Sri Lanka Accounting Standard–LKAS 12

Income Taxes
LKAS 12

CONTENTS
paragraphs

SRI LANKA ACCOUNTING STANDARD-LKAS 12

INCOME TAXES
OBJECTIVE
SCOPE 1–4
DEFINITIONS 5–11
Tax base 7–11
RECOGNITION OF CURRENT TAX LIABILITIES AND
CURRENT TAX ASSETS 12–14
RECOGNITION OF DEFERRED TAX LIABILITIES AND
DEFERRED TAX ASSETS 15–45
Taxable temporary differences 15–23
Business combinations 19
Assets carried at fair value 20
Goodwill 21–21B
Initial recognition of an asset or liability 22–23
Deductible temporary differences 24–33
Goodwill 32A
Initial recognition of an asset or liability 33
Unused tax losses and unused tax credits 34–36
Reassessment of unrecognised deferred tax assets 37
Investments in subsidiaries, branches and associates and
interests in joint ventures 38–45
MEASUREMENT 46–56
RECOGNITION OF CURRENT AND DEFERRED TAX 57–68C
Items recognised in profit or loss 58–60
Items recognised outside profit or loss 61A–65A
Deferred tax arising from a business combination 66–68

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Current and deferred tax arising from share-based

payment transactions 68A–68C
PRESENTATION 71–78
Tax assets and tax liabilities 71–76
Offset 71–76
Tax expense 77–78
Tax expense (income) related to profit or loss from ordinary
activities 77
Exchange differences on deferred foreign tax liabilities or
assets 78
DISCLOSURE 79–88
EFFECTIVE DATE 89
APPENDICES
A Examples of temporary differences
B Illustrative computations and presentation

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Sri Lanka Accounting Standard-LKAS 12

Income Taxes
Sri Lanka Accounting Standard LKAS 12 Income Taxes is set out in paragraphs
1–89. All the paragraphs have equal authority. LKAS 12 should be read in the
context of its objective, the Preface to Sri Lanka Accounting Standards and the
Framework for the Preparation and Presentation of Financial Statements.
LKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
provides a basis for selecting and applying accounting policies in the absence of
explicit guidance.

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 recognised in an entity’s statement of
financial position; and

(b) transactions and other events of the current period that are
recognised in an entity’s financial statements.

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 recognise a deferred tax liability
(deferred tax asset), with certain limited exceptions.

This Standard requires an entity to account for the tax consequences of

transactions and other events in the same way that it accounts for the
transactions and other events themselves. Thus, for transactions and
other events recognised in profit or loss, any related tax effects are also
recognised in profit or loss. For transactions and other events
recognised outside profit or loss (either in other comprehensive income
or directly in equity), any related tax effects are also recognised outside
profit or loss (either in other comprehensive income or directly in
equity, respectively). Similarly, the recognition of deferred tax assets
and liabilities in a business combination affects the amount of goodwill

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arising in that business combination or the amount of the bargain

purchase gain recognised.

This Standard also deals with the recognition of deferred tax assets
arising from unused tax losses or unused tax credits, the presentation of
income taxes in the financial statements and the disclosure of
information relating to income taxes.

Scope
1 This Standard shall be applied in accounting for income taxes.

2 For the purposes of this Standard, 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.

3 [Deleted]

4 This Standard does not deal with the methods of accounting for
government grants (see LKAS 20 Accounting for Government Grants
and Disclosure of Government Assistance) 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
5 The following terms are used in this Standard with the meanings
specified:

Accounting profit is profit or loss for a period before deducting tax

expense.

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.

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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 carryforward of unused tax losses; and

(c) the carryforward of unused tax credits.

Temporary differences are differences between the carrying amount

of an asset or liability in the statement of financial position 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 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.

6 Tax expense (tax income) comprises current tax expense (current tax
income) and deferred tax expense (deferred tax income).

Tax base
7 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.

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Examples
1 A machine cost 100. For tax purposes, depreciation of 30 has
already been deducted in the current and prior periods and the
remaining cost will be deductible in future periods, either as
depreciation or through a deduction on disposal. Revenue
generated by using the machine is taxable, any gain on disposal
of the machine will be taxable and any loss on disposal will be
deductible for tax purposes. The tax base of the machine is 70.
2 Interest receivable has a carrying amount of 100. The related
interest revenue will be taxed on a cash basis. The tax base of the
interest receivable is nil.
3 Trade receivables have a carrying amount of 100. The related
revenue has already been included in taxable profit (tax loss).
The tax base of the trade receivables is 100.
4 Dividends receivable from a subsidiary have a carrying amount
of 100. The dividends are not taxable. In substance, the entire
carrying amount of the asset is deductible against the economic
benefits. Consequently, the tax base of the dividends receivable
is 100.(a)
5 A loan receivable has a carrying amount of 100. The repayment
of the loan will have no tax consequences. The tax base of the
loan is 100.
(a) Under this analysis, there is no taxable temporary difference. An alternative
analysis is that the accrued dividends receivable have a tax base of nil and
that a tax rate of nil is applied to the resulting taxable temporary difference
of 100. Under both analyses, there is no deferred tax liability.

8 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.

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Examples
1 Current liabilities include accrued expenses with a carrying
amount of 100. The related expense will be deducted for tax
purposes on a cash basis. The tax base of the accrued expenses is
nil.
2 Current liabilities include interest revenue received in advance,
with a carrying amount of 100. The related interest revenue was
taxed on a cash basis. The tax base of the interest received in
advance is nil.
3 Current liabilities include accrued expenses with a carrying
amount of 100. The related expense has already been deducted
for tax purposes. The tax base of the accrued expenses is 100.
4 Current liabilities include accrued fines and penalties with a
carrying amount of 100. Fines and penalties are not deductible
for tax purposes. The tax base of the accrued fines and penalties
is 100.(a)
5 A loan payable has a carrying amount of 100. The repayment of
the loan will have no tax consequences. The tax base of the loan
is 100.
(a) Under this analysis, there is no deductible temporary difference. An
alternative analysis is that the accrued fines and penalties payable have a tax
base of nil and that a tax rate of nil is applied to the resulting deductible
temporary difference of 100. Under both analyses, there is no deferred tax
asset.

9 Some items have a tax base but are not recognised as assets and
liabilities in the statement of financial position. For example, research
costs are recognised 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.
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 amount of nil is a deductible temporary
difference that results in a deferred tax asset.

10 Where the tax base of an asset or liability is not immediately apparent,

it is helpful to consider the fundamental principle upon which this
Standard is based: that an entity shall, with certain limited exceptions,
recognise a deferred tax liability (asset) whenever recovery or
settlement of the carrying amount of an asset or liability would make
future tax payments larger (smaller) than they would be if such

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recovery or settlement were to have no tax consequences. Example C

following paragraph 52 illustrates circumstances when it may be
helpful to consider this fundamental principle, for example, when the
tax base of an asset or liability depends on the expected manner of
recovery or settlement.

11 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
12 Current tax for current and prior periods shall, to the extent
unpaid, be recognised 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 recognised as an asset.

13 The benefit relating to a tax loss that can be carried back to recover
current tax of a previous period shall be recognised as an asset.

14 When a tax loss is used to recover current tax of a previous period, an

entity recognises the benefit as an asset in the period in which the tax
loss occurs because it is probable that the benefit will flow to the entity
and the benefit can be reliably measured.

Recognition of deferred tax liabilities and deferred

tax assets
Taxable temporary differences
15 A deferred tax liability shall be recognised for all taxable
temporary differences, except to the extent that the deferred tax
liability arises from:

(a) the initial recognition of goodwill; or

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(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 recognised in
accordance with paragraph 39.

16 It is inherent in the recognition of an asset that its carrying amount will

be recovered in the form of economic benefits that flow to the entity in
future periods. When the carrying amount of the asset exceeds its tax
base, the amount of taxable economic benefits will exceed the amount
that will be allowed as a deduction for tax purposes. This difference is a
taxable temporary difference and the obligation to pay the resulting
income taxes in future periods is a deferred tax liability. As the entity
recovers the carrying amount of the asset, the taxable temporary
difference will reverse and the entity will have taxable profit. This
makes it probable that economic benefits will flow from the entity in
the form of tax payments. Therefore, this Standard requires the
recognition of all deferred tax liabilities, except in certain
circumstances described in paragraphs 15 and 39.

Examples
An asset which cost 150 has a carrying amount of 100. Cumulative
depreciation for tax purposes is 90 and the tax rate is 25%.

The tax base of the asset is 60 (cost of 150 less cumulative tax
depreciation of 90). To recover the carrying amount of 100, the entity
must earn taxable income of 100, but will only be able to deduct tax
depreciation of 60. Consequently, the entity will pay income taxes of 10
(40 at 25%) when it recovers the carrying amount of the asset. The
difference between the carrying amount of 100 and the tax base of 60 is
a taxable temporary difference of 40. Therefore, the entity recognises a
deferred tax liability of 10 (40 at 25%) representing the income taxes
that it will pay when it recovers the carrying amount of the asset.

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17 Some temporary differences arise when income or expense is included

in accounting profit in one period but is included in taxable profit in a
different period. Such temporary differences are often described as
timing differences. The following are examples of temporary
differences of this kind which are taxable temporary differences and
which therefore result in deferred tax liabilities:

(a) interest revenue is included in accounting profit on a time

proportion basis but may, in some jurisdictions, be included in
taxable profit when cash is collected. The tax base of any
receivable recognised in the statement of financial position with
respect to such revenues is nil because the revenues do not affect
taxable profit until cash is collected;

(b) depreciation used in determining taxable profit (tax loss) may

differ from that used in determining accounting profit. The
temporary difference is the difference between the carrying
amount of the asset and its tax base which is the original cost of
the asset less all deductions in respect of that asset permitted by
the taxation authorities in determining taxable profit of the
current and prior periods. A taxable temporary difference arises,
and results in a deferred tax liability, when tax depreciation is
accelerated (if tax depreciation is less rapid than accounting
depreciation, a deductible temporary difference arises, and results
in a deferred tax asset); and

(c) development costs may be capitalised and amortised over future

periods in determining accounting profit but deducted in
determining taxable profit in the period in which they are
incurred. Such development costs have a tax base of nil as they
have already been deducted from taxable profit. The temporary
difference is the difference between the carrying amount of the
development costs and their tax base of nil.

18 Temporary differences also arise when:

(a) the identifiable assets acquired and liabilities assumed in a

business combination are recognised at their fair values in
accordance with SLFRS 3 Business Combinations, but no
equivalent adjustment is made for tax purposes (see paragraph
19);

(b) assets are revalued and no equivalent adjustment is made for tax
purposes (see paragraph 20);

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(c) goodwill arises in a business combination (see paragraph 21);

(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 (see
paragraphs 22 and 33); 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 (see paragraphs 38–45).

Business combinations

19 With limited exceptions, the identifiable assets acquired and liabilities

assumed in a business combination are recognised 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 (see paragraph 66).

Assets carried at fair value

20 SLFRSs permit or require certain assets to be carried at fair value or to

be revalued (see, for example, LKAS 16 Property, Plant and
Equipment, LKAS 38 Intangible Assets, LKAS 39 Financial
Instruments: Recognition and Measurement and LKAS 40 Investment
Property). In some jurisdictions, the revaluation or other restatement of
an asset to fair value affects taxable profit (tax loss) for the current
period. As a result, the tax base of the asset is adjusted and no
temporary difference arises. In other jurisdictions, 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. Nevertheless, the future recovery of the carrying amount
will result in a taxable flow of economic benefits to the entity and the
amount that will be deductible for tax purposes will differ from the
amount of those economic benefits. 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. This is true
even if:

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(a) the entity does not intend to dispose of the asset. In such cases,
the revalued carrying amount of the asset will be recovered
through use and this will generate taxable income which exceeds
the depreciation that will be allowable for tax purposes in future
periods; or

(b) tax on capital gains is deferred if the proceeds of the disposal of

the asset are invested in similar assets. In such cases, the tax will
ultimately become payable on sale or use of the similar assets.

Goodwill

21 Goodwill arising in a business combination is measured as the excess of

(a) over (b) below:

(a) the aggregate of:

(i) the consideration transferred measured in accordance with

SLFRS 3, which generally requires acquisition-date fair
value;

(ii) the amount of any non-controlling interest in the acquiree

recognised in accordance with SLFRS 3; and

(iii) in a business combination achieved in stages, the

acquisition-date fair value of the acquirer’s previously held
equity interest in the acquiree.

(b) the net of the acquisition-date amounts of the identifiable assets

acquired and liabilities assumed measured in accordance with
SLFRS 3.

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.

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21A Subsequent reductions in a deferred tax liability that is unrecognised

because it arises from the initial recognition of goodwill are also
regarded as arising from the initial recognition of goodwill and are
therefore not recognised under paragraph 15(a). For example, if in a
business combination an entity recognizes goodwill of Rs.100 that has a
tax base of nil, paragraph 15(a) prohibits the entity from recognising
the resulting deferred tax liability. If the entity subsequently recognises
an impairment loss of Rs.20 for that goodwill, the amount of the
taxable temporary difference relating to the goodwill is reduced from
Rs.100 to Rs.80, with a resulting decrease in the value of the
unrecognised deferred tax liability. That decrease in the value of the
unrecognised deferred tax liability is also regarded as relating to the
initial recognition of the goodwill and is therefore prohibited from
being recognised under paragraph 15(a).

21B Deferred tax liabilities for taxable temporary differences relating to

goodwill are, however, recognised to the extent they do not arise from
the initial recognition of goodwill. For example, if in a business
combination an entity recognizes goodwill of Rs.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 Rs.100 on initial recognition
and Rs.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
Rs.100, a taxable temporary difference of Rs.20 arises at the end of that
year. Because that taxable temporary difference does not relate to the
initial recognition of the goodwill, the resulting deferred tax liability is
recognised.

Initial recognition of an asset or liability

22 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 that led to
the initial recognition of the asset or liability:

(a) in a business combination, an entity recognises any deferred tax

liability or asset and this affects the amount of goodwill or
bargain purchase gain it recognises (see paragraph 19);

(b) if the transaction affects either accounting profit or taxable profit,

an entity recognises any deferred tax liability or asset and
recognises the resulting deferred tax expense or income in profit
or loss (see paragraph 59);

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(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 provided by paragraphs 15 and 24,
recognise 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 recognise the
resulting deferred tax liability or asset, either on initial recognition
or subsequently (see example below). Furthermore, an entity does
not recognise subsequent changes in the unrecognised deferred
tax liability or asset as the asset is depreciated.

Example illustrating paragraph 22(c)

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.

As it recovers the carrying amount of the asset, the entity will earn
taxable income of 1,000 and pay tax of 400. The entity does not
recognise the resulting deferred tax liability of 400 because it results
from the initial recognition of the asset.

In the following year, the carrying amount of the asset is 800. In

earning taxable income of 800, the entity will pay tax of 320. The
entity does not recognise the deferred tax liability of 320 because it
results from the initial recognition of the asset.

23 In accordance with LKAS 32 Financial Instruments: Presentation 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 in paragraph 15(b) does
not apply. Consequently, an entity recognises the resulting deferred tax
liability. In accordance with paragraph 61A, the deferred tax is charged
directly to the carrying amount of the equity component. In accordance
with paragraph 58, subsequent changes in the deferred tax liability are
recognised in profit or loss as deferred tax expense (income).

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Deductible temporary differences

24 A deferred tax asset shall be recognised 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 utilised, 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 asset shall be recognised in
accordance with paragraph 44.

25 It is inherent in the recognition of a liability that the carrying amount

will be settled in future periods through an outflow from the entity of
resources embodying economic benefits. When resources flow from the
entity, part or all of their amounts may be deductible in determining
taxable profit of a period later than the period in which the liability is
recognised. In such cases, a temporary difference exists between the
carrying amount of the liability and its tax base. Accordingly, a
deferred tax asset arises in respect of the income taxes that will be
recoverable in the future periods when that part of the liability is
allowed as a deduction in determining taxable profit. Similarly, if the
carrying amount of an asset is less than its tax base, the difference gives
rise to a deferred tax asset in respect of the income taxes that will be
recoverable in future periods.

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Examples
An entity recognises 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 tax rate is 25%.

The tax base of the liability is nil (carrying amount of 100, less the
amount that will be deductible for tax purposes in respect of that
liability in future periods). In settling the liability for its carrying
amount, the entity will reduce its future taxable profit by an amount
of 100 and, consequently, reduce its future tax payments by 25 (100
at 25%). The difference between the carrying amount of 100 and the
tax base of nil is a deductible temporary difference of 100. Therefore,
the entity recognises a deferred tax asset of 25 (100 at 25%),
provided that it is probable that the entity will earn sufficient taxable
profit in future periods to benefit from a reduction in tax payments.

26 The following are examples of deductible temporary differences that

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. A temporary difference exists between the
carrying amount of the liability and its tax base; the tax base of
the liability is usually nil. Such a deductible temporary difference
results in a deferred tax asset as economic benefits will flow to
the entity in the form of a deduction from taxable profits when
contributions or retirement benefits are paid;

(b) research costs are recognised 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. 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 amount
of nil is a deductible temporary difference that results in a
deferred tax asset;

(c) with limited exceptions, an entity recognises the identifiable

assets acquired and liabilities assumed in a business combination
at their fair values at the acquisition date. When a liability
assumed is recognised at the acquisition date but the related costs

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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 (see
paragraph 66); and

(d) certain assets may be carried at fair value, or may be revalued,

without an equivalent adjustment being made for tax purposes
(see paragraph 20). A deductible temporary difference arises if
the tax base of the asset exceeds its carrying amount.

27 The reversal of deductible temporary differences results in deductions

in determining taxable profits of future periods. However, economic
benefits in the form of reductions in tax payments will flow to the entity
only if it earns sufficient taxable profits against which the deductions
can be offset. Therefore, an entity recognises deferred tax assets only
when it is probable that taxable profits will be available against which
the deductible temporary differences can be utilised.

28 It is probable that taxable profit will be available against which a

deductible temporary difference can be utilised when there are
sufficient taxable temporary differences relating to the same taxation
authority and the same taxable entity which are expected to reverse:

(a) in the same period as the expected reversal of the deductible

temporary difference; or

(b) in periods into which a tax loss arising from the deferred tax asset
can be carried back or forward.

In such circumstances, the deferred tax asset is recognised in the period

in which the deductible temporary differences arise.

29 When there are insufficient taxable temporary differences relating to

the same taxation authority and the same taxable entity, the deferred tax
asset is recognised to the extent that:

(a) it is probable that the entity will have sufficient taxable profit
relating to the same taxation authority and the same taxable entity
in the same period as the reversal of the deductible temporary
difference (or in the periods into which a tax loss arising from the
deferred tax asset can be carried back or forward). In evaluating
whether it will have sufficient taxable profit in future periods, an

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entity ignores taxable amounts arising from deductible temporary

differences that are expected to originate in future periods,
because the deferred tax asset arising from these deductible
temporary differences will itself require future taxable profit in
order to be utilised; or

(b) tax planning opportunities are available to the entity that will
create taxable profit in appropriate periods.

30 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 carryforward. 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;

(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 utilisation of a tax loss or tax credit
carryforward still depends on the existence of future taxable profit from
sources other than future originating temporary differences.

31 When an entity has a history of recent losses, the entity considers the
guidance in paragraphs 35 and 36.

32 [Deleted]

Goodwill
32A 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 recognised as part of the accounting for a business combination

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to the extent that it is probable that taxable profit will be available

against which the deductible temporary difference could be utilised.

Initial recognition of an asset or liability

33 One case when a deferred tax asset arises on initial recognition of an

asset is when a non-taxable government grant related to an asset is
deducted in arriving at the carrying amount of the asset but, for tax
purposes, is not deducted from the asset’s depreciable amount (in other
words its tax base); the carrying amount of the asset is less than its tax
base and this gives rise to a deductible temporary difference.
Government grants may also be set up as deferred income in which
case the difference between the deferred income and its tax base of nil
is a deductible temporary difference. Whichever method of presentation
an entity adopts, the entity does not recognise the resulting deferred tax
asset, for the reason given in paragraph 22.

Unused tax losses and unused tax credits

34 A deferred tax asset shall be recognised for the carryforward 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 utilised.

35 The criteria for recognising deferred tax assets arising from the
carryforward of unused tax losses and tax credits are the same as the
criteria for recognizing deferred tax assets arising from deductible
temporary differences. However, the existence of unused tax losses is
strong evidence that future taxable profit may not be available.
Therefore, when an entity has a history of recent losses, the entity
recognises a deferred tax asset arising from unused tax losses or tax
credits only to the extent that the entity has sufficient taxable temporary
differences or there is convincing other evidence that sufficient taxable
profit will be available against which the unused tax losses or unused
tax credits can be utilised by the entity. In such circumstances,
paragraph 82 requires disclosure of the amount of the deferred tax asset
and the nature of the evidence supporting its recognition.

36 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 utilised:

(a) whether the entity has sufficient taxable temporary differences

relating to the same taxation authority and the same taxable entity,

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which will result in taxable amounts against which the unused tax
losses or unused tax credits can be utilised 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
utilised.

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
utilised, the deferred tax asset is not recognised.

Reassessment of unrecognised deferred tax assets

37 At the end of each reporting period, an entity reassesses unrecognised
deferred tax assets. The entity recognises a previously unrecognised
deferred tax asset to the extent that it has become probable that future
taxable profit will allow the deferred tax asset to be recovered. For
example, an improvement in trading conditions may make it more
probable that the entity will be able to generate sufficient taxable profit
in the future for the deferred tax asset to meet the recognition criteria
set out in paragraph 24 or 34. Another example is when an entity
reassesses deferred tax assets at the date of a business combination or
subsequently (see paragraphs 67 and 68).

Investments in subsidiaries, branches and associates

and interests in joint ventures
38 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:

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(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.

39 An entity shall recognise 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.

40 As a parent controls the dividend policy of its subsidiary, it is able to

control the timing of the reversal of temporary differences associated
with that investment (including the temporary differences arising not
only from undistributed profits but also from any foreign exchange
translation differences). Furthermore, it would often be impracticable to
determine the amount of income taxes that would be payable when the
temporary difference reverses. Therefore, when the parent has
determined that those profits will not be distributed in the foreseeable
future the parent does not recognise a deferred tax liability. The same
considerations apply to investments in branches.

41 The non-monetary assets and liabilities of an entity are measured in its

functional currency (see LKAS 21 The Effects of Changes in Foreign
Exchange Rates). If the entity’s taxable profit or tax loss (and, hence,
the tax base of its non-monetary assets and liabilities) is determined in a
different currency, changes in the exchange rate give rise to temporary
differences that result in a recognised deferred tax liability or (subject

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to paragraph 24) asset. The resulting deferred tax is charged or credited

to profit or loss (see paragraph 58).

42 An investor in an associate does not control that entity and is usually

not in a position to determine its dividend policy. Therefore, in the
absence of an agreement requiring that the profits of the associate will
not be distributed in the foreseeable future, an investor recognises a
deferred tax liability arising from taxable temporary differences
associated with its investment in the associate. In some cases, an
investor may not be able to determine the amount of tax that would be
payable if it recovers the cost of its investment in an associate, but can
determine that it will equal or exceed a minimum amount. In such
cases, the deferred tax liability is measured at this amount.

43 The arrangement between the parties to a joint venture usually deals

with the sharing of the profits and identifies whether decisions on such
matters require the consent of all the venturers or a specified majority
of the venturers. When the venturer can control the sharing of profits
and it is probable that the profits will not be distributed in the
foreseeable future, a deferred tax liability is not recognised.

44 An entity shall recognise a deferred tax asset for all deductible

temporary differences arising from investments in subsidiaries,
branches and associates, and interests in joint ventures, to the
extent that, and only to the extent that, it is probable that:

(a) the temporary difference will reverse in the foreseeable

future; and

(b) taxable profit will be available against which the temporary

difference can be utilised.

45 In deciding whether a deferred tax asset is recognised for deductible

temporary differences associated with its investments in subsidiaries,
branches and associates, and its interests in joint ventures, an entity
considers the guidance set out in paragraphs 28 to 31.

Measurement
46 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 end of the
reporting period.

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47 Deferred tax assets and liabilities shall be measured at the tax rates
that are expected to apply to the period when the asset is realised or
the liability is settled, based on tax rates (and tax laws) that have
been enacted or substantively enacted by the end of the reporting
period.

48 Current and deferred tax assets and liabilities are usually measured
using the tax rates (and tax laws) that have been enacted. However, in
some jurisdictions, announcements of tax rates (and tax laws) by the
government have the substantive effect of actual enactment, which may
follow the announcement by a period of several months. In these
circumstances, tax assets and liabilities are measured using the
announced tax rate (and tax laws).

49 When different tax rates apply to different levels of taxable income,

deferred tax assets and liabilities are measured using the average rates
that are expected to apply to the taxable profit (tax loss) of the periods
in which the temporary differences are expected to reverse.

50 [Deleted]

51 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 end of the reporting
period, to recover or settle the carrying amount of its assets and
liabilities.

52 In some jurisdictions, the manner in which an entity recovers (settles)

the carrying amount of an asset (liability) may affect either or both of:

(a) the tax rate applicable when the entity recovers (settles) the
carrying amount of the asset (liability); and

(b) the tax base of the asset (liability).

In such cases, an entity measures deferred tax liabilities and deferred

tax assets using the tax rate and the tax base that are consistent with the
expected manner of recovery or settlement.

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Example A
An asset has a carrying amount of 100 and a tax base of 60. A tax
rate of 20% would apply if the asset were sold and a tax rate of 30%
would apply to other income.

The entity recognises a deferred tax liability of 8 (40 at 20%) if it

expects to sell the asset without further use and a deferred tax
liability of 12 (40 at 30%) if it expects to retain the asset and recover
its carrying amount through use.

Example B
An asset with a cost of 100 and a carrying amount of 80 is revalued
to 150. No equivalent adjustment is made for tax purposes.
Cumulative depreciation for tax purposes is 30 and the tax rate is
30%. If the asset is sold for more than cost, the cumulative tax
depreciation of 30 will be included in taxable income but sale
proceeds in excess of cost will not be taxable.

The tax base of the asset is 70 and there is a taxable temporary

difference of 80. If the entity expects to recover the carrying amount
by using the asset, it must generate taxable income of 150, but will
only be able to deduct depreciation of 70. On this basis, there is a
deferred tax liability of 24 (80 at 30%). If the entity expects to
recover the carrying amount by selling the asset immediately for
proceeds of 150, the deferred tax liability is computed as follows:

Taxable Deferred
Temporary Tax Tax
Difference Rate Liability
Cumulative tax 30 30% 9
depreciation
Proceeds in excess of cost 50 nil –
9
Total 80

(note: in accordance with paragraph 61A, the additional deferred tax

that arises on the revaluation is recognised in other comprehensive
income)

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Example C
The facts are as in example B, except that if the asset is sold for more
than cost, the cumulative tax depreciation will be included in taxable
income (taxed at 30%) and the sale proceeds will be taxed at 40%,
after deducting an inflation-adjusted cost of 110.

If the entity expects to recover the carrying amount by using the

asset, it must generate taxable income of 150, but will only be able to
deduct depreciation of 70. On this basis, the tax base is 70, there is a
taxable temporary difference of 80 and there is a deferred tax
liability of 24 (80 at 30%), as in example B.

If the entity expects to recover the carrying amount by selling the

asset immediately for proceeds of 150, the entity will be able to
deduct the indexed cost of 110. The net proceeds of 40 will be taxed
at 40%. In addition, the cumulative tax depreciation of 30 will be
included in taxable income and taxed at 30%. On this basis, the tax
base is 80 (110 less 30), there is a taxable temporary difference of 70
and there is a deferred tax liability of 25 (40 at 40% plus 30 at 30%).
If the tax base is not immediately apparent in this example, it may be
helpful to consider the fundamental principle set out in paragraph
10.

(note: in accordance with paragraph 61A, the additional deferred tax

that arises on the revaluation is recognised in other comprehensive
income)

52A In some jurisdictions, income taxes are payable at a higher or lower rate
if part or all of the net profit or retained earnings is paid out as a
dividend to shareholders of the entity. In some other jurisdictions,
income taxes may be refundable or payable if part or all of the net
profit or retained earnings is paid out as a dividend to shareholders of
the entity. In these circumstances, current and deferred tax assets and
liabilities are measured at the tax rate applicable to undistributed
profits.

52B In the circumstances described in paragraph 52A, the income tax

consequences of dividends are recognised when a liability to pay the
dividend is recognised. The income tax consequences of dividends are
more directly linked to past transactions or events than to distributions
to owners. Therefore, the income tax consequences of dividends are
recognised in profit or loss for the period as required by paragraph 58

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 LKAS 12

except to the extent that the income tax consequences of dividends arise
from the circumstances described in paragraph 58(a) and (b).

Example illustrating paragraphs 52A and 52B

The following example deals with the measurement of current and
deferred tax assets and liabilities for an entity in a jurisdiction where
income taxes are payable at a higher rate on undistributed profits
(50%) with an amount being refundable when profits are distributed.
The tax rate on distributed profits is 35%. At the end of the reporting
period, 31 December 20X1, the entity does not recognise a liability
for dividends proposed or declared after the reporting period. As a
result, no dividends are recognised in the year 20X1. Taxable income
for 20X1 is 100,000. The net taxable temporary difference for the
year 20X1 is 40,000.

The entity recognises a current tax liability and a current income tax
expense of 50,000. No asset is recognised for the amount potentially
recoverable as a result of future dividends. The entity also recognises
a deferred tax liability and deferred tax expense of 20,000 (40,000 at
50%) representing the income taxes that the entity will pay when it
recovers or settles the carrying amounts of its assets and liabilities
based on the tax rate applicable to undistributed profits.

Subsequently, on 15 March 20X2 the entity recognises dividends of

10,000 from previous operating profits as a liability.

On 15 March 20X2, the entity recognises the recovery of income

taxes of 1,500 (15% of the dividends recognised as a liability) as a
current tax asset and as a reduction of current income tax expense
for 20X2.

53 Deferred tax assets and liabilities shall not be discounted.

54 The reliable determination of deferred tax assets and liabilities on a

discounted basis requires detailed scheduling of the timing of the
reversal of each temporary difference. In many cases such scheduling is
impracticable or highly complex. Therefore, it is inappropriate to
require discounting of deferred tax assets and liabilities. To permit, but
not to require, discounting would result in deferred tax assets and
liabilities which would not be comparable between entities. Therefore,
this Standard does not require or permit the discounting of deferred tax
assets and liabilities.

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LKAS 12

55 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, for example in the
case of retirement benefit obligations (see LKAS 19 Employee
Benefits).

56 The carrying amount of a deferred tax asset shall be reviewed at

the end of each reporting period. An entity shall reduce the
carrying amount of a deferred tax asset to the extent that it is no
longer probable that sufficient taxable profit will be available to
allow the benefit of part or all of that deferred tax asset to be
utilised. Any such reduction shall be reversed to the extent that it
becomes probable that sufficient taxable profit will be available.

Recognition of current and deferred tax

57 Accounting for the current and deferred tax effects of a transaction or
other event is consistent with the accounting for the transaction or event
itself. Paragraphs 58 to 68C implement this principle.

Items recognised in profit or loss

58 Current and deferred tax shall be recognised as income or an
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 recognised, in the same or a

different period, outside profit or loss, either in other
comprehensive income or directly in equity (see paragraphs
61A to 65); or

(b) a business combination (see paragraphs 66 to 68).

59 Most deferred tax liabilities and deferred tax assets arise where income
or expense is included in accounting profit in one period, but is
included in taxable profit (tax loss) in a different period. The resulting
deferred tax is recognised in profit or loss. Examples are when:

(a) interest, royalty or dividend revenue is received in arrears and is

included in accounting profit on a time apportionment basis in
accordance with LKAS 18 Revenue, but is included in taxable
profit (tax loss) on a cash basis; and

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(b) costs of intangible assets have been capitalised in accordance with

LKAS 38 and are being amortised in profit or loss, but were
deducted for tax purposes when they were incurred.

60 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 reassessment 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 recognised in profit or loss, except to the

extent that it relates to items previously recognised outside profit or loss
(see paragraph 63).

Items recognised outside profit or loss

61 [Deleted]

61A Current tax and deferred tax shall be recognised outside profit or
loss if the tax relates to items that are recognised, in the same or a
different period, outside profit or loss. Therefore, current tax and
deferred tax that relates to items that are recognised, in the same or
a different period:

(a) in other comprehensive income, shall be recognised in other

comprehensive income (see paragraph 62).

(b) directly in equity, shall be recognised directly in equity (see

paragraph 62A).

62 Sri Lanka Accounting Standards require or permit particular items to be

recognised in other comprehensive income. Examples of such items
are:

(a) a change in carrying amount arising from the revaluation of

property, plant and equipment (see LKAS 16); and

(b) [deleted]

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LKAS 12

(c) exchange differences arising on the translation of the financial

statements of a foreign operation (see LKAS 21).

(d) [deleted]

62A Sri Lanka Accounting Standards require or permit particular items to be

credited or charged directly to equity. Examples of such items are:

(a) an adjustment to the opening balance of retained earnings

resulting from either a change in accounting policy that is applied
retrospectively or the correction of an error (see LKAS 8
Accounting Policies, Changes in Accounting Estimates and
Errors); and

(b) amounts arising on initial recognition of the equity component of

a compound financial instrument (see paragraph 23).

63 In exceptional circumstances it may be difficult to determine the

amount of current and deferred tax that relates to items recognised
outside profit or loss (either in other comprehensive income or directly
in equity). This may be the case, for example, when:

(a) there are graduated rates of income tax and it is impossible to

determine the rate at which a specific component of taxable profit
(tax loss) has been taxed;

(b) a change in the tax rate or other tax rules affects a deferred tax
asset or liability relating (in whole or in part) to an item that was
previously recognised outside profit or loss; or

(c) an entity determines that a deferred tax asset should be

recognised, or should no longer be recognised in full, and the
deferred tax asset relates (in whole or in part) to an item that was
previously recognised outside profit or loss.

In such cases, the current and deferred tax related to items that are
recognised outside profit or loss are based on a reasonable pro rata
allocation of the current and deferred tax of the entity in the tax
jurisdiction concerned, or other method that achieves a more
appropriate allocation in the circumstances.

64 LKAS 16 does not specify whether an entity should transfer each year
from revaluation surplus to retained earnings an amount equal to the
difference between the depreciation or amortisation on a revalued asset

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and the depreciation or amortisation based on the cost of that asset. If

an entity makes such a transfer, the amount transferred is net of any
related deferred tax. Similar considerations apply to transfers made on
disposal of an item of property, plant or equipment.

65 When an asset is revalued for tax purposes and that revaluation is

related to an accounting revaluation of an earlier period, or to one that
is expected to be carried out in a future period, the tax effects of both
the asset revaluation and the adjustment of the tax base are recognised
in other comprehensive income in the periods in which they occur.
However, if the revaluation for tax purposes is not related to an
accounting revaluation of an earlier period, or to one that is expected to
be carried out in a future period, the tax effects of the adjustment of the
tax base are recognised in profit or loss.

65A When an entity pays dividends to its shareholders, it may be required to

pay a portion of the dividends to taxation authorities on behalf of
shareholders. In many jurisdictions, this amount is referred to as a
withholding tax. Such an amount paid or payable to taxation authorities
is charged to equity as a part of the dividends.

Deferred tax arising from a business combination

66 As explained in paragraphs 19 and 26(c), temporary differences may
arise in a business combination. In accordance with SLFRS 3, an entity
recognises any resulting deferred tax assets (to the extent that they meet
the recognition criteria in paragraph 24) or deferred tax liabilities as
identifiable assets and liabilities at the acquisition date. Consequently,
those deferred tax assets and deferred tax liabilities affect the amount of
goodwill or the bargain purchase gain the entity recognises. However,
in accordance with paragraph 15(a), an entity does not recognise
deferred tax liabilities arising from the initial recognition of goodwill.

67 As a result of a business combination, the probability of realising a pre-

acquisition deferred tax asset of the acquirer could change. An acquirer
may consider it probable that it will recover its own deferred tax asset
that was not recognised 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 acquiree. Alternatively, as a
result of the business combination it might no longer be probable that
future taxable profit will allow the deferred tax asset to be recovered. In
such cases, the acquirer recognises a change in the deferred tax asset in
the period of the business combination, but does not include it as part of
the accounting for the business combination. Therefore, the acquirer

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does not take it into account in measuring the goodwill or bargain

purchase gain it recognises in the business combination.

68 The potential benefit of the acquiree’s income tax loss carryforwards or

other deferred tax assets might not satisfy the criteria for separate
recognition when a business combination is initially accounted for but
might be realized subsequently. An entity shall recognise acquired
deferred tax benefits that it realises after the business combination as
follows:

(a) Acquired deferred tax benefits recognised within the

measurement period that result from new information about facts
and circumstances that existed at the acquisition date shall be
applied to reduce the carrying amount of any goodwill related to
that acquisition. If the carrying amount of that goodwill is zero,
any remaining deferred tax benefits shall be recognised in profit
or loss.

(b) All other acquired deferred tax benefits realised shall be

recognised in profit or loss (or, if this Standard so requires,
outside profit or loss).

Current and deferred tax arising from share-based

payment transactions
68A In some tax jurisdictions, an entity receives a tax deduction (ie an
amount that is deductible in determining taxable profit) that relates to
remuneration paid in shares, share options or other equity instruments
of the entity. The amount of that tax deduction may differ from the
related cumulative remuneration expense, and may arise in a later
accounting period. For example, in some jurisdictions, an entity may
recognise an expense for the consumption of employee services
received as consideration for share options granted, in accordance with
SLFRS 2 Share-based Payment, and not receive a tax deduction until
the share options are exercised, with the measurement of the tax
deduction based on the entity’s share price at the date of exercise.

68B As with the research costs discussed in paragraphs 9 and 26(b) of this
Standard, the difference between the tax base of the employee services
received to date (being the amount the taxation authorities will permit
as a deduction in future periods), and the carrying amount of nil, is a
deductible temporary difference that results in a deferred tax asset. If
the amount the taxation authorities will permit as a deduction in future
periods is not known at the end of the period, it shall be estimated,

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 LKAS 12

based on information available at the end of the period. For example, if

the amount that the taxation authorities will permit as a deduction in
future periods is dependent upon the entity’s share price at a future
date, the measurement of the deductible temporary difference should be
based on the entity’s share price at the end of the period.

68C As noted in paragraph 68A, the amount of the tax deduction (or
estimated future tax deduction, measured in accordance with paragraph
68B) may differ from the related cumulative remuneration expense.
Paragraph 58 of the Standard requires that current and deferred tax
should be recognised as income or an expense and included in profit or
loss for the period, except to the extent that the tax arises from (a) a
transaction or event that is recognised, in the same or a different period,
outside profit or loss, or (b) a business combination. If the amount of
the tax deduction (or estimated future tax deduction) exceeds the
amount of the related cumulative remuneration expense, this indicates
that the tax deduction relates not only to remuneration expense but also
to an equity item. In this situation, the excess of the associated current
or deferred tax should be recognised directly in equity.

Presentation
Tax assets and tax liabilities
69 [Deleted]

70 [Deleted]

Offset
71 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 recognised

amounts; and

(b) intends either to settle on a net basis, or to realise the asset

and settle the liability simultaneously.

72 Although current tax assets and liabilities are separately recognised and
measured they are offset in the statement of financial position subject to
criteria similar to those established for financial instruments in LKAS
32. An entity will normally have a legally enforceable right to set off a

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current tax asset against a current tax liability when they relate to
income taxes levied by the same taxation authority and the taxation
authority permits the entity to make or receive a single net payment.

73 In consolidated financial statements, a current tax asset of one entity in

a group is offset against a current tax liability of another entity in the
group if, and only if, the entities concerned have a legally enforceable
right to make or receive a single net payment and the entities intend to
make or receive such a net payment or to recover the asset and settle
the liability simultaneously.

74 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:

(i) the same taxable entity; or

(ii) different taxable entities which intend either to settle

current tax liabilities and assets on a net basis, or to
realise 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.

75 To avoid the need for detailed scheduling of the timing of the reversal
of each temporary difference, this Standard requires an entity to set off
a deferred tax asset against a deferred tax liability of the same taxable
entity if, and only if, they relate to income taxes levied by the same
taxation authority and the entity has a legally enforceable right to set
off current tax assets against current tax liabilities.

76 In rare circumstances, an entity may have a legally enforceable right of

set-off, and an intention to settle net, for some periods but not for
others. In such rare circumstances, detailed scheduling may be required
to establish reliably whether the deferred tax liability of one taxable
entity will result in increased tax payments in the same period in which
a deferred tax asset of another taxable entity will result in decreased
payments by that second taxable entity.

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 LKAS 12

Tax expense
Tax expense (income) related to profit or loss from ordinary
activities

77 The tax expense (income) related to profit or loss from ordinary

activities shall be presented in the statement of comprehensive
income.

77A If an entity presents the components of profit or loss in a separate

income statement as described in paragraph 81 of LKAS 1
Presentation of Financial Statements, it presents the tax expense
(income) related to profit or loss from ordinary activities in that
separate statement.

Exchange differences on deferred foreign tax liabilities or

assets

78 LKAS 21 requires certain exchange differences to be recognised as

income or expense but does not specify where such differences should
be presented in the statement of comprehensive income. Accordingly,
where exchange differences on deferred foreign tax liabilities or assets
are recognised in the statement of comprehensive income, such
differences may be classified as deferred tax expense (income) if that
presentation is considered to be the most useful to financial statement
users.

Disclosure
79 The major components of tax expense (income) shall be disclosed
separately.

80 Components of tax expense (income) may include:

(a) current tax expense (income);

(b) any adjustments recognised 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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LKAS 12

(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 unrecognised

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 unrecognised 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 in accordance with
paragraph 56; 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 LKAS 8, because they cannot be accounted for
retrospectively.

81 The following shall also be disclosed separately:

(a) the aggregate current and deferred tax relating to items that
are charged or credited directly to equity (see paragraph
62A);

(b) the amount of income tax relating to each component of other

comprehensive income (see paragraph 62 and LKAS 1);

(b) [deleted];

(c) an explanation of the relationship between tax expense

(income) and accounting profit in either or both of the
following forms:

(i) a numerical reconciliation between tax expense (income)

and the product of accounting profit multiplied by the
applicable tax rate(s), disclosing also the basis on which
the applicable tax rate(s) is (are) computed; or

(ii) a numerical reconciliation between the average effective

tax rate and the applicable tax rate, disclosing also the
basis on which the applicable tax rate is computed;

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(d) an explanation of changes in the applicable tax rate(s)

compared to the previous accounting period;

(e) the amount (and expiry date, if any) of deductible temporary

differences, unused tax losses, and unused tax credits for
which no deferred tax asset is recognised in the statement of
financial position;

(f) the aggregate amount of temporary differences associated

with investments in subsidiaries, branches and associates and
interests in joint ventures, for which deferred tax liabilities
have not been recognised (see paragraph 39);

(g) in respect of each type of temporary difference, and in respect

of each type of unused tax losses and unused tax credits:

(i) the amount of the deferred tax assets and liabilities

recognised in the statement of financial position for each
period presented;

(ii) the amount of the deferred tax income or expense

recognised in profit or loss, if this is not apparent from
the changes in the amounts recognised in the statement
of financial position;

(h) in respect of discontinued operations, the tax expense relating

to:

(i) the gain or loss on discontinuance; and

(ii) the profit or loss from the ordinary activities of the

discontinued operation for the period, together with the
corresponding amounts for each prior period presented;

(i) the amount of income tax consequences of dividends to

shareholders of the entity that were proposed or declared
before the financial statements were authorised for issue, but
are not recognised as a liability in the financial statements;

(j) if a business combination in which the entity is the acquirer

causes a change in the amount recognised for its pre-
acquisition deferred tax asset (see paragraph 67), the amount
of that change; and

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(k) if the deferred tax benefits acquired in a business combination

are not recognised at the acquisition date but are recognised
after the acquisition date (see paragraph 68), a description of
the event or change in circumstances that caused the deferred
tax benefits to be recognised.

82 An entity shall disclose the amount of a deferred tax asset and the
nature of the evidence supporting its recognition, when:

(a) the utilisation of the deferred tax asset is dependent on future

taxable profits in excess of the profits arising from the
reversal of existing taxable temporary differences; and

(b) the entity has suffered a loss in either the current or

preceding period in the tax jurisdiction to which the deferred
tax asset relates.

82A In the circumstances described in paragraph 52A, an entity shall

disclose the nature of the potential income tax consequences that
would result from the payment of dividends to its shareholders. In
addition, the entity shall disclose the amounts of the potential
income tax consequences practicably determinable and whether
there are any potential income tax consequences not practicably
determinable.

83 [Deleted]

84 The disclosures required by paragraph 81(c) enable users of financial

statements to understand whether the relationship between tax expense
(income) and accounting profit is unusual and to understand the
significant factors that could affect that relationship in the future. The
relationship between tax expense (income) and accounting profit may
be affected by such factors as revenue that is exempt from taxation,
expenses that are not deductible in determining taxable profit (tax loss),
the effect of tax losses and the effect of foreign tax rates.

85 In explaining the relationship between tax expense (income) and

accounting profit, an entity uses an applicable tax rate that provides the
most meaningful information to the users of its financial statements.
Often, the most meaningful rate is the domestic rate of tax in the
country in which the entity is domiciled, aggregating the tax rate
applied for national taxes with the rates applied for any local taxes
which are computed on a substantially similar level of taxable profit
(tax loss). However, for an entity operating in several jurisdictions, it

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may be more meaningful to aggregate separate reconciliations prepared

using the domestic rate in each individual jurisdiction. The following
example illustrates how the selection of the applicable tax rate affects
the presentation of the numerical reconciliation.

Example illustrating paragraph 85

In 19X2, an entity has accounting profit in its own jurisdiction

(country A) of 1,500 (19X1: 2,000) and in country B of 1,500 (19X1:
500). The tax rate is 30% in country A and 20% in country B. In
country A, expenses of 100 (19X1: 200) are not deductible for tax
purposes.
The following is an example of a reconciliation to the domestic tax
rate.
19X1 19X2
Accounting profit 2,500 3,000
Tax at the domestic rate of 30% 750 900
Tax effect of expenses that are not deductible 60 30
for tax purposes
Effect of lower tax rates in country B (50) (150)
Tax expense 760 780

The following is an example of a reconciliation prepared by

aggregating separate reconciliations for each national jurisdiction.
Under this method, the effect of differences between the reporting
entity’s own domestic tax rate and the domestic tax rate in other
jurisdictions does not appear as a separate item in the reconciliation.
An entity may need to discuss the effect of significant changes in
either tax rates, or the mix of profits earned in different jurisdictions,
in order to explain changes in the applicable tax rate(s), as required
by paragraph 81(d).
Accounting profit 2,500 3,000
Tax at the domestic rates applicable to profits in
the country concerned 700 750
Tax effect of expenses that are not deductible for
tax purposes 60 30
Tax expense 760 780

86 The average effective tax rate is the tax expense (income) divided by
the accounting profit.

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87 It would often be impracticable to compute the amount of unrecognised

deferred tax liabilities arising from investments in subsidiaries,
branches and associates and interests in joint ventures (see paragraph
39). Therefore, this Standard requires an entity to disclose the aggregate
amount of the underlying temporary differences but does not require
disclosure of the deferred tax liabilities. Nevertheless, where
practicable, entities are encouraged to disclose the amounts of the
unrecognised deferred tax liabilities because financial statement users
may find such information useful.

87A Paragraph 82A requires an entity to disclose the nature of the potential
income tax consequences that would result from the payment of
dividends to its shareholders. An entity discloses the important features
of the income tax systems and the factors that will affect the amount of
the potential income tax consequences of dividends.

87B It would sometimes not be practicable to compute the total amount of

the potential income tax consequences that would result from the
payment of dividends to shareholders. This may be the case, for
example, where an entity has a large number of foreign subsidiaries.
However, even in such circumstances, some portions of the total
amount may be easily determinable. For example, in a consolidated
group, a parent and some of its subsidiaries may have paid income
taxes at a higher rate on undistributed profits and be aware of the
amount that would be refunded on the payment of future dividends to
shareholders from consolidated retained earnings. In this case, that
refundable amount is disclosed. If applicable, the entity also discloses
that there are additional potential income tax consequences not
practicably determinable. In the parent’s separate financial statements,
if any, the disclosure of the potential income tax consequences relates
to the parent’s retained earnings.

87C An entity required to provide the disclosures in paragraph 82A may

also be required to provide disclosures related to temporary differences
associated with investments in subsidiaries, branches and associates or
interests in joint ventures. In such cases, an entity considers this in
determining the information to be disclosed under paragraph 82A. For
example, an entity may be required to disclose the aggregate amount of
temporary differences associated with investments in subsidiaries for
which no deferred tax liabilities have been recognised (see paragraph
81(f)). If it is impracticable to compute the amounts of unrecognised
deferred tax liabilities (see paragraph 87) there may be amounts of
potential income tax consequences of dividends not practicably
determinable related to these subsidiaries.

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88 An entity discloses any tax-related contingent liabilities and contingent

assets in accordance with LKAS 37 Provisions, Contingent Liabilities
and Contingent Assets. Contingent liabilities and contingent assets may
arise, for example, from unresolved disputes with the taxation
authorities. Similarly, where changes in tax rates or tax laws are
enacted or announced after the reporting period, an entity discloses any
significant effect of those changes on its current and deferred tax assets
and liabilities (see LKAS 10 Events after the Reporting Period).

Effective date
89 This Standard becomes operative for financial statements covering
periods beginning on or after 1 January 2012. If an entity applies this
Standard for financial statements covering periods beginning before 1
January 2012, the entity shall disclose the fact it has applied this
Standard.

90 [Deleted]

91 [Deleted]

92 [Deleted]

93 [Deleted]

94 [Deleted]

95 [Deleted]

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Appendix A
Examples of temporary differences
The appendix accompanies, but is not part of, LKAS 12.

A. Examples of circumstances that give rise to

taxable temporary differences
All taxable temporary differences give rise to a deferred tax liability.

Transactions that affect profit or loss

1 Interest revenue is received in arrears and is included in accounting

profit on a time apportionment basis but is included in taxable profit on
a cash basis.

2 Revenue from the sale of goods is included in accounting profit when

goods are delivered but is included in taxable profit when cash is
collected. (note: as explained in B3 below, there is also a deductible
temporary difference associated with any related inventory).

3 Depreciation of an asset is accelerated for tax purposes.

4 Development costs have been capitalised and will be amortised to the

statement of comprehensive income but were deducted in determining
taxable profit in the period in which they were incurred.

5 Prepaid expenses have already been deducted on a cash basis in

determining the taxable profit of the current or previous periods.

Transactions that affect the statement of financial

position
6 Depreciation of an asset is not deductible for tax purposes and no
deduction will be available for tax purposes when the asset is sold or
scrapped. (note: paragraph 15(b) of the Standard prohibits recognition
of the resulting deferred tax liability unless the asset was acquired in a
business combination, see also paragraph 22 of the Standard.)

7 A borrower records a loan at the proceeds received (which equal the

amount due at maturity), less transaction costs. Subsequently, the

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carrying amount of the loan is increased by amortisation of the

transaction costs to accounting profit. The transaction costs were
deducted for tax purposes in the period when the loan was first
recognised. (notes: (1) the taxable temporary difference is the amount
of transaction costs already deducted in determining the taxable profit
of current or prior periods, less the cumulative amount amortised to
accounting profit; and (2) as the initial recognition of the loan affects
taxable profit, the exception in paragraph 15(b) of the Standard does
not apply. Therefore, the borrower recognises the deferred tax
liability.)

8 A loan payable was measured on initial recognition at the amount of the

net proceeds, net of transaction costs. The transaction costs are
amortised to accounting profit over the life of the loan. Those
transaction costs are not deductible in determining the taxable profit of
future, current or prior periods. (notes: (1) the taxable temporary
difference is the amount of unamortised transaction costs; and (2)
paragraph 15(b) of the Standard prohibits recognition of the resulting
deferred tax liability.)

9 The liability component of a compound financial instrument (for

example a convertible bond) is measured at a discount to the amount
repayable on maturity (see LKAS 32 Financial Instruments:
Presentation). The discount is not deductible in determining taxable
profit (tax loss).

Fair value adjustments and revaluations

10 Financial assets or investment property are carried at fair value which
exceeds cost but no equivalent adjustment is made for tax purposes.

11 An entity revalues property, plant and equipment (under the revaluation

model treatment in LKAS 16 Property, Plant and Equipment) but no
equivalent adjustment is made for tax purposes. (note: paragraph 61A
of the Standard requires the related deferred tax to be recognised in
other comprehensive income).

Business combinations and consolidation

12 The carrying amount of an asset is increased to fair value in a business
combination and no equivalent adjustment is made for tax purposes.
(Note that on initial recognition, the resulting deferred tax liability
increases goodwill or decreases the amount of any bargain purchase
gain recognised. See paragraph 66 of the Standard.)

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LKAS 12

13 Reductions in the carrying amount of goodwill are not deductible in

determining taxable profit and the cost of the goodwill would not be
deductible on disposal of the business. (Note that paragraph 15(a) of
the Standard prohibits recognition of the resulting deferred tax
liability.)

14 Unrealised losses resulting from intragroup transactions are eliminated

by inclusion in the carrying amount of inventory or property, plant and
equipment.

15 Retained earnings of subsidiaries, branches, associates and joint

ventures are included in consolidated retained earnings, but income
taxes will be payable if the profits are distributed to the reporting
parent. (note: paragraph 39 of the Standard prohibits recognition of the
resulting deferred tax liability if the parent, investor or venturer is able
to control the timing of the reversal of the temporary difference and it is
probable that the temporary difference will not reverse in the
foreseeable future.)

16 Investments in foreign subsidiaries, branches or associates or interests

in foreign joint ventures are affected by changes in foreign exchange
rates. (notes: (1) there may be either a taxable temporary difference or
a deductible temporary difference; and (2) paragraph 39 of the
Standard prohibits recognition of the resulting deferred tax liability if
the parent, investor or venturer is able to control the timing of the
reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.)

17 The non-monetary assets and liabilities of an entity are measured in its

functional currency but the taxable profit or tax loss is determined in a
different currency. (notes: (1) there may be either a taxable temporary
difference or a deductible temporary difference; (2) where there is a
taxable temporary difference, the resulting deferred tax liability is
recognised (paragraph 41 of the Standard); and (3) the deferred tax is
recognised in profit or loss, see paragraph 58 of the Standard.)

Hyperinflation
18 Non-monetary assets are restated in terms of the measuring unit current
at the end of the reporting period (see LKAS 29 Financial Reporting in
Hyperinflationary Economies) and no equivalent adjustment is made
for tax purposes. (notes: (1) the deferred tax is recognised in profit or
loss; and (2) if, in addition to the restatement, the non-monetary assets
are also revalued, the deferred tax relating to the revaluation is

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recognised in other comprehensive income and the deferred tax

relating to the restatement is recognised in profit or loss.)

B. Examples of circumstances that give rise to

deductible temporary differences
All deductible temporary differences give rise to a deferred tax asset. However,
some deferred tax assets may not satisfy the recognition criteria in paragraph
24 of the Standard.

Transactions that affect profit or loss

1 Retirement benefit costs are deducted in determining accounting profit
as service is provided by the employee, but are not deducted in
determining taxable profit until the entity pays either retirement
benefits or contributions to a fund. (note: similar deductible temporary
differences arise where other expenses, such as product warranty costs
or interest, are deductible on a cash basis in determining taxable
profit.)

2 Accumulated depreciation of an asset in the financial statements is

greater than the cumulative depreciation allowed up to the end of the
reporting period for tax purposes.

3 The cost of inventories sold before the end of the reporting period is
deducted in determining accounting profit when goods or services are
delivered but is deducted in determining taxable profit when cash is
collected. (note: as explained in A2 above, there is also a taxable
temporary difference associated with the related trade receivable.)

4 The net realisable value of an item of inventory, or the recoverable

amount of an item of property, plant or equipment, is less than the
previous carrying amount and an entity therefore reduces the carrying
amount of the asset, but that reduction is ignored for tax purposes until
the asset is sold.

5 Research costs (or organisation or other start up costs) are recognised as

an expense in determining accounting profit but are not permitted as a
deduction in determining taxable profit until a later period.

6 Income is deferred in the statement of financial position but has already

been included in taxable profit in current or prior periods.

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7 A government grant which is included in the statement of financial

position as deferred income will not be taxable in future periods. (note:
paragraph 24 of the Standard prohibits the recognition of the resulting
deferred tax asset, see also paragraph 33 of the Standard.)

Fair value adjustments and revaluations

8 Financial assets or investment property are carried at fair value which is
less than cost, but no equivalent adjustment is made for tax purposes.

Business combinations and consolidation

9 A liability is recognised at its fair value in a business combination, but
none of the related expense is deducted in determining taxable profit
until a later period. (Note that the resulting deferred tax asset decreases
goodwill or increases the amount of any bargain purchase gain
recognised. See paragraph 66 of the Standard.)

10 [Deleted]

11 Unrealised profits resulting from intragroup transactions are eliminated

from the carrying amount of assets, such as inventory or property, plant
or equipment, but no equivalent adjustment is made for tax purposes.

12 Investments in foreign subsidiaries, branches or associates or interests

in foreign joint ventures are affected by changes in foreign exchange
rates. (notes: (1) there may be a taxable temporary difference or a
deductible temporary difference; and (2) paragraph 44 of the Standard
requires recognition of the resulting deferred tax asset to the extent,
and only to the extent, that it is probable that: (a) the temporary
difference will reverse in the foreseeable future; and (b) taxable profit
will be available against which the temporary difference can be
utilised).

13 The non-monetary assets and liabilities of an entity are measured in its

functional currency but the taxable profit or tax loss is determined in a
different currency. (notes: (1) there may be either a taxable temporary
difference or a deductible temporary difference; (2) where there is a
deductible temporary difference, the resulting deferred tax asset is
recognised to the extent that it is probable that sufficient taxable profit
will be available (paragraph 41 of the Standard); and (3) the deferred
tax is recognised in profit or loss, see paragraph 58 of the Standard.)

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C. Examples of circumstances where the carrying

amount of an asset or liability is equal to its tax
base
1 Accrued expenses have already been deducted in determining an
entity’s current tax liability for the current or earlier periods.

2 A loan payable is measured at the amount originally received and this

amount is the same as the amount repayable on final maturity of the
loan.

3 Accrued expenses will never be deductible for tax purposes.

4 Accrued income will never be taxable.

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Appendix B
Illustrative computations and presentation
The appendix accompanies, but is not part of, LKAS 12. Extracts from
statements of financial position and statements of comprehensive income are
provided to show the effects on these financial statements of the transactions
described below. These extracts do not necessarily conform with all the
disclosure and presentation requirements of other Standards.

All the examples in this appendix assume that the entities concerned have no
transaction other than those described.

Example 1 – Depreciable assets

An entity buys equipment for 10,000 and depreciates it on a straight-line basis
over its expected useful life of five years. For tax purposes, the equipment is
depreciated at 25% a year on a straight-line basis. Tax losses may be carried
back against taxable profit of the previous five years. In year 0, the entity’s
taxable profit was 5,000. The tax rate is 40%.

The entity will recover the carrying amount of the equipment by using it to
manufacture goods for resale. Therefore, the entity’s current tax computation is
as follows:

Year
1 2 3 4 5
Taxable income 2,000 2,000 2,000 2,000 2,000
Depreciation for tax
purposes 2,500 2,500 2,500 2,500 0
Taxable profit (tax loss) (500) (500) (500) (500) 2,000
Current tax expense
(income) at 40% (200) (200) (200) (200) 800

The entity recognises a current tax asset at the end of years 1 to 4 because it
recovers the benefit of the tax loss against the taxable profit of year 0.

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The temporary differences associated with the equipment and the resulting
deferred tax asset and liability and deferred tax expense and income are as
follows:

Year
1 2 3 4 5
Carrying amount 8,000 6,000 4,000 2,000 0
Tax base 7,500 5,000 2,500 0 0
Taxable temporary difference 500 1,000 1,500 2,000 0

Opening deferred tax liability 0 200 400 600 800

Deferred tax expense (income) 200 200 200 200 (800)
Closing deferred tax liability 200 400 600 800 0

The entity recognises the deferred tax liability in years 1 to 4 because the
reversal of the taxable temporary difference will create taxable income in
subsequent years. The entity’s statement of comprehensive income includes the
following:

Year
1 2 3 4 5
Income 2,000 2,000 2,000 2,000 2,000
Depreciation 2,000 2,000 2,000 2,000 2,000
Profit before tax 0 0 0 0 0
Current tax expense (income) (200) (200) (200) (200) 800
Deferred tax expense (income) 200 200 200 200 (800)
Total tax expense (income) 0 0 0 0 0

Profit for the period 0 0 0 0 0

Example 2 – Deferred tax assets and liabilities

The example deals with an entity over the two-year period, X5 and X6. In X5
the enacted income tax rate was 40% of taxable profit. In X6 the enacted
income tax rate was 35% of taxable profit.

Charitable donations are recognised as an expense when they are paid and are
not deductible for tax purposes.

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LKAS 12

In X5, the entity was notified by the relevant authorities that they intend to
pursue an action against the entity with respect to sulphur emissions. Although
as at December X6 the action had not yet come to court the entity recognised a
liability of 700 in X5 being its best estimate of the fine arising from the action.
Fines are not deductible for tax purposes.

In X2, the entity incurred 1,250 of costs in relation to the development of a new
product. These costs were deducted for tax purposes in X2. For accounting
purposes, the entity capitalised this expenditure and amortised it on the straight-
line basis over five years. At 31/12/X4, the unamortised balance of these
product development costs was 500.

In X5, the entity entered into an agreement with its existing employees to
provide healthcare benefits to retirees. The entity recognises as an expense the
cost of this plan as employees provide service. No payments to retirees were
made for such benefits in X5 or X6. Healthcare costs are deductible for tax
purposes when payments are made to retirees. The entity has determined that it
is probable that taxable profit will be available against which any resulting
deferred tax asset can be utilised.

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 a straight-line
basis and at 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.

At 1/1/X6, 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 X6 and the taxation
authorities did not adjust the tax base of the building to reflect the revaluation.
In X6, the entity transferred 1,033 from revaluation reserve to retained earnings.
This represents the difference of 1,590 between the actual depreciation on the
building (3,250) and equivalent depreciation based on the cost of the building
(1,660, which is the book value at 1/1/X6 of 33,200 divided by the remaining
useful life of 20 years), less the related deferred tax of 557 (see paragraph 64 of
the Standard).

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 LKAS 12

Current tax expense

X5 X6
Accounting profit 8,775 8,740
Add
Depreciation for accounting purposes 4,800 8,250
Charitable donations 500 350
Fine for environmental pollution 700 –
Product development costs 250 250
Healthcare benefits 2,000 1,000
17,025 18,590
Deduct
Depreciation for tax purposes (8,100) (11,850)
Taxable profit 8,925 6,740

Current tax expense at 40% 3,570

Current tax expense at 35% 2,359

Carrying amounts of property, plant and equipment

Cost Building Motor Total
vehicles
Balance at 31/12/X4 50,000 10,000 60,000
Additions X5 6,000 – 6,000
Balance at 31/12/X5 56,000 10,000 66,000
Elimination of accumulated
depreciation on revaluation at 1/1/X6 (22,800) – (22,800)
Revaluation at 1/1/X6 31,800 – 31,800
Balance at 1/1/X6 65,000 10,000 75,000
Additions X6 – 15,000 15,000
65,000 25,000 90,000

continued...

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LKAS 12

…continued
Carrying amounts of property, plant and equipment
Cost Building Motor Total
vehicles
Accumulated depreciation 5% 20%
Balance at 31/12/X4 20,000 4,000 24,000
Depreciation X5 2,800 2,000 4,800
Balance at 31/12/X5 22,800 6,000 28,800
Revaluation at 1/1/X6 (22,800) – (22,800)
Balance at 1/1/X6 – 6,000 6,000
Depreciation X6 3,250 5,000 8,250
Balance at 31/12/X6 3,250 11,000 14,250

Carrying amount
31/12/X4 30,000 6,000 36,000
31/12/X5 33,200 4,000 37,200
31/12/X6 61,750 14,000 75,750

Tax base of property, plant and equipment

Cost Building Motor Total
vehicles
Balance at 31/12/X4 50,000 10,000 60,000
Additions X5 6,000 – 6,000
Balance at 31/12/X5 56,000 10,000 66,000
Additions X6 – 15,000 15,000
Balance at 31/12/X6 56,000 25,000 81,000

Accumulated depreciation 10% 25%

Balance at 31/12/X4 40,000 5,000 45,000
Depreciation X5 5,600 2,500 8,100
Balance at 31/12/X5 45,600 7,500 53,100

continued...

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 LKAS 12

…continued
Tax base of property, plant and equipment
Cost Building Motor Total
vehicles
Depreciation X6 5,600 6,250 11,850
Balance 31/12/X6 51,200 13,750 64,950

Tax base
31/12/X4 10,000 5,000 15,000
31/12/X5 10,400 2,500 12,900
31/12/X6 4,800 11,250 16,050

Deferred tax assets, liabilities and expense at 31/12/X4

Carrying Tax Temporary
amount Base differences
Accounts receivable 500 500 –
Inventory 2,000 2,000 –
Product development costs 500 – 500
Investments 33,000 33,000 –
Property, plant & equipment 36,000 15,000 21,000
TOTAL ASSETS 72,000 50,500 21,500

Current income taxes payable 3,000 3,000 –

Accounts payable 500 500 –
Fines payable – – –
Liability for healthcare benefits – – –
Long-term debt 20,000 20,000 –
Deferred income taxes 8,600 8,600 –
TOTAL LIABILITIES 32,100 32,100

continued...

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LKAS 12

…continued
Deferred tax assets, liabilities and expense at 31/12/X4
Carrying Tax Temporary
amount Base differences
Share capital 5,000 5,000 –
Revaluation surplus – – –
Retained earnings 34,900 13,400
TOTAL LIABILITIES/EQUITY 72,000 50,500

TEMPORARY DIFFERENCES 21,500

Deferred tax liability 21,500 at 40% 8,600

Deferred tax asset – – –

Net deferred tax liability 8,600

Deferred tax assets, liabilities and expense at 31/12/X5

Carrying Tax Temporary
amount Base differences
Accounts receivable 500 500 –
Inventory 2,000 2,000 –
Product development costs 250 – 250
Investments 33,000 33,000 –
Property, plant & equipment 37,200 12,900 24,300
TOTAL ASSETS 72,950 48,400 24,550

Current income taxes payable 3,570 3,570 –

Accounts payable 500 500 –
Fines payable 700 700 –
Liability for healthcare benefits 2,000 – (2,000)
Long-term debt 12,475 12,475 –
Deferred income taxes 9,020 9,020
TOTAL LIABILITIES 28,265 26,265 (2,000)
continued...

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 LKAS 12

…continued
Deferred tax assets, liabilities and expense at 31/12/X5
Carrying Tax Temporary
amount Base differences
Share capital 5,000 5,000 –
Revaluation surplus – – –
Retained earnings 39,685 17,135
TOTAL LIABILITIES/EQUITY 72,950 48,400

TEMPORARY DIFFERENCES 22,550

Deferred tax liability 24,550 at 40% 9,820

Deferred tax asset 2,000 at 40% (800)
Net deferred tax liability 9,020
Less: Opening deferred tax liability (8,600)
Deferred tax expense (income)
related to the origination and
reversal of temporary differences 420

Deferred tax assets, liabilities and expense at 31/12/X6

Carrying Tax Temporary
amount Base differences
Accounts receivable 500 500 –
Inventory 2,000 2,000 –
Product development costs – – –
Investments 33,000 33,000 –
Property, plant & equipment 75,750 16,050 59,700
TOTAL ASSETS 111,250 51,550 59,700

Current income taxes payable 2,359 2,359 –

Accounts payable 500 500 –
Fines payable 700 700
continued...

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LKAS 12

…continued
Deferred tax assets, liabilities and expense at 31/12/X6
Carrying Tax Temporary
amount Base differences
Liability for healthcare benefits 3,000 – (3,000)
Long-term debt 12,805 12,805 –
Deferred income taxes 19,845 19,845 –
TOTAL LIABILITIES 39,209 36,209 (3,000)
Share capital 5,000 5,000 –
Revaluation surplus 19,637 – –
Retained earnings 47,404 10,341
TOTAL LIABILITIES/EQUITY 111,250 51,550

TEMPORARY DIFFERENCES 56,700

Deferred tax liability 59,700 at 35% 20,895
Deferred tax asset 3,000 at 35% (1,050)
Net deferred tax liability 19,845
Less: Opening deferred tax liability (9,020)
Adjustment to opening deferred tax
liability resulting from reduction in
tax rate 22,550 at 5% 1,127
Deferred tax attributable to
revaluation surplus 31,800 at 35% (11,130)
Deferred tax expense (income)
related to the origination and
reversal of temporary differences 822

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Illustrative disclosure
The amounts to be disclosed in accordance with the Standard are as follows:

Major components of tax expense (income) (paragraph 79)

X5 X6
Current tax expense 3,570 2,359
Deferred tax expense relating to the origination and
reversal of temporary differences: 420 822
Deferred tax expense (income) resulting from
reduction in tax rate – (1,127)
Tax expense 3,990 2,054

Income tax relating to the components of other comprehensive income

paragraph 81(ab))

Deferred tax relating to revaluation of building – (11,130)

In addition, deferred tax of 557 was transferred in X6 from retained earnings to

revaluation reserve. This relates to the difference between the actual
depreciation on the building and equivalent depreciation based on the cost of the
building.

Explanation of the relationship between tax expense and accounting profit

(paragraph 81(c))

The Standard permits two alternative methods of explaining the relationship

between tax expense (income) and accounting profit. Both of these formats are
illustrated below.

(i) a numerical reconciliation between tax expense (income) and the product
of accounting profit multiplied by the applicable tax rate(s), disclosing
also the basis on which the applicable tax rate(s) is (are) computed

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X5 X6
Accounting profit 8,775 8,740
Tax at the applicable tax rate of 35% (X5: 40%) 3,510 3,059
Tax effect of expenses that are not deductible in
determining taxable profit:
Charitable donations 200 122
Fines for environmental pollution 280 –
Reduction in opening deferred taxes resulting
from reduction in tax rate – (1,127)
Tax expense 3,990 2,054

The applicable tax rate is the aggregate of the national income tax rate of
30% (X5: 35%) and the local income tax rate of 5%.

(ii) a numerical reconciliation between the average effective tax rate and the
applicable tax rate, disclosing also the basis on which the applicable tax
rate is computed

X5 X6
% %
Applicable tax rate 40.0 35.0
Tax effect of expenses that are not deductible for tax
purposes:
Charitable donations 2.3 1.4
Fines for environmental pollution 3.2 –
Effect on opening deferred taxes of reduction in tax
rate – (12.9)
Average effective tax rate (tax expense divided by
profit before tax) 45.5 23.5

The applicable tax rate is the aggregate of the national income tax rate of
30% (X5: 35%) and the local income tax rate of 5%.

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An explanation of changes in the applicable tax rate(s) compared to the

previous accounting period (paragraph 81(d))

In X6, the government enacted a change in the national income tax rate from
35% to 30%.

In respect of each type of temporary difference, and in respect of each type

of unused tax losses and unused tax credits:

(i) the amount of the deferred tax assets and liabilities recognised in the
statement of financial position for each period presented;

(ii) the amount of the deferred tax income or expense recognised in profit
or loss for each period presented, if this is not apparent from the
changes in the amounts recognised in the statement of financial
position (paragraph 81(g))

X5 X6
Accelerated depreciation for tax purposes 9,720 10,322
Liabilities for healthcare benefits that are
deducted for tax purposes only when paid (800) (1,050)
Product development costs deducted from
taxable profit in earlier years 100 –
Revaluation, net of related depreciation – 10,573
Deferred tax liability 9,020 19,845

(note: the amount of the deferred tax income or expense recognised in profit or
loss for the current year is apparent from the changes in the amounts
recognised in the statement of financial position)

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Example 3 – Business combinations

On 1 January X5 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 and the resulting
temporary differences.

Amount recognised Tax Temporary

at acquisition base differences
Property, plant and equipment 270 155 115
Accounts receivable 210 210 –
Inventory 174 124 50
Retirement benefit obligations (30) – (30)
Accounts payable (120) (120) –
Identifiable assets acquired and liabilities
assumed, excluding deferred tax 504 369 135

The deferred tax asset arising from the retirement benefit obligations is offset
against the deferred tax liabilities arising from the property, plant and equipment
and inventory (see paragraph 74 of the Standard).

No deduction is available in B’s tax jurisdiction for the cost of the goodwill.
Therefore, the tax base of the goodwill in B’s jurisdiction is nil. However, in
accordance with paragraph 15(a) of the Standard, A recognises no deferred tax
liability for the taxable temporary difference associated with the goodwill in B’s
tax jurisdiction.

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The carrying amount, in A’s consolidated financial statements, of its investment

in B is made up as follows:

Fair value of identifiable assets acquired and liabilities assumed,

excluding deferred tax 504
Deferred tax liability (135 at 40%) (54)
Fair value of identifiable assets acquired and liabilities assumed 450
Goodwill 150
Carrying amount 600

Because, at the acquisition date, the tax base in A’s tax jurisdiction, of A’s
investment in B is 600, no temporary difference is associated in A’s tax
jurisdiction with the investment.

During X5, B’s equity (incorporating the fair value adjustments made as a result
of the business combination) changed as follows:

At 1 January X5 450
Retained profit for X5 (net profit of 150, less dividend payable of 80) 70
At 31 December X5 520

A recognises a liability for any withholding tax or other taxes that it will incur
on the accrued dividend receivable of 80.

At 31 December X5, the carrying amount of A’s underlying investment in B,

excluding the accrued dividend receivable, is as follows:

Net assets of B 520

Goodwill 150
Carrying amount 670

The temporary difference associated with A’s underlying investment is 70. This
amount is equal to the cumulative retained profit since the acquisition date.

If A has determined that it will not sell the investment in the foreseeable future
and that B will not distribute its retained profits in the foreseeable future, no
deferred tax liability is recognised in relation to A’s investment in B (see
paragraphs 39 and 40 of the Standard). Note that this exception would apply for

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an investment in an associate only if there is an agreement requiring that the

profits of the associate will not be distributed in the foreseeable future (see
paragraph 42 of the Standard). A discloses the amount of the temporary
difference for which no deferred tax is recognised, ie 70 (see paragraph 81(f) of
the Standard).

If A expects to sell the investment in B, or that B will distribute its retained

profits in the foreseeable future, A recognises a deferred tax liability to the
extent that the temporary difference is expected to reverse. The tax rate reflects
the manner in which A expects to recover the carrying amount of its investment
(see paragraph 51 of the Standard). A recognises the deferred tax in other
comprehensive income to the extent that the deferred tax results from foreign
exchange translation differences that have been recognised in other
comprehensive income (paragraph 61A of the Standard). A discloses separately:

(a) the amount of deferred tax that has been recognised in other
comprehensive income (paragraph 81(ab) of the Standard); and

(b) the amount of any remaining temporary difference which is not expected
to reverse in the foreseeable future and for which, therefore, no deferred
tax is recognised (see paragraph 81(f) of the Standard).

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Example 4 – Compound financial instruments

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 LKAS 32
Financial Instruments: 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
recognises 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%.

The temporary differences associated with the liability component and the
resulting deferred tax liability and deferred tax expense and income are as
follows:

Year
X4 X5 X6 X7
Carrying amount of liability component 751 826 909 1,000
Tax base 1,000 1,000 1,000 1,000
Taxable temporary difference 249 174 91 –
Opening deferred tax liability at 40% 0 100 70 37
Deferred tax charged to equity 100 – – –
Deferred tax expense (income) – (30) (33) (37)
Closing deferred tax liability at 40% 100 70 37 –

As explained in paragraph 23 of the Standard, at 31 December X4, the entity

recognises the resulting deferred tax liability by adjusting the initial carrying
amount of the equity component of the convertible liability. Therefore, the
amounts recognised at that date are as follows:

Liability component 751

Deferred tax liability 100
Equity component (249 less 100) 149
1,000

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Subsequent changes in the deferred tax liability are recognised in profit or loss
as tax income (see paragraph 23 of the Standard). Therefore, the entity’s profit
or loss includes the following:

Year
X4 X5 X6 X7
Interest expense (imputed discount) – 75 83 91
Deferred tax expense (income) – (30) (33) (37)
– 45 50 54

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Example 5 – Share-based payment transactions

In accordance with SLFRS 2 Share-based Payment, an entity has recognised an
expense for the consumption of employee services received as consideration for
share options granted. A tax deduction will not arise until the options are
exercised, and the deduction is based on the options’ intrinsic value at exercise
date.

As explained in paragraph 68B of the Standard, the difference between the tax
base of the employee services received to date (being the amount the taxation
authorities will permit as a deduction in future periods in respect of those
services), and the carrying amount of nil, is a deductible temporary difference
that results in a deferred tax asset. Paragraph 68B requires that, if the amount
the taxation authorities will permit as a deduction in future periods is not known
at the end of the period, it should be estimated, based on information available
at the end of the period. If the amount that the taxation authorities will permit as
a deduction in future periods is dependent upon the entity’s share price at a
future date, the measurement of the deductible temporary difference should be
based on the entity’s share price at the end of the period. Therefore, in this
example, the estimated future tax deduction (and hence the measurement of the
deferred tax asset) should be based on the options’ intrinsic value at the end of
the period.

As explained in paragraph 68C of the Standard, if the tax deduction (or

estimated future tax deduction) exceeds the amount of the related cumulative
remuneration expense, this indicates that the tax deduction relates not only to
remuneration expense but also to an equity item. In this situation, paragraph
68C requires that the excess of the associated current or deferred tax should be
recognised directly in equity.

The entity’s tax rate is 40 per cent. The options were granted at the start of year
1, vested at the end of year 3 and were exercised at the end of year 5. Details of
the expense recognised for employee services received and consumed in each
accounting period, the number of options outstanding at each year-end, and the
intrinsic value of the options at each year-end, are as follows:

Employee services Number of options Intrinsic value

expense at year-end per option
Year 1 188,000 50,000 5
Year 2 185,000 45,000 8
Year 3 190,000 40,000 13
Year 4 0 40,000 17
Year 5 0 40,000 20

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LKAS 12

The entity recognises a deferred tax asset and deferred tax income in years 1–4
and current tax income in year 5 as follows. In years 4 and 5, some of the
deferred and current tax income is recognised directly in equity, because the
estimated (and actual) tax deduction exceeds the cumulative remuneration
expense.

Year 1
Deferred tax asset and deferred tax income:
(50,000 × 5 × 1/3 (a) × 0.40) = 33,333

(a) The tax base of the employee services received is based on the intrinsic value of the
options, and those options were granted for three years’ services. Because only one
year’s services have been received to date, it is necessary to multiply the option’s
intrinsic value by one-third to arrive at the tax base of the employee services
received in year 1.

The deferred tax income is all recognised in profit or loss, because the estimated
future tax deduction of 83,333 (50,000 × 5 × 1/3) is less than the cumulative
remuneration expense of 188,000.

Year 2
Deferred tax asset at year-end:
(45,000 × 8 × 2/3 × 0.40) = 96,000
Less deferred tax asset at start of year (33,333)
Deferred tax income for year 62,667*
*
This amount consists of the following:
Deferred tax income for the temporary difference
between the tax base of the employee services received
during the year and their carrying amount of nil:
(45,000 × 8 × 1/3 × 0.40) 48,000
Tax income resulting from an adjustment to the tax
base of employee services received in previous years:
(a) increase in intrinsic value: (45,000 × 3 × 1/3 ×
0.40) 18,000
1
(b) decrease in number of options: (5,000 × 5 × /3 ×
0.40) (3,333)
Deferred tax income for year 62,667

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 LKAS 12

The deferred tax income is all recognised in profit or loss, because the
estimated future tax deduction of 240,000 (45,000 × 8 × 2/3) is less than the
cumulative remuneration expense of 373,000 (188,000 + 185,000).

Year 3
Deferred tax asset at year-end:
(40,000 × 13 × 0.40) = 208,000
Less deferred tax asset at start of year (96,000)
Deferred tax income for year 112,000

The deferred tax income is all recognised in profit or loss, because the estimated
future tax deduction of 520,000 (40,000 × 13) is less than the cumulative
remuneration expense of 563,000 (188,000 + 185,000 + 190,000).

Year 4
Deferred tax asset at year-end:
(40,000 × 17 × 0.40) = 272,000
Less deferred tax asset at start of year (208,000)
Deferred tax income for year 64,000
The deferred tax income is recognised partly in profit or
loss and partly directly in equity as follows:
Estimated future tax deduction (40,000 × 17) = 680,000
Cumulative remuneration expense 563,000
Excess tax deduction 117,000
Deferred tax income for year 64,000
Excess recognised directly in equity (117,000 × 0.40) = 46,800
Recognised in profit or loss 17,200

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LKAS 12

Year 5
Deferred tax expense (reversal of deferred tax asset) 272,000
Amount recognised directly in equity (reversal of
cumulative deferred tax income recognised directly in
equity) 46,800
Amount recognised in profit or loss 225,200
Current tax income based on intrinsic value of options at
exercise date (40,000 × 20 × 0.40) = 320,000
Amount recognised in profit or loss (563,000 × 0.40) = 225,200
Amount recognised directly in equity 94,800

Summary

Statement of Statement of
comprehensive income financial position
Current Deferred
Employee tax tax Total tax Deferred
services expense expense expense tax
expense (income) (income) (income) Equity asset
Year 1 188,000 0 (33,333) (33,333) 0 33,333
Year 2 185,000 0 (62,667) (62,667) 0 96,000
Year 3 190,000 0 (112,000) (112,000) 0 208,000
Year 4 0 0 (17,200) (17,200) (46,800) 272,000
Year 5 0 (225,200) 225,200 0 46,800 0
(94,800)
Totals 563,000 (225,200) 0 (225,200) (94,800) 0

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 LKAS 12

Example 6 – Replacement awards in a business

combination
On January 20X1 Entity A acquired 100 per cent of Entity B. Entity A pays
cash consideration of Rs.400 to the former owners of Entity B.

At the acquisition date Entity B had outstanding employee share options with a
market-based measure of Rs.100. The share options were fully vested. As part
of the business combination Entity B’s outstanding share options are replaced
by share options of Entity A (replacement awards) with a market-based measure
of Rs.100 and an intrinsic value of Rs.80. The replacement awards are fully
vested. In accordance with paragraphs B56–B62 of SLFRS 3 Business
Combinations, the replacement awards are part of the consideration transferred
for Entity B. A tax deduction for the replacement awards will not arise until the
options are exercised. The tax deduction will be based on the share options’
intrinsic value at that date. Entity A’s tax rate is 40 per cent. Entity A recognizes
a deferred tax asset of Rs.32 (Rs.80 intrinsic value × 40%) on the replacement
awards at the acquisition date.

Entity A measures the identifiable net assets obtained in the business

combination (excluding deferred tax assets and liabilities) at Rs.450. The tax
base of the identifiable net assets obtained is Rs.300. Entity A recognises a
deferred tax liability of Rs.60 ((Rs.450 – Rs.300) × 40%) on the identifiable net
assets at the acquisition date.

Goodwill is calculated as follows:

Rs.
Cash consideration 400
Market-based measure of replacement awards 100
Total consideration transferred 500
Identifiable net assets, excluding deferred tax assets and liabilities (450)
Deferred tax asset 32
Deferred tax liability 60
Goodwill 78

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LKAS 12

Reductions in the carrying amount of goodwill are not deductible for tax
purposes. In accordance with paragraph 15(a) of the Standard, Entity A
recognises no deferred tax liability for the taxable temporary difference
associated with the goodwill recognised in the business combination.

The accounting entry for the business combination is as follows:

Rs. Rs.
Dr Goodwill 78
Dr Identifiable net assets 450
Dr Deferred tax asset 32
Cr Cash 400
Cr Equity (replacement awards) 100
Cr Deferred tax liability 60

On 31 December 20X1 the intrinsic value of the replacement awards is Rs.120.

Entity A recognises a deferred tax asset of Rs.48 (Rs.120 × 40%). Entity A
recognises deferred tax income of Rs.16 (Rs.48 – Rs.32) from the increase in
the intrinsic value of the replacement awards. The accounting entry is as
follows:

Rs. Rs.
Dr Deferred tax asset 16
Cr Deferred tax income 16

If the replacement awards had not been tax-deductible under current tax law,
Entity A would not have recognised a deferred tax asset on the acquisition date.
Entity A would have accounted for any subsequent events that result in a tax
deduction related to the replacement award in the deferred tax income or
expense of the period in which the subsequent event occurred.

Paragraphs B56–B62 of SLFRS 3 provide guidance on determining which

portion of a replacement award is part of the consideration transferred in a
business combination and which portion is attributable to future service and thus
a post-combination remuneration expense. Deferred tax assets and liabilities on
replacement awards that are post-combination expenses are accounted for in
accordance with the general principles as illustrated in Example 5.

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