales 150,500
Less: cost of sales 75,500
Depreciation 20,434 (95,934)
Gross profit 54,566
Operating expenses (12,050)
Profit before tax 42,516
Tax expense
Current tax 6,611
Deferred tax 8,293 (14,904)
Profit after tax 27,612
Other comprehensive income --

Total comprehensive income 27,612

a) Statement of changes in equity

Ordinary Retained Total
share earnings
capital
Rs. (000) Rs. (000) Rs.
(000)
B/f balances 50,000 15,000 65,000
Page 29 of 42
 Effect of prior year error (143) (143)
Restated balances 50,000 14,857 64,857
Total comprehensive income -- 27,612 27,612
for the year
50,000 42,469 92,469
b) Statement of financial
position

Property, plant and 115,791

equipment
Stock 15,600
Trade debtors 15,500
Current tax paid 5,000
Cash and bank 15,125
167,016
Capital 50,000
Retained earnings 42,469
92,469
Employee benefits 4,500
Bank balance 15,000
Trade creditors 40,000
Deferred tax 8,436
Current tax 6,611
74,547
167,016
W-1 Calculation of current tax
Rs. (000) Rs.
(000)
Profit before tax 42,516
Add:
Accounting 20,434
depreciation
Provision for doubtful 10,000
debts
Stock at NRV 2,000
Employee benefits 4,500 36,934

Page 30 of 42
 Less:
Tax depreciation (25,062)
Taxable profit 54,388
Un-used tax loss b/f (35,500)
Net taxable profit 18,888
Current tax for the year 6,611

W-2 Calculation of deferred tax

CV TB TTD DTD
Rs. Rs. Rs. Rs.
(000) (000) (000) (000)
Assets
Property, plant and 115,791 75,188 40,603
equipment
Stock 15,600 17,600 2,000
Trade debtors 15,500 25,500 10,000
Current tax paid 5,000 5,000 --
Cash and bank 15,125 15,125 --
167,016 133,413
Liabilities
Employee benefits 4,500 -- 4,500
Bank balance 15,000 15,000 -- --
Trade creditors 40,000 40,000 -- --
59,500 55,000
Equity
Capital 50,000 50,000 -- --
Retained earnings 57,516 28,413 -- --
107,516 78,413
167,016 133,413 40,603 16,500

Deferred tax closing 8,436

Deferred tax opening (143)
Deferred tax for the year 8,293
A–4
a) Calculation of current and deferred tax
There will be no current tax liability
Page 31 of 42
 The deferred tax charged to income statement is Rs. 36,050
W-1
Income statement for the year
Rs. Rs.
(000) (000)
Sales 1,000
Cost of sales 780
Depreciation not recognized
Furniture 15
Motor vehicles 27
Plant and machinery 60 (882)
Gross profit 118
Less: operating expenses (230)
Finance cost (15)
Add: interest income 35 (280)
Loss before tax (162)
Calculation of taxable profit
Accounting loss (162)
Add: Accounting depreciation 102
Provision for bad debts 10
Provision for warranty 50 162
Less: Interest income 35
Accrued expenses 10
Tax depreciation
Furniture 15
Motor vehicles 22.50
Plant and machinery 20 (102.50)
Taxable loss (102.50)
No current tax provision is required
W-2
Calculation of opening deferred tax liability
Particulars Carrying Tax Taxable Deductible
value Base Temporary Temporary
differences differences
Rs. (000) Rs. Rs. (000) Rs. (000)
(000)

Page 32 of 42
Furniture 150 100 50 --
Motor Vehicles 270 150 120
Plant and machinery 250 100 150
Debtors 120 140 20
Provision for warranty 300 -- 300
Accrued expenses 50 -- 50
Un-used tax losses -- 150 150
carried forward
320 520
Net deductible 200
Opening deferred tax 200x.35=70

Calculation of closing deferred tax

Furniture 135 85 50
Motor Vehicles 243 127.50 115.50
Plant and machinery 340 80 260
Debtors 250 280 30
Provision for warranty 350 -- 350
Accrued expenses 40 -- 40
Un-used tax losses 252.50
carried forward
425.50 672.50
Opening deferred tax 70
asset
Closing deferred tax (672.50-425.50)x.35 86.45
Net increase in 16.45
deferred tax
The deferred tax to be 150x.35=52.50
charged to revaluation
surplus
The deferred tax (70+52.50-86.45)=36.05
recognized in income
statement is
b) The concept of tax base is as under: -
The tax base of an asset or liability is the amount attributed to that
asset or liability for tax purposes.
Tax base of an asset

Page 33 of 42
 The tax base of an asset is the amount that will be deductible for tax
purposes against any taxable economic benefits that will flow to an
entity when it recovers the carrying amount of the asset. If those
economic benefits will not be taxable, the tax base of the asset is
equal to its carrying amount.
The tax base of a liability
The tax base of a liability is its carrying amount, less any amount that
will be deductible for tax purposes in respect of that liability in future
periods.
In the case of revenue which is received in advance, the tax base of
the resulting liability is its carrying amount, less any amount of the
revenue that will not be taxable in future periods.
A-5
a)
Calculation of taxable profit Rs. (000) Rs. (000)
Accounting profit 250,500
Add: -
Accounting depreciation 24,750
Amortization of development cost 5,000
Advance income 10,000
Provision for penalty 5,000
Accrued expenses 5,000 49,750
Less: -
Tax depreciation 8,000 (8,000)
Taxable profit 292,250
Current tax for the current year @35% 102,287.50

Calculation of deferred tax

Closing temporary CV TB TTD DTD
differences
Property, plant and 74,250 32,000 42,250 -
equipment
Development cost 20,000 - 20,000 -
Advance income 10,000 - - 10,000
Accrued expenses 5,000 - - 5,000
Total 62,250 15,000
Net taxable temporary 47,250
difference
Deferred tax liability 16,537.50

Page 34 of 42
closing balance
Opening temporary
differences
Property, plant and 80,000 40,000 40,000
equipment
Development cost 25,000 - 25,000
Total 65,000 -
Net taxable temporary 65,000
difference
Deferred tax liability 22,750
opening balance
Deferred tax for the year
Opening balance 22,750
Deferred tax charged to (19,000*.35) 6,650
revaluation surplus
To profit and loss account (12,862.50)
Closing balance 16,537.50

Tax expense for the year

Current tax 102,287.50
Deferred tax (12,862.50) 89,425
Tax on accounting profit 250,500*.35 87,675
Effect of: -
Penalty (5,000*.35) 1,750
89,425
A-6
Rupees
Current
- for the year (W-1) 8.294.853
- for prior years (1,800,000 x 35%) (630.000)
7,664,853
Deferred (W-2) 6,402,753
14,067,606

W-1: Computation of tax expense for the year Rupees

Page 35 of 42
Accounting profit before tax
(177,633,594 + 375,000 + 512,500 - 122,106,875 - 9,385,542 - 1,815,212 -
562,500 - 2,237,500 - 6,150,000) 36,263,465
Less: Admissible deduction/Inadmissible income
Income under FTR – Dividend 512,500
Lease rentals paid (Rs. 1,750,222 + Rs. 2,061,359) 3,811,581
Tax depreciation 8,501,758
Bad debts written off 200,000
Accounting Gain on sale of machines 375,000
13,400,839

Add: Inadmissible deduction/Admissible income

Interest paid on leases 1,750,222
Depreciation on leases 1,815,212
Accounting depreciation 9,385,542
Donations 562,500
Bad debts expense 853,750
Tax gain on sale of machines (650,000 + 375,000 - 450,000) 575,000
14,942,226
Taxable income 37,804,852

Less: Assessed tax losses (14,251,700)

23,553,152

Tax on normal income @ 35% 8,243,603

Tax on dividend income @ 10% 51,250
Total tax liability – current 8,294,853

W-2: Computation of deferred tax expense for the year

Carrying Tax base Difference
amount
Rupees
Taxable temporary differences
Fixed assets – owned 110,187,500 95,098,242 15,089,258
(W-3)
Fixed assets – leased 17,152,115 - 17,152,115

Deductible temporary differences

Page 36 of 42
 Obligation under finance lease (15,436,900) - (15,436,900)
Provision for bad debts (653.750) (653,750)
Net temporary difference 16,150,723

Deferred Tax Liability as of December 31, 5,652,753

2008 (16,150,723 x 35%)
Add: Deferred tax asset as of December 31, 750,000
2007
Deferred tax expense for the year 6,402,753
W-3: Tax base of owned fixed assets
Rupees
Tax WDV – opening 96,550,000
Addition 7,500,000
Disposal (450,000)
Tax Depreciation (8,501,758)
95,098,242
A-07
a) Permanent differences
i) Penalties and fines
ii) Provision for bad debts
iii) Expenses disallowed Rs. 400,000
Rs.
b) Requirements for calculation of tax
i) Provision for taxation – current (W-1) expense 3,120,250
ii) Provision for taxation – prior year (W-2) income (190,000)
iii) Deferred tax – current (W-3) income 4,586,750
iv) Deferred tax – prior years (W-4) expense 200,000
v) Deferred tax liability (W-3) liability 313,250

W-1 Provision for taxation – current

Rs. Rs.
Accounting profit for the year 2,200,000
Add: Accounting depreciation 20,500,000
Provision for gratuity 1,200,000
Expenses disallowed 1,000,000 22,700,000

Less: Tax depreciation 15,500,000

Payment for gratuity 200,000
Expenses allowed (500,000/4) 125,000
Expenses partially allowed 120,000
(600,000/5)
Bad debts recovered 40,000 (15,985,000)

Page 37 of 42
 8,915,000
Current tax @ 35% 3,120,250

W-2 Provision for taxation – prior year

2002 Assessed profit for the year 1,800,000
Adjustment of closing stock-disallowed (4,000,000)
Un-used tax loss carried forward (2,200,000)
2003 assessed profit for the year 1,900,000
Adjustment of opening stock-disallowed 4,000,000
Expenses allowed by tax laws (500,000/4) (125,000)
Revised taxable profit for the year 5,775,000
Un-used tax loss b /f (2,200,000)
Taxable profit for the year 3,575,000
Tax @ 40% (A) 1,430,000
2004 assessed profit for the year 2,100,000
Expenses allowed by tax laws (500,000/4) (125,000)
Taxable profit for the year 1,975,000
Tax @ 40% (B) 790,000
Total tax provision (A+B) 2,220,000
Tax provision already recognized (2,410,000)
Excess provision to be reversed (190,000)
W-3 Deferred tax - current TTD DTD
Depreciation/PPE 5,000,000
Provision for gratuity 3,500,000
Expenses allowable in next years 125,000
Expenses allowable next years (600,000- 480,000
120,000)
5,000,000 4,105,000
Net taxable difference 895,000
Deferred tax liability @ 35% 313,250
Deferred tax income (4,900,000-313,250) 4,586,750

W-4 Deferred tax – prior years TTD DTD

Depreciation/PPE (4,000,000/0.40) 10,000,000
Leasing (2,000,000/0.40) 5,000,000
Provision for gratuity (1,000,000/0.40) 2,500,000
Expenses to be allowed in next year 250,000
Page 38 of 42
 15,000,000 2,750,000
Net taxable difference 12,250,000
Deferred tax @40% 4,900,000
Already recognized (4,700,000)
Excess to be recognized 200,000

A-08
a) Temporary differences
i) Accelerated deprecation
ii) Allowances of doubtful debts
iii) Amortization of issuance cost
iv) Bonus payable
b) Deferred tax liability
CV TB TTD DTD
Rs. Rs. RS. Rs.
Fixed assets 1,800,000 1,600,000 200,000
Allowances for doubtful debts 150,000 -- -- 150,000
Accrued expenses 100,000 -- -- 100,000
Long term loan -- 240,000 240,000 --
440,000 250,000
Net taxable temporary 190,000
difference
Deferred tax liability @50% 95,000

c) Calculation of current tax

Rs. RS.
Profit before tax 1,000,000
Add:
Accounting depreciation 200,000
Provision for doubtful debts 150,000
Accrued expenses 100,000
Amortization of long term debts 60,000 510,000
Less:
Tax depreciation 400,000
Corporate dividend 40,000
Finance cost paid 300,000 740,000
Taxable profit 770,000
Current tax 385,000

Page 39 of 42
 Tax expense
Current tax 385,000
Deferred tax 95,000
480,000

d) Journal entries
Debit Credit
Rs. RS.
Current tax expense 385,000
Current tax payable 385,000

Deferred tax expense 95,000

Deferred tax liability 95,000

e) Reconciliation
Rs. Rs.
Tax on accounting profit 1,000,000 x 0.50 500,000
Effect of permanent difference 40,000 x 0.50 (20,000)
Tax expense for the year 480,000

A-09
Niazi Company Limited
Notes to the financial statements
For the year ended 31 December 2012
Deferred Tax Liability / (Assets) - net
Description Balance 1 Charge / Recognised Balance 31
Jan 2012 (Reversal) in in surplus on Dec 2012
PL revaluation

Rupees in million
Deductible temporary differences

Provision for retirement benefits and (17.50) (0.35) (17.85)

doubtful debts
01 Jan 2012 [50 x 35%]
31 Dec 2012 [(50 - 5 + 6) x 35%]

Liabilities outstanding for more than 3 (1.05) (1.05)

years added back to income
31 Dec 2012 [(8 - 2 - 3) x 35%]

Taxable temporary differences

Property, plant and equipments (W-l) 134.75 (49.00) 14.00 99.75

117.25 (50.40) 14.00 80.85
W-l: Property, plant and equipment:
01 Jan 2012 31 Dec 2012

Page 40 of 42
 Accounting WDV 2,000 2,700
Revaluation surplus on freehold land not subject to depreciation (15) (15)
Tax WDV (1,600) (2,400)
Excess of accounting WDV over tax WDV 385 285
Deferred tax liability at 35% 134.75 99.75
Deferred tax liability on revaluation of PPE on 31-12-2012 to be adjusted
against its revaluation surplus. [145 - (150 -f 10 x 7)] = 40 x 35% 14.00

A-10
Moon Light Limited
Notes to the financial statements
For the year ended December 31, 2013
1 Deferred tax (assets)/liability-net
Balance (credit)/ Balance
1-Jan-13 Charge for 31-dec-
the year 13

Rs. (m) Rs. (m) Rs. (m)

Deductible temporary differences
Provision for doubtful debts (31.50) (12.50) (43.75)
2012 (90x.35) 2013 (125x.35)
Actuarial gains on defined benefits plans
routed through other comprehensive 49.00 21.00 70.00
income
Taxable temporary differences
Property, plant and equipment 17.50 (28.00) (10.50)
2012 (1,800-1,750)x.35
2013 (1,850-1,880)x.35
Deferred tax (asset) / liability - net 35.00 (19.50) 15.75

2 Taxation Rs. (m)

Current
For the year (w-1) 230.00
Prior year 4.20
Deferred tax credit (12.25+28) (40.25)
193.95
2.1 Relationship between tax expense Rs. (m)
and accounting profit

Accounting profit (500+25+28) 553.00

Page 41 of 42
Applicable tax rate 35%
Tax expense for the year 193.55
Tax for prior year 4.20
Tax effect of permanent differences (35x.35) 12.25
Lower rate tax at 10% on dividend income 25 x (.35-.10) (6.25)
Income exempt from tax (28x.35) (9.80)
Tax expense 193.95

W-1 Current tax liability Rs. (m)

Accounting profit before dividend
and exempt income 500.00
Inadmissible expenses 35.00
Provision for doubtful debts 125-(90- 60
25)
Provision for doubtful debts written
off during the year (25)
Excess of accounting depreciation
over tax depreciation 28/.35 80
Taxable income 650.00
Tax on business income at 35% 227.50
Tax on dividend income or Rs. 25 at 2.50
10%
Tax for the year 230.00

Page 42 of 42