Question 1

What is the objective of Ind AS 12 in financial reporting?

Accepted Answer

The objective of Ind AS 12 is to prescribe the accounting treatment for income taxes, including the recognition of deferred tax assets and liabilities. It aims to ensure that the financial statements reflect the current and future tax consequences of transactions and events recognized in the financial statements.

Question 2

Define deferred tax asset (DTA) and deferred tax liability (DTL) under Ind AS 12.

Accepted Answer

A deferred tax asset (DTA) represents taxes recoverable in future periods due to deductible temporary differences, while a deferred tax liability (DTL) reflects taxes payable in future periods due to taxable temporary differences. Under Ind AS 12, these items are crucial for understanding tax effects on profit and loss.

Question 3

How is the tax base of an asset or liability determined, and why is it important?

Accepted Answer

The tax base of an asset or liability is determined by the amount that will be deductible or taxable for tax purposes in the future. It's important because it affects the calculation of deferred tax assets and liabilities, which can significantly impact financial statements and tax planning strategies.

Question 4

What are temporary differences, and how do they give rise to DTAs or DTLs?

Accepted Answer

Temporary differences arise when there are discrepancies between the accounting income and taxable income due to timing differences in recognizing income or expenses, leading to the creation of DTAs for future tax benefits and DTLs for future tax obligations.

Question 5

Why are deferred tax items not discounted under Ind AS 12?

Accepted Answer

Under Ind AS 12, deferred tax items are not discounted because they are based on the timing differences between tax and accounting treatments that will reverse in the future, and the measurement is done at nominal value to reflect the tax effects on the financial statements as they are recognized.

Question 6

How do you recognize a DTA for unused tax losses or credits?

Accepted Answer

To recognize a DTA for unused tax losses or credits, you must assess the likelihood of realizing these benefits against future taxable income. If it is probable that sufficient taxable income will be available in the future, you can recognize the DTA. Additionally, consider any necessary valuation allowances to reduce the DTA to the amount expected to be realized.

Question 7

What role does “probable future taxable profit” play in recognizing DTAs?

Accepted Answer

Probable future taxable profit is crucial for recognizing deferred tax assets (DTAs) as it determines whether there will be sufficient taxable income to utilize the tax benefits. DTAs can only be recognized to the extent that it is probable that future taxable profits will be available.

Question 8

When and why are certain temporary differences exempt from deferred tax recognition (e.g., initial recognition of goodwill)?

Accepted Answer

Certain temporary differences are exempt from deferred tax recognition when they arise from initial recognition of assets or liabilities, such as goodwill. This exemption is in place to prevent the immediate recognition of tax effects that do not impact cash flows at the time of transaction.

Question 9

How is deferred tax measured under Ind AS 12?

Accepted Answer

Deferred tax is measured under Ind AS 12 by recognizing temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. The measurement is based on the tax rates expected to apply when the asset is realized or the liability is settled, reflecting future tax consequences.

Question 10

Should deferred taxes be recognized on fair value adjustments? Why or why not?

Accepted Answer

Yes, deferred taxes should be recognized on fair value adjustments because these adjustments can create temporary differences between the book value and tax basis. Recognizing deferred tax ensures that the tax effects of these differences are reflected in the financial statements, aligning with the matching principle.

Question 11

How are current tax assets and liabilities presented and offset in the statement of financial position?

Accepted Answer

Current tax assets and liabilities are presented in the statement of financial position as separate line items. They can be offset against each other if they relate to the same taxing authority and the entity has a legally enforceable right to set off the recognized amounts.

Question 12

Where are deferred tax assets and liabilities classified in the financial statements?

Accepted Answer

Deferred tax assets and liabilities are classified on the balance sheet. Generally, they are presented as non-current items, unless they are expected to be realized or settled within the operating cycle, in which case they may be classified as current. Proper classification is crucial as it impacts the overall financial position and performance metrics of the company.

Question 13

How are deductible and taxable temporary differences treated from a presentation standpoint?

Accepted Answer

Deductible and taxable temporary differences are presented in financial statements as deferred tax assets and liabilities, respectively. Deductible temporary differences arise when expenses are recognized for accounting purposes before they are deducted for tax purposes, while taxable temporary differences occur when income is taxed before it is recognized in financial statements. Proper presentation ensures that users of the financial statements can assess the future tax implications of current transactions.

Question 14

When a deferred tax arises from an item directly recognized in OCI (e.g., revaluation reserve), how should it be presented?

Accepted Answer

Deferred tax arising from items recognized in Other Comprehensive Income (OCI) should be presented in the OCI section of the statement of comprehensive income. This ensures that the tax effect is appropriately reflected alongside the related income or expense, maintaining transparency in the financial statements.

Question 15

How should deferred tax be accounted for when recognized directly in equity (e.g., share issue costs)?

Accepted Answer

Deferred tax recognized directly in equity should be accounted for in accordance with the applicable accounting standards, such as IAS 12. This involves recognizing the deferred tax in other comprehensive income or directly in equity, ensuring that it reflects the tax effect of transactions that are also recorded in equity.

Question 16

How do doubtful or uncertain tax positions alter tax accounting under Ind AS 12?

Accepted Answer

Under Ind AS 12, doubtful or uncertain tax positions require recognition of a liability for expected tax outflows. Companies must assess the likelihood of the tax authority accepting the position and recognize the tax benefit only if it is probable. This involves careful evaluation and documentation to support the position taken.

Question 17

When deferred tax is based on uncertain tax positions, what judgement is required?

Accepted Answer

When dealing with deferred tax based on uncertain tax positions, significant judgement is required to assess the likelihood of an uncertain tax position being sustained upon examination by tax authorities. This involves evaluating the technical merits of the position, potential outcomes, and the impact on financial reporting, ensuring compliance with relevant accounting standards.

Question 18

How should contingent tax liabilities or possible tax penalties be disclosed or accounted?

Accepted Answer

Contingent tax liabilities should be disclosed in the financial statements when it is probable that a liability has been incurred and the amount can be reasonably estimated. According to IAS 37, if the likelihood of an outflow of resources is low, no provision is recognized, but disclosure is still required. Proper accounting treatment ensures that stakeholders are informed of potential risks and obligations, aligning with principles of transparency and accountability.

Question 19

What documentation should support uncertain tax positions for audit purposes?

Accepted Answer

Documentation for uncertain tax positions should include detailed analyses of the tax positions taken, relevant laws and regulations, and any correspondence with tax authorities. Supporting evidence, such as calculations and rationale for the positions, must also be maintained to demonstrate the reasonableness of the estimates in the event of an audit. This ensures compliance and mitigates the risk of penalties.

Question 20

How often should an entity reassess the probability of uncertain tax events reversing or crystallizing?

Accepted Answer

An entity should reassess the probability of uncertain tax events at least annually or whenever there are significant changes in tax laws or regulations, as these can impact the likelihood of reversal and the financial implications for the entity.

Question 21

In a business combination, how are deferred taxes on intangible assets measured?

Accepted Answer

Deferred taxes on intangible assets in a business combination are measured based on the temporary differences between the carrying amount of the intangible assets and their tax bases. This involves applying the applicable tax rate to the difference, considering any valuation allowances for deferred tax assets.

Question 22

How are deferred taxes treated for goodwill acquired in a business combination?

Accepted Answer

Deferred taxes associated with goodwill acquired in a business combination are typically recognized on the balance sheet, as they represent future tax consequences of temporary differences. Goodwill impairment testing must also consider these deferred taxes to ensure compliance with accounting standards.

Question 23

How does Ind AS 12 interact with Ind AS 116 when accounting for deferred tax on right-of-use assets?

Accepted Answer

Ind AS 12 requires recognition of deferred tax on temporary differences arising from the right-of-use assets recognized under Ind AS 116. The tax base of these assets may differ from their carrying amount, leading to deferred tax assets or liabilities based on the expected tax consequences of future deductions or payments.

Question 24

How are deferred taxes handled for consolidation eliminations or equity‑accounted associates?

Accepted Answer

Deferred taxes for consolidation eliminations are recognized to reflect the tax effects of temporary differences arising from the consolidation process, ensuring that the financial statements accurately represent the tax position of the consolidated entity.

Question 25

How should deductible temporary differences arising from share‑based payments under Ind AS 102 be recognized in deferred taxes?

Accepted Answer

Deductible temporary differences arising from share-based payments under Ind AS 102 should be recognized as deferred tax assets, reflecting the tax benefit expected to be realized in the future when the expense is deducted for tax purposes, thereby reducing future taxable income.

Question 26

When should a DTA or DTL be remeasured?

Accepted Answer

A DTA or DTL should be remeasured when there is a change in tax rates or laws that impacts the future tax consequences of the temporary differences. This ensures that the financial statements reflect the current tax position accurately.

Question 27

How do you account for changes in enacted tax rates on deferred taxes?

Accepted Answer

Changes in enacted tax rates require adjustments to deferred tax assets and liabilities to reflect the new rates. This adjustment impacts the income tax expense in the income statement, ensuring that the tax effects are accurately represented in the financial statements.

Question 28

How are deferred tax balances affected by assets held for sale or discontinued operations?

Accepted Answer

Deferred tax balances are affected by assets held for sale or discontinued operations as these assets may trigger recognition of deferred tax liabilities or assets, impacting the overall financial statements. When such assets are sold, it can lead to taxable gains or losses, influencing future tax liabilities.

Question 29

Can deferred tax assets once recognized be reversed? Under what circumstances?

Accepted Answer

Yes, deferred tax assets can be reversed if the company no longer expects to generate sufficient taxable income in the future to utilize them, often due to changes in profitability forecasts or tax laws that affect the realization of these assets.

Question 30

How do you implement retrospective restatements if prior periods' tax balances change due to reassessment?

Accepted Answer

To implement retrospective restatements due to changes in prior periods' tax balances from reassessment, I first analyze the nature and impact of the reassessment on financial statements. I then prepare the necessary adjustments to the prior period's tax accounts, ensuring that all affected financial statements are restated in accordance with relevant accounting standards. Finally, I communicate these changes to stakeholders and adjust disclosures to maintain transparency.

Question 31

What disclosures are required in the notes for deferred tax amounts?

Accepted Answer

Disclosures for deferred tax amounts typically include the components of deferred tax assets and liabilities, the nature of the temporary differences, and any valuation allowances. Additionally, it is important to disclose the tax rates used and any changes in tax laws that may affect these amounts.

Question 32

What details are needed regarding deductible temporary differences not recognized?

Accepted Answer

Details needed include the nature of the deductible temporary differences, the timing of reversals, and the likelihood of realizing the deferred tax asset. It's crucial to assess whether there is sufficient taxable income expected to utilize these differences.

Question 33

How should entities reconcile accounting profit to tax expense?

Accepted Answer

Entities reconcile accounting profit to tax expense by adjusting for temporary and permanent differences. Temporary differences, such as depreciation methods, affect the timing of tax payments, while permanent differences, like certain non-deductible expenses, affect the overall taxable income. The reconciliation typically involves starting with the accounting profit, adjusting for these differences, and arriving at the taxable income, which is then multiplied by the applicable tax rate to determine the tax expense.

Question 34

What disclosures are required when deferred taxes are recognized in OCI?

Accepted Answer

When deferred taxes are recognized in OCI, disclosures should include the nature and amount of the deferred tax, the components of OCI that have given rise to the deferred tax, and any changes in the deferred tax asset or liability during the period. This ensures transparency and provides users of the financial statements with a clear understanding of the impact of deferred taxes on comprehensive income.

Question 35

How and when should entities disclose deferred tax implications of business combinations or transitions to new tax regimes?

Accepted Answer

Entities should disclose deferred tax implications of business combinations or transitions to new tax regimes in their financial statements at the time of the transaction or change. This disclosure should include the impact on the financial position and performance, detailing how the deferred tax assets and liabilities will be recognized and measured. Compliance with relevant accounting standards, such as IFRS or GAAP, is crucial, ensuring that all material aspects are communicated transparently to stakeholders.

Question 36

A tax loss arises in one jurisdiction—how do you assess whether to recognize a DTA in the financial statements?

Accepted Answer

To assess whether to recognize a deferred tax asset when a tax loss arises, I evaluate the likelihood of future taxable income in that jurisdiction. If there is sufficient evidence, such as historical profitability or credible forecasts, I would recognize the DTA. If not, I would apply a valuation allowance to reduce the DTA to the amount that is more likely than not to be realized.

Question 37

How do you handle deferred tax when an asset is impaired (e.g., PPE impairment under Ind AS 36)?

Accepted Answer

When an asset is impaired, the carrying amount is reduced, which may create a deferred tax liability if the tax base remains unchanged. Under Ind AS 36, I would assess the temporary differences caused by the impairment and adjust the deferred tax accordingly, ensuring compliance with the accounting standards while accurately reflecting the tax implications.

Question 38

A deferred tax liability is created by unrealized foreign exchange gains—how is it measured and reversed?

Accepted Answer

A deferred tax liability from unrealized foreign exchange gains is measured based on the tax rate applicable at the time of realization. It is reversed when the gains are realized, typically when the foreign currency is converted back to the functional currency, and the tax effect is recognized in the profit and loss statement.

Question 39

How should deferred tax be treated on temporary differences due to investments in subsidiaries when dividends are planned?

Accepted Answer

Deferred tax on temporary differences arising from investments in subsidiaries should be recognized based on the expected tax consequences of the dividends. If dividends are planned, I would assess the likelihood of their declaration and the applicable tax rate. It’s crucial to account for any withholding taxes that may apply, as these can affect cash flow. The deferred tax asset or liability should be adjusted accordingly to reflect the tax impact when the dividends are distributed, ensuring that the financial statements accurately represent the tax position.

Question 40

A deferred tax becomes material after recognizing an extraordinary gain—what steps do you take?

Accepted Answer

I would first assess the materiality of the deferred tax by reviewing the magnitude of the extraordinary gain and its effect on the overall financial position. Next, I would evaluate how this deferred tax impacts the financial statements, ensuring it is accurately reflected in the income statement and balance sheet. Finally, I would ensure compliance with relevant accounting standards, such as IAS 12, to determine appropriate disclosures.

Question 41

How do you account for deferred taxes when multiple tax jurisdictions impose different rates on the same temporary difference?

Accepted Answer

When accounting for deferred taxes across multiple jurisdictions with varying rates, you calculate the deferred tax asset or liability based on the enacted tax rate applicable to each jurisdiction. This involves recognizing the temporary differences and applying the appropriate tax rates to ensure accurate financial reporting.

Question 42

When tax rates differ in parent vs subsidiary jurisdictions, which tax rate is used for deferred tax?

Accepted Answer

In cases where tax rates differ between parent and subsidiary jurisdictions, the tax rate used for deferred tax is typically the rate applicable to the jurisdiction where the subsidiary operates. This ensures that deferred tax assets and liabilities reflect the expected tax consequences of future taxable income in that jurisdiction.

Question 43

How do deferred taxes on intercompany dividends deferred in capital appear on consolidation?

Accepted Answer

Deferred taxes on intercompany dividends deferred in capital typically appear as a separate line item under equity in the consolidated balance sheet. They reflect the tax implications of unrealized profits that are not recognized in the profit or loss until realized upon distribution.

Question 44

How are deferred tax assets in one jurisdiction treated against deferred tax liabilities in another?

Accepted Answer

Deferred tax assets in one jurisdiction can typically be offset against deferred tax liabilities in another jurisdiction, provided there is a legal right to offset and the taxes relate to the same taxable entity. This requires careful consideration of the tax laws applicable in both jurisdictions.

Question 45

In a hybrid legal structure, how do you determine DTA recognition for group losses under each jurisdiction?

Accepted Answer

To determine DTA recognition for group losses in a hybrid legal structure, I would assess the tax regulations of each jurisdiction to identify the ability to offset losses against future taxable income. It's crucial to evaluate the likelihood of future profitability in each jurisdiction and ensure compliance with local tax laws regarding loss carryforwards.

Question 46

What internal controls are vital for ensuring the accuracy of deferred tax accounting?

Accepted Answer

Vital internal controls for deferred tax accounting include regular reconciliation processes to ensure that tax assets and liabilities are accurately reflected. Documentation of tax positions taken is essential for transparency and compliance, while review and approval procedures help mitigate errors and ensure accuracy in reporting.

Question 47

How should companies document their probability assessments for recognizing DTAs?

Accepted Answer

Companies should document their probability assessments for recognizing Deferred Tax Assets (DTAs) by outlining the methodologies used to evaluate the likelihood of future taxable income, including historical data analysis, management forecasts, and tax planning strategies. This documentation must be detailed enough to support the recognition of DTAs under relevant accounting standards and should be regularly updated to reflect changes in business conditions.

Question 48

What role does audit committee or tax authority engagement play in evaluating deferred taxes and uncertain tax positions?

Accepted Answer

Audit committee engagement ensures that deferred taxes and uncertain tax positions are evaluated rigorously, promoting transparency and compliance with accounting standards. It helps in identifying potential risks and ensuring that adequate provisions are made, thereby protecting the organization from future liabilities.

Question 49

How do you address past tax assessments where deferred tax balances differ from filed returns?

Accepted Answer

To address past tax assessments with differing deferred tax balances, I would first review the assessments for discrepancies, then adjust the deferred tax balances accordingly, and if needed, consult with tax advisors to ensure compliance and accuracy in financial reporting.

Question 50

What is the impact of deferred tax policy decisions on key financial ratios and investor expectations?

Accepted Answer

Deferred tax policy decisions can significantly affect key financial ratios such as return on equity and debt-to-equity. When deferred tax assets are recognized, it may enhance earnings, leading to improved investor expectations. Conversely, changes in deferred tax liabilities can signal potential future tax obligations, affecting investor confidence.

Tax Accounting under Ind AS 12 – Advance Interview Q&A

A. Foundations & Key Concepts

Q1: What is the objective of Ind AS 12 in financial reporting?

Q2: Define deferred tax asset (DTA) and deferred tax liability (DTL) under Ind AS 12.

Q3: How is the tax base of an asset or liability determined, and why is it important?

Q4: What are temporary differences, and how do they give rise to DTAs or DTLs?

Q5: Why are deferred tax items not discounted under Ind AS 12?

B. Recognition & Measurement

Q6: How do you recognize a DTA for unused tax losses or credits?

Q7: What role does “probable future taxable profit” play in recognizing DTAs?

Q8: When and why are certain temporary differences exempt from deferred tax recognition (e.g., initial recognition of goodwill)?

Q9: How is deferred tax measured under Ind AS 12?

Q10: Should deferred taxes be recognized on fair value adjustments? Why or why not?

C. Current vs Deferred Tax Presentation

Q11: How are current tax assets and liabilities presented and offset in the statement of financial position?

Q12: Where are deferred tax assets and liabilities classified in the financial statements?

Q13: How are deductible and taxable temporary differences treated from a presentation standpoint?

Q14: When a deferred tax arises from an item directly recognized in OCI (e.g., revaluation reserve), how should it be presented?

Q15: How should deferred tax be accounted for when recognized directly in equity (e.g., share issue costs)?

D. Uncertain Tax Positions & Risk Areas

Q16: How do doubtful or uncertain tax positions alter tax accounting under Ind AS 12?

Q17: When deferred tax is based on uncertain tax positions, what judgement is required?

Q18: How should contingent tax liabilities or possible tax penalties be disclosed or accounted?

Q19: What documentation should support uncertain tax positions for audit purposes?

Q20: How often should an entity reassess the probability of uncertain tax events reversing or crystallizing?

E. Business Combinations & Complex Interactions

Q21: In a business combination, how are deferred taxes on intangible assets measured?

Q22: How are deferred taxes treated for goodwill acquired in a business combination?

Q23: How does Ind AS 12 interact with Ind AS 116 when accounting for deferred tax on right-of-use assets?

Q24: How are deferred taxes handled for consolidation eliminations or equity‑accounted associates?

Q25: How should deductible temporary differences arising from share‑based payments under Ind AS 102 be recognized in deferred taxes?

F. Measurement Changes & Reversals

Q26: When should a DTA or DTL be remeasured?

Q27: How do you account for changes in enacted tax rates on deferred taxes?

Q28: How are deferred tax balances affected by assets held for sale or discontinued operations?

Q29: Can deferred tax assets once recognized be reversed? Under what circumstances?

Q30: How do you implement retrospective restatements if prior periods' tax balances change due to reassessment?

G. Disclosures & Transparency

Q31: What disclosures are required in the notes for deferred tax amounts?

Q32: What details are needed regarding deductible temporary differences not recognized?

Q33: How should entities reconcile accounting profit to tax expense?

Q34: What disclosures are required when deferred taxes are recognized in OCI?

Q35: How and when should entities disclose deferred tax implications of business combinations or transitions to new tax regimes?

H. Applied Scenarios & Judgement

Q36: A tax loss arises in one jurisdiction—how do you assess whether to recognize a DTA in the financial statements?

Q37: How do you handle deferred tax when an asset is impaired (e.g., PPE impairment under Ind AS 36)?

Q38: A deferred tax liability is created by unrealized foreign exchange gains—how is it measured and reversed?

Q39: How should deferred tax be treated on temporary differences due to investments in subsidiaries when dividends are planned?

Q40: A deferred tax becomes material after recognizing an extraordinary gain—what steps do you take?

I. Multi‑Jurisdiction Tax Complexities

Q41: How do you account for deferred taxes when multiple tax jurisdictions impose different rates on the same temporary difference?

Q42: When tax rates differ in parent vs subsidiary jurisdictions, which tax rate is used for deferred tax?

Q43: How do deferred taxes on intercompany dividends deferred in capital appear on consolidation?

Q44: How are deferred tax assets in one jurisdiction treated against deferred tax liabilities in another?

Q45: In a hybrid legal structure, how do you determine DTA recognition for group losses under each jurisdiction?

J. Governance & Policy Controls

Q46: What internal controls are vital for ensuring the accuracy of deferred tax accounting?

Q47: How should companies document their probability assessments for recognizing DTAs?

Q48: What role does audit committee or tax authority engagement play in evaluating deferred taxes and uncertain tax positions?

Q49: How do you address past tax assessments where deferred tax balances differ from filed returns?

Q50: What is the impact of deferred tax policy decisions on key financial ratios and investor expectations?