How to approach it
- Compute taxable profit/loss: start from accounting result, remove non-taxable and non-deductible items, swap accounting depreciation and amortisation for tax allowances, adjust accruals that are taxed on cash.
- List every asset and liability with a different tax base; compute temporary differences.
- Measure deferred tax at the rate enacted for when the differences reverse.
- Recognise a deferred tax asset on losses only to the extent future use is probable.
- Build the reconciliation: accounting profit × rate, then each permanent difference, rate change effect and unrecognised losses.
Key rules to apply
- IAS 12: use rates enacted or substantively enacted by the reporting date.
- Deferred tax assets need probable future taxable profits.
- Remeasurement of opening deferred tax for a rate change goes to P&L (or OCI if the item was in OCI).
Answer layout
| Tax note | Rs m |
|---|---|
| Current tax | |
| Deferred tax: origination and reversal | |
| Deferred tax: rate change | |
| Tax expense | |
| Reconciliation: accounting profit × rate | |
| Permanent differences | |
| Rate change / unrecognised losses |
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Not removing the fair value gain on investment property from taxable profit (examiners' point).
- Measuring closing deferred tax at the old rate when a new rate was enacted before year-end.
- Recognising a deferred tax asset on losses that are not expected to be used.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q9 without copying it.
Original practice question
Tax note with a rate change
Profit before tax Rs 200m. Non-deductible expenses Rs 6m; tax-exempt income Rs 10m. Accounting depreciation Rs 30m; tax depreciation Rs 45m. The opening deferred tax liability on PPE was Rs 30m (temporary difference Rs 100m at 30%). Before year-end a cut to 25% from next year was enacted; this year's current tax is still at 30%.
Required: Prepare the tax expense and reconciliation.
Worked solution
| Working | Rs m |
|---|---|
| Taxable profit: 200 + 6 − 10 + 30 − 45 | 181.00 |
| Current tax at 30% | 54.30 |
| Closing DTL: (100 + 15) × 25% | 28.75 |
| Deferred tax credit: 28.75 − 30.00 | (1.25) |
| Tax expense | 53.05 |
| Reconciliation | Rs m |
|---|---|
| 200 × 30% | 60.00 |
| Non-deductible: 6 × 30% | 1.80 |
| Exempt income: 10 × 30% | (3.00) |
| Rate change on closing temporary difference: 115 × (25% − 30%) | (5.75) |
| Tax expense | 53.05 |
Answer: Tax expense Rs 53.05m; closing deferred tax liability Rs 28.75m.