Income Taxes, Leases and Foreign Currency (Ind AS 12, 116, 21)
Ind AS 12, 116 and 21 link tax, lease and currency mechanics.
Core rules
- Ind AS 12: deferred tax arises on temporary differences between carrying amount and tax base. Recognise DTL for taxable differences and DTA for deductible differences when probable. Initial recognition exemption applies to some assets and liabilities. Outside basis differences in subsidiaries need assessment.
- Ind AS 116: lessee recognises a right-of-use asset and lease liability at present value of lease payments, discounted at the incremental borrowing rate or rate implicit in the lease. Exemptions exist for short-term and low-value leases. Remeasure on lease term changes.
- Ind AS 21: functional currency is the currency of the primary economic environment; foreign currency transactions are translated at spot on the transaction date. Monetary items are retranslated at the closing rate; non-monetary at historical rate. Foreign operations: assets and liabilities at closing rate, income and expenses at average rate, exchange differences in OCI.
Worked example
A 3-year lease requires ₹1,00,000 at each year-end; incremental borrowing rate is 10%. PV = 90,909 + 82,645 + 75,131 = ₹2,48,685. The ROU asset and lease liability start at ₹2,48,685; interest for year 1 is ₹24,869.
Traps
- Creating a lease liability for variable payments not based on an index.
- Applying the initial recognition exemption to all temporary differences.
- Translating non-monetary items at the closing rate.
- Ignoring deferred tax on the ROU asset and lease liability.