A Ltd. prepares financial statements to 31 March each year. The rate of income tax applicable to A Ltd. is 20%. The following information relates to…

CA Final · Financial Reporting · RTP · November 2026
A Ltd. prepares financial statements to 31 March each year. The rate of income tax applicable to A Ltd. is 20%. The following information relates to transactions, assets, and liabilities of A Ltd. during the year ended 31 March 20X2 (i) A Ltd. has a 40% shareholding in L Ltd. A Ltd. purchased this shareholding for ₹ 45 million. The shareholding gives A Ltd. significant influence over L Ltd. but not control and therefore A Ltd. accounts for its interest in L Ltd. using the equity method. The equity method carrying value of A Ltd.'s investment in L Ltd. was ₹ 70 million on 31 March 20X1 and ₹ 75 million on 31 March 20X2. In the tax jurisdiction in which A Ltd. operates, profits recognised under the equity method are taxed if and when they are distributed as a dividend or the relevant investment is disposed of. (ii) A Ltd. measures its head office property using the revaluation model. The property is revalued every year on 31 March. On 31 March 20X1, the carrying value of the property (after revaluation) was ₹ 40 million and its tax base was ₹ 22 million. During the year ended 31 March 20X2, A Ltd. charged depreciation in its statement of profit or loss of ₹ 2 million and claimed a tax deduction for tax depreciation of ₹ 1.25 million. On 31 March 20X2, the property was revalued to ₹ 45 million. In the tax jurisdiction in which A Ltd. operates, revaluation of property, plant and equipment does not affect taxable income at the time of revaluation. There are no other temporary differences other than those indicated above. Compute: The deferred tax liability of A Ltd. at 31 March 20X2. The charge or credit to both profit or loss and other comprehensive income relating to deferred tax for the year ended 31 March 20X2. Include brief explanations to support your computations.

Suggested Answer and Working Notes:

Deferred tax liability @ 20% as at 31 March, 20X2 Component Explanation/working ₹ in million Investment in L Ltd. Carrying value is ₹ 75 million. Tax base is ₹ 45 million. Taxable temporary difference is ₹ 30 million. (20% × {₹ 75 million – ₹ 45 million}) 6.00 Head office property Carrying value is ₹ 45 million. Tax base is ₹ 20.75 million 4.85 Total 10.85 * ₹ 22 million – ₹ 1.25 million = ₹ 20.75 million. Deferred tax charge/(credit) to profit or loss for the year ended 31 March, 20X2 Component Explanation/working ₹ in million Investment in L Ltd. Opening deferred tax liability is ₹ 5 million (20% × {₹ 70 million – ₹ 45 million}). Share of profits under the equity method is recognised in profit or loss. Tax charge is the difference between the closing and opening liability. 1.00 Head office property Refer Working Note (0.15) Total 0.85 Deferred tax charge/(credit) to other comprehensive income for the year ended 31 March 20X2 Component Explanation/working ₹ in million Head office property Refer Working Note 1.40 Working Note: Computation of deferred tax on property revaluation: The deferred tax liability at 31 March 20X1 is ₹ 3.6 million (20% of {₹ 40 million - ₹ 22 million}). At 31 March 20X2, prior to revaluation, the carrying amount of the property is ₹ 38 million and its tax base is ₹ 20.75 million (₹ 22 million - ₹ 1.25 million). The deferred tax liability at this point is ₹ 3.45 million (20% x {₹ 38 million - ₹ 20.75 million}). The reduction in this liability is ₹ 0.15 million (₹ 3.6 million - ₹ 3.45 million). This would be credited to income tax expense in arriving at profit or loss. Following revaluation, the carrying value becomes ₹ 45 million and the tax base stays the same. So, the new deferred tax liability is ₹ 4.85 million [20% x (₹ 45 million - ₹ 20.75 million)]. The increase in the deferred tax liability of ₹ 1.4 million (₹ 4.85 million - ₹ 3.45 million) is debited to other comprehensive income.

Topics: Ind AS 12

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