Question 1

What is the objective of Ind AS 12, and how does the balance sheet approach influence its application?

Accepted Answer

The objective of Ind AS 12 is to prescribe the accounting treatment for income taxes, focusing on the recognition of deferred tax assets and liabilities. The balance sheet approach influences its application by requiring entities to recognize tax effects based on temporary differences between the carrying amount of assets and liabilities in the balance sheet and their tax bases. This approach ensures that the tax implications are accurately reflected in financial statements, providing a clearer picture of the entity's financial position.

Question 2

Which taxes fall within the scope of Ind AS 12, and how is “income tax” defined under this standard?

Accepted Answer

Ind AS 12 covers current and deferred income taxes, including taxes on profits. Income tax is defined as the amount payable to the tax authority based on taxable profit, which is derived from accounting profit adjusted for tax regulations and exemptions.

Question 3

What is a temporary difference under Ind AS 12?

Accepted Answer

A temporary difference under Ind AS 12 refers to the difference between the carrying amount of an asset or liability in the balance sheet and its tax base. This can lead to taxable or deductible amounts in future periods, affecting deferred tax calculations.

Question 4

How is the tax base of an asset or liability determined in practice?

Accepted Answer

The tax base of an asset is determined by its cost minus any tax deductions that have been claimed, while the tax base of a liability is its carrying amount minus any amounts that will be deductible in the future. This involves considering applicable tax rates and the timing of tax deductions.

Question 5

Why are certain transactions excluded from deferred tax recognition on initial recognition?

Accepted Answer

Certain transactions are excluded from deferred tax recognition on initial recognition because they do not create taxable temporary differences or are not expected to result in future tax consequences, such as initial recognition of goodwill or certain equity transactions.

Question 6

How are deferred tax assets and liabilities measured under Ind AS 12?

Accepted Answer

Under Ind AS 12, deferred tax assets and liabilities are measured based on temporary differences between the carrying amount of assets and liabilities and their tax bases, using enacted tax rates expected to apply when the asset is realized or the liability is settled.

Question 7

Why are deferred tax balances not discounted even if they are expected to reverse in the distant future?

Accepted Answer

Deferred tax balances are not discounted because accounting standards require them to be recognized at their nominal value. The time value of money is not applied since these balances are expected to reverse based on enacted tax rates, maintaining consistency in financial reporting.

Question 8

Under what conditions should deferred tax assets be recognized, especially for unused tax losses?

Accepted Answer

Deferred tax assets should be recognized when it is probable that future taxable income will be available against which the unused tax losses can be utilized. Companies must consider tax planning strategies and the expiration of tax losses to ensure the recognition is valid.

Question 9

How are current tax assets and liabilities presented in the financial statements?

Accepted Answer

Current tax assets and liabilities are presented on the balance sheet, typically under current assets and current liabilities, respectively. Current tax assets represent amounts recoverable from tax authorities, while current tax liabilities reflect amounts owed. They are measured based on the expected tax payments or refunds for the current period, in accordance with the relevant accounting standards.

Question 10

Where are deferred tax assets and liabilities classified in the balance sheet?

Accepted Answer

Deferred tax assets and liabilities are classified as non-current assets and non-current liabilities, respectively, in the balance sheet. This classification reflects their long-term nature and the expectation that they will be realized or settled in future periods.

Question 11

How are deferred tax effects arising from items recognized in OCI or equity presented?

Accepted Answer

Deferred tax effects from items recognized in OCI are presented in the statement of comprehensive income, reflecting the tax impact of those items. In the equity section, they are shown within the deferred tax asset or liability, ensuring that the tax effects are aligned with the timing of income recognition.

Question 12

How is the tax effect of transactions allocated between P&L, OCI, and equity?

Accepted Answer

The tax effect of transactions is allocated based on their nature; for instance, items recognized in profit and loss (P&L) affect current tax expense, while other comprehensive income (OCI) items may have deferred tax implications. Equity transactions, such as those from share-based payments, are also considered, impacting retained earnings and overall equity. This allocation ensures that the financial statements reflect the true economic impact of taxes.

Question 13

How should deferred tax be presented for discontinued operations or business combinations?

Accepted Answer

Deferred tax related to discontinued operations should be presented separately in the financial statements to provide clarity to users. In business combinations, deferred tax assets and liabilities must be recognized at fair value as part of the acquisition accounting, ensuring compliance with relevant accounting standards.

Question 14

How is deferred tax on intangible assets arising from a business combination treated?

Accepted Answer

Deferred tax on intangible assets in a business combination is recognized based on the difference between the carrying amount of the asset and its tax base. It is important to measure the deferred tax liability or asset accurately, as it affects the overall valuation and financial reporting of the acquired entity.

Question 15

What are the key considerations when accounting for deferred tax on compound financial instruments?

Accepted Answer

When accounting for deferred tax on compound financial instruments, it is crucial to identify temporary differences between the carrying amount and tax base, apply the applicable tax rates, and consider how components classified as equity or liabilities affect the deferred tax calculation.

Question 16

Should deferred tax be recognized on capitalized foreign exchange differences in PPE?

Accepted Answer

Yes, deferred tax should be recognized on capitalized foreign exchange differences in PPE as it reflects the future tax consequences of temporary differences. According to accounting standards, these differences arise when the carrying amount of the asset differs from its tax base due to currency fluctuations, necessitating deferred tax recognition.

Question 17

How are DTAs evaluated in situations involving uncertainty or limited future taxable income?

Accepted Answer

Deferred tax assets (DTAs) are evaluated based on the likelihood of realizing them against future taxable income. If uncertainty exists, a valuation allowance may be necessary to reduce the carrying amount of DTAs, ensuring compliance with accounting regulations and reflecting realistic recovery expectations.

Question 18

What are the key disclosure requirements for current and deferred taxes?

Accepted Answer

Key disclosure requirements include presenting current tax liabilities and assets, detailing deferred tax assets and liabilities, and providing a reconciliation of the effective tax rate to the statutory tax rate.

Question 19

How should a reconciliation between accounting profit and tax expense be presented?

Accepted Answer

A reconciliation between accounting profit and tax expense should clearly present the adjustments made to the accounting profit, including permanent and temporary differences, in a structured format that complies with relevant accounting standards, ensuring transparency for all stakeholders.

Question 20

What disclosures are required for deferred tax related to subsidiaries and associates?

Accepted Answer

Disclosures for deferred tax related to subsidiaries and associates must include the nature of deferred tax assets and liabilities, their impact on the overall financial position, and a reconciliation of the effective tax rate to the statutory tax rate, ensuring transparency in tax-related matters.

Question 21

How would you respond if management proposes recognizing a DTA without sufficient justification?

Accepted Answer

I would express my concerns to management, emphasizing the importance of adhering to accounting standards and the potential implications of recognizing a Deferred Tax Asset without sufficient justification. I would suggest conducting a thorough review of the underlying assumptions to ensure compliance and accuracy.

Question 22

What risks exist in tax-related presentation or disclosure that could mislead users?

Accepted Answer

Risks include inaccurate tax calculations that can lead to under or overstatement of liabilities, lack of transparency in disclosures that may hide potential tax liabilities, and failure to disclose contingent liabilities which could mislead users about the company's true tax position.

Question 23

How would you calculate deferred tax based on given temporary differences and tax rates?

Accepted Answer

To calculate deferred tax, identify the temporary differences between the accounting and tax bases of assets and liabilities. Multiply these differences by the applicable tax rates. For example, if a company has a temporary difference of $100,000 and a tax rate of 30%, the deferred tax liability would be $30,000. This method ensures accurate financial reporting and compliance with tax regulations.

Question 24

How should a change in tax rate during the year be reflected in deferred tax accounting?

Accepted Answer

A change in tax rate during the year should prompt a re-evaluation of deferred tax assets and liabilities. The adjustment is recorded in the period the change is enacted, affecting the effective tax rate and potentially leading to a remeasurement of deferred tax balances in the financial statements.

Question 25

If a prior year error impacts deferred tax, how should the correction and disclosure be handled?

Accepted Answer

In the case of a prior year error impacting deferred tax, the correction should involve restating the prior financial statements to reflect the accurate figures, disclosing the nature of the error in the notes to the financial statements, and adjusting current tax provisions to ensure compliance with accounting standards.

Ind AS 12 - Income Taxes Interview Q&A

A. Objective, Scope & Definitions

Q1: What is the objective of Ind AS 12, and how does the balance sheet approach influence its application?

Q2: Which taxes fall within the scope of Ind AS 12, and how is “income tax” defined under this standard?

B. Temporary Differences & Tax Bases

Q3: What is a temporary difference under Ind AS 12?

Q4: How is the tax base of an asset or liability determined in practice?

Q5: Why are certain transactions excluded from deferred tax recognition on initial recognition?

C. Recognition & Measurement of Deferred Tax

Q6: How are deferred tax assets and liabilities measured under Ind AS 12?

Q7: Why are deferred tax balances not discounted even if they are expected to reverse in the distant future?

Q8: Under what conditions should deferred tax assets be recognized, especially for unused tax losses?

D. Presentation & Classification

Q9: How are current tax assets and liabilities presented in the financial statements?

Q10: Where are deferred tax assets and liabilities classified in the balance sheet?

Q11: How are deferred tax effects arising from items recognized in OCI or equity presented?

E. Allocation of Tax Expense/Credit

Q12: How is the tax effect of transactions allocated between P&L, OCI, and equity?

Q13: How should deferred tax be presented for discontinued operations or business combinations?

F. Business Combinations & Complex Transactions

Q14: How is deferred tax on intangible assets arising from a business combination treated?

Q15: What are the key considerations when accounting for deferred tax on compound financial instruments?

G. Real-World Scenarios & Special Situations

Q16: Should deferred tax be recognized on capitalized foreign exchange differences in PPE?

Q17: How are DTAs evaluated in situations involving uncertainty or limited future taxable income?

H. Disclosures & Reconciliations

Q18: What are the key disclosure requirements for current and deferred taxes?

Q19: How should a reconciliation between accounting profit and tax expense be presented?

I. Ethical Judgments & Risk Considerations

Q21: How would you respond if management proposes recognizing a DTA without sufficient justification?

J. Applied Case-Based Challenges

Q23: How would you calculate deferred tax based on given temporary differences and tax rates?

Q24: How should a change in tax rate during the year be reflected in deferred tax accounting?

Q25: If a prior year error impacts deferred tax, how should the correction and disclosure be handled?