TAX BASE of an ASSET- Indian GAAP Vs. IFRS
(Assuming the economic benefits that will flow to an entity when it recovers the carrying amount of the asset is taxable) Tax base of an asset as per IAS12 is
“The amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset’.
If you are of the opinion that the IAS-12 is completely different from AS-22, please see the below explanation to know the fact.
Under Indian GAAP, Deferred tax asset (DTA) or Deferred tax liability (DTL) would arise when the profit as per books and as per the income tax is different.
Similarly, under IFRS (i.e. IAS-12), DTA/DTL would come into picture when the tax base of an asset/liability as per income tax (IT) and as per books is different.
For example, in the below case
Cost of a machine purchased at the start of year 2010 = Rs.100
Depreciation as per books in year 2010 = Rs.30
Depreciation for tax purposes in year 2010 = Rs.40
Carrying value of that machine at year end of 2010 = Rs.70 (100-30)
Value of that machine as per IT law = Rs.60 (100-40)
Tax Rate = 30%
Year 2010 = Jan’10 to Dec’10
Indian GAAP :--
As the depreciation is more for income tax purpose, DTL as per AS-22 is calculated as under
Excess Depreciation which would result in timing difference is 40-30=Rs.10
So, Timing Difference = Rs.10
DTL/DTA= Timing Difference *Tax Rate
DTL= 10 *30% = Rs.3
Similarly, in IFRS also, this situation would result into DTL of Rs.3.
Let us see how that happens.
The Definition in IAS-12 is, the tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset
Let us assume that this asset is sold for Rs. 85 at the start of year 2011.
The taxable economic benefits that flow to the entity are Rs.85.
GAIN as per IT Law would be = Rs. 85 – Rs. 60 = Rs.25
Tax would be computed on this gain of Rs. 25.
Here, Rs. 60 is allowed against Rs. 85 as deduction by IT law but not Rs.70 (book value)
Thus, as per the definition in IAS-12, the tax base is Rs.60
In IFRS, DTL/DTA is calculated using a formula which is
DTL/DTA =“Temporary Difference *Tax Rate”
Temporary difference is calculated using a formula which is
“TAX BASE of asset/liability LESS value of such asset/liability as per Books”
In this case,
Temporary difference =TAX BASE of asset LESS Rs.70
Temporary difference = 60 LESS Rs.70 =Rs.10
DTL= 10 *30% = Rs.3
Thus, conceptually, IAS 12 and AS-22 are similar in nature.
Only, the method of finding the DTA/DTL is changed which will generally give similar result like AS-22 except when the tax rates over the period are different.
1) If the tax base of an asset is less, that would result into DTL and if it is more that would result into DTA.
2) Generally a definition would be constructed in a broad way so as to cover everything without any loopholes. Here, I have narrowed it with the help of an example to make the concept simple.