How to approach it
- Taxable profit: add back non-deductible items, remove exempt income, replace accounting depreciation with tax depreciation, adjust provisions deductible on payment.
- Current tax at the rate that applies to the current year.
- Closing temporary differences × new rate; opening balances at the old rate. The difference splits into origination/reversal and rate-change effects.
- Deferred tax on a revaluation goes to OCI, even if the gain is taxed only on sale.
Key rules to apply
- IAS 12: deferred tax on items recognised in OCI is also recognised in OCI.
- A gain taxable only on disposal still creates a taxable temporary difference.
- Provisions deductible when paid create deductible temporary differences (deferred tax assets).
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Applying the rate cut inconsistently between current tax, closing deferred tax and opening balances (examiners' point).
- Ignoring deferred tax on the land revaluation, or putting it through P&L.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q2 without copying it.
Original practice question
Rate cut plus revaluation
PBT Rs 300m. Non-deductible costs Rs 10m. Accounting depreciation Rs 40m vs tax Rs 60m; opening PPE temporary difference Rs 80m. Warranty provision: opening Rs 20m, expense Rs 12m, paid Rs 7m (deductible when paid). Land revalued up by Rs 50m. During the year the rate was cut from 30% to 28% for this year onwards.
Required: Calculate current tax, deferred tax and the reconciliation.
Worked solution
| Working | Rs m |
|---|---|
| Taxable profit: 300 + 10 + 40 − 60 + 12 − 7 | 295.0 |
| Current tax at 28% | 82.6 |
| DTL on PPE: 100 × 28% − 80 × 30% | 4.0 charge |
| DTA on warranty: 25 × 28% − 20 × 30% | 1.0 credit |
| Tax expense in P&L | 85.6 |
| Deferred tax on land (OCI): 50 × 28% | 14.0 |
| Reconciliation | Rs m |
|---|---|
| 300 × 28% | 84.0 |
| Non-deductible: 10 × 28% | 2.8 |
| Remeasuring opening net DTL: (80 − 20) × (28% − 30%) | (1.2) |
| Tax expense | 85.6 |
Answer: P&L tax Rs 85.6m; OCI tax Rs 14m.