P Ltd., a manufacturing company, prepares consolidated financial statements to 31 st March each year. During the year ended 31 st March, 20X2, the…

CA Final · Financial Reporting · MTP · May 2024
P Ltd., a manufacturing company, prepares consolidated financial statements to 31 st March each year. During the year ended 31 st March, 20X2, the following events affected the tax position of the group: Q Ltd., a wholly owned subsidiary of P Ltd., incurred a loss adjusted for tax purposes of 10,00,000. Q Ltd. is unable to utilise this loss against previous tax liabilities. Income-tax Act does not allow Q Ltd. to transfer the tax loss to other group companies. However, it allows Q Ltd. to carry the loss forward and utilise it against company's future taxable profits. The directors of P Ltd. do not consider that Q Ltd. will make taxable profits in the foreseeable future.During the year ended 31 st March, 20X2, P Ltd. capitalised development costs which satisfied the criteria as per Ind AS 38 'Intangible Assets'. The total amount capitalised was - 20,00,000. The development project began to generate economic benefits for P Ltd. from 1 st January, 20X2. The directors of P Ltd. estimated that the project would generate economic benefits for five years from that date. The development expenditure was fully deductible against taxable profits for the year ended 31 st March, 20X2.On 1 st April, 20X1, P Ltd. borrowed - 1,00,00,000. The cost to P Ltd. of arranging the borrowing was - 2,00,000 and this cost qualified for a tax deduction on 1 st April 20X1. The loan was for a three-year period. No interest was payable on the loan but the amount repayable on 31 st March 20X4 will be - 1,30,43,800. This equates to an effective annual interest rate of 10%. As per the Income-tax Act, a further tax deduction of 30,43,800 will be claimable when the loan is repaid on 31 st March, 20X4. Explain and show how each of these events would affect the deferred tax assets / liabilities in the consolidated balance sheet of P Ltd. group at 31 st March, 20X2 as per Ind AS. The rate of corporate income tax is 30%.

Suggested Answer and Working Notes:

Impact on consolidated balance sheet of P Ltd. group at 31 st March, 20X2 The tax loss creates a potential deferred tax asset for the P Ltd. group since its carrying value is nil and its tax base is 10,00,000. However, no deferred tax asset can be recognised because there is no prospect of being able to reduce tax liabilities in the foreseeable future as no taxable profits are anticipated.The development costs have a carrying value of 19,00,000 (₹ 20,00,000 – (₹ 20,00,000 x 1/5 x 3/12)). The tax base of the development costs is nil since the relevant tax deduction has already been claimed. The deferred tax liability will be - 5,70,000 (₹ 19,00,000 x 30%). All deferred tax liabilities are shown as non-current.The carrying value of the loan at 31 st March, 20X2 is 1,07,80,000 (₹ 1,00,00,000 +200,000 + (₹ 98,00,000 x 10%)). The tax base of the loan is 1,00,00,000. This creates a deductible temporary difference of 7,80,000 and a potential deferred tax asset of 2,34,000 (₹ 7,80,000 x 30%).

Topics: Ind AS 12

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