Temporary differences between carrying amount and tax base of net assets of subsidiaries, branch or associate consolidated in consolidated financials may lead to recognition of deferred tax. This presentation explains the recognition of deferred tax in cases where 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. The same has been split into following sections:-
Para 38 of Ind AS 12- Income Taxes
Temporary differences arise when the carrying amount of investments in subsidiaries, branches and associates or interests in joint arrangements (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:
- the existence of undistributed profits of subsidiaries, branches, associates and joint arrangements;
- changes in foreign exchange rates when a parent and its subsidiary are based in different countries; and
- 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.
Analysis of Para 38
i. Deferred tax in consolidated financial statements due to the existence of undistributed profits of subsidiaries, branches, associates and joint arrangements
Let’s Say a company H has invested INR 100,000 (assuming on 31st March) in a wholly owned subsidiary S and after one year subsidiary earns 10,000 profit.
| Year | Net Assets of S consolidated(INR) | Tax Base(INR) | Temporary Difference | DTA/DTL @ applicable tax rate |
| 1(Year of consolidation) | 100,000 | 100,000 | – | NA |
| 2 | 110,000 | 100,000 | 10,000 | DTL |
ii. Deferred tax in consolidated financial statements due to- changes in foreign exchange rates when a parent and its subsidiary are based in different countries; and
Let’s Say a company H has invested USD 100,000 (65 i.e. INR 65,00,000) in a wholly owned subsidiary S and after one year dollar rate comes to 64 and hence net assets owing to the same comes to INR 64,00,000.
| Year | Net Assets of S consolidated (INR) | Tax Base (INR) | Temporary Difference | DTA/DTL @ applicable tax rate |
| 1 (Year of consolidation) | 65,00,000 | 65,00,000 | – | NA |
| 2 | 64,00,000 | 65,00,000 | (100,000) | DTA |
iii. Deferred tax in consolidated financial statements due to- a reduction in the carrying amount of an investment in an associate to its recoverable amount
Let’s Say a company H has invested INR 100,000 (assuming on 31st March) in a wholly owned subsidiary S and after few years H impairs S ltd to half of its value.
| Year | Net Assets of S consolidated (INR) | Tax Base (INR) | Temporary Difference | DTA/DTL @ applicable tax rate |
| 1(Year of consolidation) | 100,000 | 100,000 | – | NA |
| Year of impairment | 50,000 | 100,000 | (50,000) | DTA |
Para 39 of Ind AS 12- Income Taxes
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 arrangements, except to the extent that both of the following conditions are satisfied:
the parent, investor, joint venturer or joint operator 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.
Para 40 of Ind AS 12- Income Taxes
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.
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(Author CA Arpit Arora can be reached @ arpit.arora@icai.org or +91983458778)
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if the undsitributed profits will be distributed then it will be dividend and hence no tax liability.
Hi Nitish,
This explanation is only for temporary differences arising exclusively in consolidated financials.
Ind AS 12 covers wide range of areas including detailed knowledge of tax base calculation, disclosure of reconciliation between current tax expense and effective tax rate.
please explain ind-as 12 with clear examples sir