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development project began to generate economic benefits for PQR Ltd. from 1st January, 2018. The

directors of PQR 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 31st

March, 2018.
● On 1st April, 2017, PQR Ltd. borrowed Rs 1,00,00,000. The cost to PQR Ltd. of arranging the borrowing was

Rs 2,00,000 and this cost qualified for a tax deduction on 1st April 2017. The loan was for a three-year
period. No interest was payable on the loan but the amount repayable on 31st 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 deduction of Rs30,43,800 will be claimable when the loan is repaid on 31st March, 2020.

Explain and show how each of these events would affect the deferred tax assets / liabilities in the
consolidated balance sheet of PQR Ltd. group at 31st March, 2018 as per Ind AS. The rate of corporate income

tax is 30%.
SOLUTION

Impact on consolidated balance sheet of PQR Ltd. group at 31st March, 2018

● The tax loss creates a potential deferred tax asset for the PQR Ltd. 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.
● The development costs have a carrying value of Rs15,20,000(Rs16,00,000 – (Rs16,00,000 x 1/5 x 3/12)).

The tax base of the development costs is nil since the relevant tax deduction has already been claimed.
The deferred tax liability will be Rs4,56,000 (Rs15,20,000 x 30%). All deferred tax liabilities are shown as

non-current.
● The carrying value of the loan at 31st March, 2018 is Rs1,07,80,000 (Rs1,00,00,000 – Rs200,000 +

Rs98,00,000 x 10%)). The tax base of the loan is 1,00,00,000. This creates a deductible temporary
difference of Rs7,80,000 and a potential deferred tax asset of Rs2,34,000 (Rs7,80,000 x 30%).

Q4 (Nov. 19)

An entity is finalizing its financial statements for the year ended 31st March, 20X2. Before 31st March,

20X2, the government announced that the tax rate was to be amended from 40% to 45% of taxable profit

from 30th June, 20X2.
The legislation to amend the tax rate has not yet been approved by the legislature. However, the government
has a significant majority and it is usual, in the tax jurisdiction concerned, to regard an announcement of a

change in the tax rate as having the substantive effect of actual enactment (i.e. it is substantively enacted).

After performing the income tax calculations at the rate of 40 per cent, the entity has the following deferred
tax asset and deferred tax liability balances:

Deferred Tax Asset 80,000
Deferred Tax Liability 60,000
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