IN THE NAME OF ALLAH THE MOST BENEFICIENT THE MOST BENEVOLENT

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IAS-12 Income Taxes Analysis of Financial Reports of Nishat Mills Limited

Submitted to Prof. Azfar Ali By Hassan Abbas (L3f08bcom2312) Hafiz Islam Aslam (L3f08bcom2325) Muhammad Saad (L3f09bcom2599) Muhammad Suleman (L3f08bcom2324) Adil Bin Naeem (L3f08bcom2314) Fall, 2011 Faculty of Commerce University of Central Punjab Lahore, Pakistan
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Preface
This report is based on the International Accounting Standard no. 12 Income Taxes. The objective of this report is to gives detailed view and explanation for the Standard and the necessary disclosures required by this standard. The report will covers all the aspects related to Income Taxes under IAS-12 from historical perspective to the adjustments and treatments in the financial statements of the companies. As the reference to make this standard more clear and understandable for the readers the financial reports of Nishat Mills Limited, Pakistan have been used to review how they follows the IAS 12 and how this standard is actually used by other organization in accounting and disclosure of their financial statements. We hope this reports will helpful for the readers to better understand this standard and application of this standard on the actual financial statements of the organizations.

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Acknowledgements
We are thankful to Almighty Allah for the countless blessing and help, which enabled us to give our presentation and to complete this report work. We wish to extend our sincere appreciation to our course instructor Prof. Azfar Ali, we are thankful to her for her extremely valuable advises and help.

Hassan Abbas Muhammad Saad Hafiz Islam Aslam Muhammad Suleman Adil Bin Naeem

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Table of Contents
1.0Introduction to IFRS Foundation and the IASB.7 1.1Standard-settings....7 1.1.1- The IASB (International Accounting Standards Board)...7 1.1.2- The IFRS Interpretations Committee...7 1.21.3Structure of IFRSs.8 List of Standard..8 1.3.1- International Financial Reporting Standards.8 1.3.2- International Accounting Standards.9 2.03.0History of International Accounting Standard 12.11 Introduction to IAS-12 Income Taxes.11 3.13.23.34.0Objective of IAS 12.11 Scope of IAS 12...11 Key Concepts of IAS 12..11

Measurement of Deferred Tax Assets and Liabilities...14 4.1Tax Consequences of Dividends.14

5.0-

Guidelines for Recognition...14 5.15.25.35.4Recognition of Deferred Tax Assets14 Recognition of Deferred Tax Liabilities..15 Recognition of Current tax liabilities and Current Tax Assets15 Recognition of Tax Expense or Income..15

6.0-

Disclosure Requirements..16 6.16.2Major Disclosure.16 Other Disclosure..16

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7.08.0-

Presentation Requirements..17 Review of Financial Statements (Nishat Mills Limited)18 Balance sheet as on June 30 2011...18 Profit and Loss Account.20 Statement of Comprehensive Income.20 Cash Flow Statement..21 Significant Accounting Policies (Related to IAS 12).22 Notes to the Account (Related to IAS 12)..23

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1.0- Introduction to IFRS Foundation and the IASB:

The IFRS Foundation is an independent, not-for-profit private sector organization working in the public interest. Its principal objectives are:

To develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standardsetting body, the IASB;

To promote the use and rigorous application of those standards; To take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and

To bring about convergence of national accounting standards and IFRSs to high quality solutions.

1.1-

Standard-settings:
Standard Setting Involves following two bodies.

1.1.1- The IASB (International Accounting Standards Board) : The IASB is the independent standard-setting body of the IFRS Foundation. Its members are responsible for the development and publication of IFRSs, including the IFRS for SMEs and for approving Interpretations of IFRSs as developed by the IFRS Interpretations Committee (formerly called the IFRIC). The IASB engages closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession. 1.1.2- The IFRS Interpretations Committee The IFRS Interpretations Committee (formerly called the IFRIC) is the interpretative body of the IASB. The mandate of the Interpretations Committee is to review on a timely basis widespread accounting issues that have arisen within the context of current IFRSs and to provide authoritative guidance (IFRICs) on those issues. In developing interpretations, the Interpretations Committee works closely with similar national committees and follows a transparent, thorough and open due process.
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1.2-

Structure of IFRSs

1.3-

List of Standard

1.3.1- International Financial Reporting Standards: IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Assets IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments IFRS 9 Financial Instruments IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements
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IFRS 12 Disclosure of Interests in Other Entities IFRS 13 Fair Value Measurement

1.3.2- International Accounting Standards: IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 3 Consolidated Financial Statements Originally issued 1976, effective 1 Jan 1977. Superseded in 1989 by IAS 27 and IAS 28 IAS 4 Depreciation Accounting Withdrawn in 1999, replaced by IAS 16, 22, and 38, all of which were issued or revised in 1998 IAS 5 Information to Be Disclosed in Financial Statements Originally issued October 1976, effective 1 January 1997. Superseded by IAS 1 in 1997 IAS 6 Accounting Responses to Changing Prices Superseded by IAS 15, which was withdrawn December 2003 IAS 7 Statement of Cash Flows IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 9 Accounting for Research and Development Activities Superseded by IAS 38 effective 1.7.99 IAS 10 Events after the Reporting Period IAS 11 Construction Contracts IAS 12 Income Taxes IAS 13 Presentation of Current Assets and Current Liabilities Superseded by IAS 1 IAS 14 Segment Reporting IAS 15 Information Reflecting the Effects of Changing Prices Withdrawn December, 2003 IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue
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IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 22 Business Combinations Superseded by IFRS 3 effective 31 March 2004 IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 25 Accounting for Investments Superseded by IAS 39 and IAS 40 effective 2001 IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Consolidated and Separate Financial Statements Superseded by IFRS 10, IFRS 12 and IAS 27 (rev. 2011) effective 2013 IAS 28 Investments in Associates Superseded by IAS 28 (rev. 2011) and IFRS 12 effective 2013 IAS 29 Financial Reporting in Hyperinflationary Economies IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions Superseded by IFRS 7 effective 2007 IAS 31 Interests in Joint Ventures Superseded by IFRS 11 and IFRS 12 effective 2013 IAS 32 Financial Instruments: Presentation Disclosure provisions superseded by IFRS 7 effective 2007 IAS 33 Earnings Per Share IAS 34 Interim Financial Reporting IAS 35 Discontinuing Operations Superseded by IFRS 5 effective 2005 IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement Superseded by IFRS 9 effective 2013
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IAS 40 Investment Property IAS 41 Agriculture

2.0- History of International Accounting Standard 12:

The roots of IAS 12 move back to 1978 when its first draft was made and in 1979 the IAS 12 Accounting for Taxes on Income was implemented. After that some changes were made in IAS 12 in 1989 and it was reformatted in 1994. In October, 1996 IAS 12 Income Taxes was proposed and the effective date of IAS 12 was I January, 1998. After that limited revisions were made in the standard in 2000, 2009 and 2010. In 2010 IAS was amended in Deferred Tax: Recovery of Underlying Assets, these amendments are in effect from 1 January, 2012.

3.0- Introduction to IAS-12 Income Taxes:

The IAS 12 deals with each and every aspect of accounting treatment, adjustments and disclosure requirements related to the income tax calculations and presentation in the financial statements.

3.1-

Objective of IAS 12:

The objective of this standard is to prescribe the accounting treatment of income

taxes and how this treatment effects the financial statement and their presentation.

3.2-

Scope of IAS 12:

This standard is applicable for the accounting for income taxes which includes all

domestic and foreign taxes that are applied on the taxable profits of the companies. It also provides guidelines for the calculation of taxable income, and how calculation of taxable income of organization differs from that of income calculated by tax department.

3.3-

Key Concepts of IAS 12:

Following are some key concepts used in the IAS 12: 1. Current Year Tax
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2. Prior Year Tax 3. Temporary Differences 4. Taxable Temporary Differences 5. Deductable Temporary Differences 6. Deferred Tax Asset 7. Deferred Tax Liability 8. Current Tax Asset 9. Current Tax Liability Temporary Difference: It is the difference between the carrying amount of an asset or liability and its tax base. Examples, Interest revenue received in arrears and is included in accounting profit on a time apportionment basis but is included in taxable profit on a cash basis Revenue from sales is included in accounting profit at delivery and in tax profit when cash is received. Depreciation of an asset is accelerated for tax purposes Development cost is amortized for accounting purposes but deducted in the year of payment for tax purposes Taxable Temporary Difference: A temporary difference that will result in taxable amounts in the future when the carrying amount of the asset is recovered or the liability is settled. Deductible Temporary Difference: A temporary difference that will result in amounts that are tax deductible in the future when the carrying amount of the asset is recovered or the liability is settled. Deferred Tax Asset: A deferred tax asset is created by overpaying taxes during a given time period. This usually occurs as a result of timing differences based on how the
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company depreciates its assets. This deferred tax asset reduces the company's tax liability in the future. Deferred Tax Liability: An account on a company's balance sheet that is a result of temporary differences between the company's accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. This liability may or may not be realized during any given year, which makes the deferred status appropriate. Current Tax Liability: The total amount of tax that an entity is legally obligated to pay to a Taxation authority as the result of the occurrence of a taxable event. Tax Base of Asset: It is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to any enterprise when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount. Tax Base of Liability: It is the carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. In case of revenue which is received in advance the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.

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4.0- Measurement of Deferred Tax Assets and Liabilities:

Current tax liabilities for the current and prior periods should be measured at the amount expected to be paid to the taxation authorities, using the tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets and liabilities should be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets and liabilities should not be discounted.

4.1-

Tax Consequences of Dividends:

In some jurisdictions, income taxes are payable at a higher or lower rate if part or

all of the net profit or retained earnings is paid out as a dividend. In other jurisdictions, income taxes may be refundable if part or all of the net profit or retained earnings is paid out as a dividend. Possible future dividend distributions or tax refunds should not be anticipated in measuring deferred tax assets and liabilities.

5.0- Guidelines for Recognition:

IAS 12 describes different rules and guidelines for the recognition of different types of taxes, different guidelines for recognition are as follows:

5.1-

Recognition of Deferred Tax Assets:

A deferred tax asset should be recognized for deductible temporary differences,

unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized, unless the deferred tax asset arises from: The initial recognition of an asset or liability in a transaction which is not a business transaction and at the time of the transaction, affects neither accounting profit nor taxable profit. Deferred tax assets for deductible temporary differences arising from investments in subsidiaries, associates, branches and joint ventures should be recognized to the extent
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that it is probable that the temporary difference will reverse in the foreseeable future and that taxable profit will be available against which the temporary difference will be utilized. The carrying amount of deferred tax assets should be reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or the entire deferred tax asset to be utilized.

5.2-

Recognition of Deferred Tax Liabilities:

The general principle in IAS 12 is that deferred tax liabilities should be

recognized for all taxable temporary differences. There are three exceptions to the requirement to recognize a deferred tax liability, as follows:

liabilities arising from initial recognition of goodwill for which amortization is not deductible for tax purposes;

The initial recognition of an asset or liability in a transaction which is not a business transaction and at the time of the transaction, affects neither accounting profit nor taxable profit.

5.3-

Recognition of Current tax liabilities and Current Tax Assets:

Current tax for the current and prior periods should be recognized as a liability to

the extent that it has not yet been settled, and as an asset to the extent that the amounts already paid exceed the amount due. Current tax assets and liabilities should be measured at the amount expected to be paid to (recovered from) taxation authorities, using the rates/laws that have been enacted or substantively enacted by the balance sheet date.

5.4-

Recognition of Tax Expense or Income:

Current and deferred tax should be recognized as income or expense and included

in profit or loss for the period, except to the extent that the tax arises from:

A transaction or event that is recognized directly in equity; or A business combination accounted for as an acquisition.
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If the tax relates to items that are credited or charged directly to equity, the tax should also be charged or credited directly to equity.

6.0- Disclosure Requirements:

IAS 12 requires disclosure of tax expense (tax income) relating to ordinary activities on the face of the statement of comprehensive income. IAS 12 requires that if an entity presents a statement of income, in addition to a statement of comprehensive income, tax expense (income) from ordinary activities should be presented in the statement of income.

6.1-

Major Disclosure:
IAS 12 requires that tax expense and income should be disclosed separately. The

major components of tax expense and income are:

Current tax expense (income) Any adjustments of taxes of prior periods Amount of deferred tax expense (income) relating to the origination and reversal of temporary differences

Amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes

Amount of the benefit arising from a previously unrecognized tax loss, tax credit or temporary difference of a prior period

Write down, or reversal of a previous write down, of a deferred tax asset Amount of tax expense (income) relating to changes in accounting policies and corrections of errors

6.2-

Other Disclosure:

Aggregate current and deferred tax relating to items reported directly in equity

Tax relating to each component of other comprehensive income Explanation of the relationship between tax expense (income) and the tax that would be expected by applying the current tax rate to accounting
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profit or loss (this can be presented as a reconciliation of amounts of tax or a reconciliation of the rate of tax)

Changes in tax rates Amounts and other details of deductible temporary differences, unused tax losses, and unused tax credits

Temporary differences associated with investments in subsidiaries, associates, branches, and joint ventures

For each type of temporary difference and unused tax loss and credit, the amount of deferred tax assets or liabilities recognized in the statement of financial position and the amount of deferred tax income or expense recognized in the income statement

Tax relating to discontinued operations Details of deferred tax assets

7.0- Presentation Requirements:

Current tax assets and current tax liabilities should be offset on the balance sheet only if the entity has the legal right and the intention to settle on a net basis. Deferred tax assets and deferred tax liabilities should be offset on the balance sheet only if the entity has the legal right to settle on a net basis and they are levied by the same taxing authority on the same entity or different entities that intend to realize the asset and settle the liability at the same time.

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8.0- Review of Financial Statements (Nishat Mills Limited):

Financial Statements of Nishat Mills Limited have been selected for review purpose that how they have followed the IAS 12 and at what places IAS 12 has been used and mentioned. Encircled are the points where IAS 12 is used:

Balance sheet as on June 30 2011

2011 Note 2010 (Rupees in Thousands)

Equity and Liabilities Share Capital and RESERVES Authorized share capital
1,100,000,000 (2010: 1,100,000,000) ordinary Shares of Rupees 10 each Issued, subscribed and paid-up share capital Reserves 3 4 11,000,000 3,515,999 31,877,960 11,000,000 3,515,999 27,860,314

Total equity
35,393,959 31,376,313

Liabilities Non-Current Liabilities

Long term financing Liabilities against assets subject to finance lease Deferred income tax 5 6 7 2, 6592,328 202,628 510,640 3,372,596 2,980,694 1,256,892 4,237,586

Current Liabilities
Trade and other payables Accrued mark-up Short term borrowings Current portion of non-current liabilities Provision for taxation 8 9 10 11 2,577,020 358,454 10,471,685 1,283,865 631,325 15,322,349 2,139,321 232,247 6,649,447 1,128,632 418,768 10,568,415 14,806,001 46,182,314

Total Liabilities Contingencies and Commitments Total Equity and Liabilities

18,694,945 12 54,088,904

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Note

2011 2010 (Rupees in Thousands)

Assets Non-Current assets

Property, plant and equipment Investment properties Long term investments Long term loans Long term deposits and prepayments 13 14 15 16 17 13,303,514 126,834 21,337,889 849,206 29,502 35,646,945 11,841,667 132,550 21,959,543 498,803 16,823 34,449,386

Current assets
Stores, spare parts and loose tools Stock in trade Trade debts Loans and advances Short term deposits and prepayments Other receivables Accrued interest Short term investments Cash and bank balances 18 19 20 21 22 23 24 25 26 955,136 9,846,680 2,481,259 756,351 47,211 1,406,890 34,260 1,781,471 1,132,701 18,441,959 688,832 6,060,441 2,041,256 504,046 31,912 724,407 16,906 1,554,543 110,585 11,732,928

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Profit and Loss Account For the end year 30 June 2011
2011 (Rupees in Thousands) 48,565,144 (40,718,697) 7,846,447 (2,190,496) (656,756) (431,220) (3,278,472) 4,567,975 2,444,985 7,012,960 (1,601,048) 5,411,912 (568,000) 4,843,912 2010

Note Sales Cost of sales Gross profit Distribution cost Administrative expenses Other operating expenses 27 28

31,535,647 (25,555,462) 5,980,185 (1,714,598) (545,166) (289,080) (2,548,844) 3,431,341 981,650 4,412,991 (1,126,922) 3,286,069 (370,608) 2,915,461

29 30 3

Other operating income Profit from operations Finance cost Profit before taxation Provision for taxation Profit after taxation Earnings per Share- Basic and Diluted (Rupees)

32

33

34

35

13.78

10.50

Statement of Comprehensive Income For the year ended 30 June 2012

2011 (Rupees in Thousands) 2010

Profit after Taxation Other Comprehensive income

Surplus/ (deficit) arising on re-measurement of available For sale investments to fair value Reclassification adjustments for gains included in profit or loss Deferred income tax relating to surplus on available For sale investments Other comprehensive income for the year - net of tax

4,843,912

2,915,461

(584,488) (109,030) 746,252 52,734 4,896,646

6,314,129 (52,118) (1,011,649) 5,250,362 8,165,823

Total Comprehensive income for the year

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Cash Flow Statement For the year ended 30 June 2012

2011 2010 (Rupees in Thousands) 1,614,622 (1,474,841) (561,819) 706,160 (9,690) (13,909) 260,523 2,386,569 (1,096,389) (343,036) 64,725 (19,570) (4,106) 988,193

Note Cash flows from operating activities Cash generated from operations Finance cost paid Income tax paid Exchange gain on forward exchange contract received Net increase in long term loans to employees Net increase in long term deposits and prepayments Net cash generated from operating activities Cash flows from investing activities Capital expenditure on property, plant and equipment Proceeds from sale of property, plant and equipment Investments made Proceeds from sale of investment Long term loan to subsidiary company Interest received on loan to subsidiary company Dividends received Net cash used in investing activities Cash flows from financing activities\ Proceeds from long term financing Repayment of long term financing Repayment of assets subject to finance lease Proceeds from issue of right shares Short term borrowings - net Dividend paid Net cash from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 36

(2,848,115) 275,447 (710,655) 301,282 (345,335) 106,200 998,675 (2,222,501)

(1,955,542) 145,490 (4,249,397) 430,000 (472,885) 22,331 559,134 (5,520,869)

1,152,150 (1,078,628) (37,027) 3,822,238 (874,639) 2,984,094 1,022,116 110,585 1,132,701

1,937,415 (595,813) 4,364,688 (693,153) (481,370) 4,531,767 (909) 111,494 110,585

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Significant Accounting Policies (Related to IAS 12)

Taxation (Page no. 47 of Annual Report 2011)
In making the estimates for income tax currently payable by the Company, the management takes into account the current income tax law and the decisions of appellate authorities on certain issues in the past.

2.3 Taxation (Page no. 50 of Annual Report 2011)

Current Provision for current tax is based on the taxable income for the year determined in accordance with the prevailing law for taxation of income. The charge for current tax is calculated using prevailing tax rates or tax rates expected to apply to the profit for the year if enacted. The charge for current tax also includes adjustments, where considered necessary, to provision for tax made in previous years arising from assessments framed during the year for such years. Deferred Deferred tax is accounted for using the balance sheet liability method in respect of all temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of the taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilized. Deferred tax is calculated at the rates that are expected to apply to the period when the differences reverse based on tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the profit and loss account, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case the tax is also recognized in other comprehensive income or directly in equity, respectively.
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Notes to the Account (Related to IAS 12)

Note no. 7-Deferred Income Tax:
This represents deferred income tax liability on surplus on revaluation of unquoted equity investments available for sale. Provision for deferred tax on other temporary differences was not considered necessary as the Company is chargeable to tax under section 169 of the Income Tax Ordinance, 2001.

Note no. 34-Provision for Taxation:

Current (Note 34.1) Prior year adjustment 568,000 400,608 (30,000)

568,000 370,608 34.1 The Company falls under the ambit of presumptive tax regime under section 169 of the Income Tax Ordinance, 2001. Provision for income tax is made accordingly. 34.2 Provision for deferred tax is not required as the Company is chargeable to tax under section 169 of the Income Tax Ordinance, 2001 and no temporary differences are expected to arise in the foreseeable future except for deferred tax liability as explained in note 7. 34.3 Reconciliation of tax expense and product of accounting profit multiplied by the applicable tax rate is not required in view of presumptive taxation.

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