A company, say X Ltd. has two subsidiaries, say Y Ltd. and Z Ltd. Ind AS is applicable on X Ltd. from April 1, 2017. In April, 2016 both subsidiaries got amalgamated and consequently goodwill has been recognised in the books of amalgamated subsidiary. This goodwill is an allowable deduction to the amalgamated entity under Income tax laws. X Ltd. decided to apply Ind AS 103, Business Combinations prospectively.
At the time of consolidation as per Ind AS, X Ltd. has eliminated the goodwill as consolidation adjustments. But, tax base of assets in the consolidated financial statements (CFS) has increased because of eliminated tax deductible goodwill.
Whether X Ltd. should recognise deferred tax asset in CFS on goodwill as the same is deductible under tax laws, even if the goodwill has been eliminated from the CFS?
Tax base of an asset is defines under para 5 of Ind AS 12, Income Taxes as the amount that will be deductible while determining taxable profits.
According to para 9 of Ind AS 12, some assets and liabilities have tax base even if they are not recognised in the books. For example, preliminary expenses, which are allowed as deduction over the years under Income tax laws but while determining accounting profit these are recognised as expense in the year of their incurrence. In such case, in the second year, tax base of preliminary expenses is the amount deductible over the future years even if there is no corresponding entry in the financial statements.
Further, para 24 of Ind AS 12 states that deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available in future years against which the deductible temporary differences can be utilised. But where deductible temporary differences arises on initial recognition of an asset or liability in a business combination or on recognition of a transaction that affectsneither accounting profit nor taxable profit, no deferred tax asset should be recognised.
From the above paras, X Ltd. should recognise deferred tax asset on the tax base of the eliminated goodwill by crediting consolidated profit or loss to the extent that it is probable that taxable profit will be available in future years against which tax base of the goodwill can be deducted.
- Issue 3 of Ind AS Transition Facilitation Group Clarification Bulletin 10