Enquiry:
Our client is an unlisted public limited company, we seek your advice regarding the recognition of deferred tax asset / liability.
Due to admissible lease rent and substantial amount of unabsorbed tax depreciation losses normal tax is not likely to be payable for a number of years. However, on the other hand due to increase in the rate of minimum turnover tax applicable to the company there will be no benefit to the company in the future years for the aforesaid unabsorbed tax depreciation losses/business losses. The only benefit available to the company in future may be on account of credit for turn over tax paid, provided the same does not expire and there is sufficient taxable profit.
The company has been recognizing deferred tax asset/liability in the past keeping in view the temporary differences between the tax base of assets or liability and its carrying amount in the statement of financial position. Para IN4 of IAS 12 (revised requires the recognition of deferred tax asset when it is probable that taxable profits will be available against which the deferred tax asset can be utilized, there are sufficient taxable differences and there is convincing other evidence that sufficient taxable profit will be available. Para IN6 of the Standard prohibits recognition of such deferred tax liabilities to the extent that the temporary difference will not reverse in the foreseeable future. In case of prohibition resulting in no deferred tax liability only disclosure of the aggregate amount of the temporary differences concerned is required.
In view of the above, we understand that as the timing differences on account of accelerated tax depreciation, lease rental tax expenses etc. will not be reverse, no deferred taxation is to be provided there against. Deferred tax asset to the extent of turnover tax paid should however be recognized to the extent of the amount likely to be offset against tax of future normal taxable income.
We shall be grateful if you will kindly confirm that our above understanding is correct. In such situation when only turnover tax asset adjustable in future will be recognized as deferred tax asset whether separate disclosure for other non-reversible timing differences is also required? Alternatively, what other options are available to the entity to comply with IAS 12.
Opinion:
The Committees would like to draw your attention towards the following paragraphs of IAS 12 (revised):
35 The criteria for recognising deferred tax assets arising from the carry forward 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:
- whether the entity has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses or unused tax credits can be utilised before they expire;
- whether it is probable that the entity will have taxable profits before the unused tax losses or unused tax credits expire;
- whether the unused tax losses result from identifiable causes which are unlikely to recur; and
- 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.
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.
Based on above, the Committee is of the view that no deferred taxation is to be recognised when the temporary differences are not expected to reverse in future.
With regard to your second query, the Committee is of the view that separate disclosure for other non-reversible timing differences is not required.