Page 4 - 2. COMPILER QB - INDAS 12

Q2 (Nov. 18)

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X Ltd. prepares consolidated financial statements to 31 March each year. During the year ended 31 March
2018, the following events affected the tax position of the group:
(i) Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of Rs 30,00,000. Y
Ltd. is unable to utilise this loss against previous tax liabilities. The Income-tax Act does not allow Y Ltd.

to transfer the tax loss to other group companies. However, it allows Y Ltd. to carry the loss forward and

utilise it against the company's future taxable profits. The directors of X Ltd. do not consider that Y Ltd.
will make taxable profits in the foreseeable future.
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(ii) Just before 31 March, 2018, X Ltd. committed itself to closing a division after the year end, making a
number of employees redundant. Therefore X Ltd. recognised a provision for closure costs of Rs. 20,00,000

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in its statement of financial position as at 31 March, 2018. The Income-tax Act allows tax deductions
for closure costs only when the closure actually takes place. In the year ended 31 March 2019, X Ltd.

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expects to make taxable profits which are well in excess of 20,00,000. On 31 March, 2018, X Ltd. Had
taxable temporary differences from other sources which were greater than Rs. 20,00,000.

(iii) During the year ended 31 March 2017, X Ltd. capitalised development costs which satisfied the criteria in
paragraph 57 of Ind AS 38 ‘Intangible Assets’. The total amount capitalised was Rs16,00,000. The

development project began to generate economic benefits for X Ltd. from 1 January 2018. The directors
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of X Ltd. estimated that the project would generate economic benefits for five years from that date. The

development expenditure was fully deductible against taxable profits for the year ended 31 March2018.
(iv) On 1 April 2017, X Ltd. borrowed Rs1,00,00,000. The cost to X Ltd. of arranging the borrowing was Rs.

2,00,000 and this cost qualified for a tax deduction on 1 April 2017. The loan was for a three-year period.
No interest was payable on the loan but the amount repayable on 31 March 2020 will be Rs. 1,30,43,800.

This equates to an effective annual interest rate of 10%. As per the Income-tax Act, a further tax
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deduction of Rs. 30,43,800 will be claimable when the loan is repaid on 31 March, 2020.
Explain and show how each of these events would affect the deferred tax assets/liabilities in the consolidated

balance sheet of X Ltd. group at 31 March, 2018 as per Ind AS. Assume the rate of corporate income tax is
20%.

SOLUTION

(i) The tax loss creates a potential deferred tax asset for the group since its carrying value is nil and its

tax base is Rs. 30,00,000.
However, no deferred tax asset can be recognised because there is no prospect of being able to reduce

tax liabilities in the foreseeable future as no taxable profits are anticipated.
(In simple words - we create DTA to recognize a potential tax benefit in the future. To avail this

benefit, there must be some taxable profit in the future. In the given case, there is no probability for
taxable profits and hence the DTA will not get set-off in future. Therefore, no DTA will be recognized
on such items.)
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