As explained in paragraph 68C of the Standard, if the tax deduction (or estimated future tax deduction) exceeds the amount of the related cumulative remuneration expense, this indicates that the tax deduction relates not only to remuneration expense but also to an equity item. In this situation, paragraph 68C requires that the excess of the associated current or deferred tax should be recognised directly in equity.
The entity's tax rate is 40 per cent. The options were granted at the start of year 1, vested at the end of year 3 and were exercised at the end of year 5. Details of the expense recognised for employee services received and consumed in each accounting period, the number of options outstanding at each year-end, and the intrinsic value of the options at each year-end, are as follows:

Example 5 - Share-based Payment Transactions
Editorial note: Example 5 inserted by IFRS 2 with effect for accounting periods beginning on or after 1 January 2005. If an entity applies IFRS 2 for an earlier period, these amendments shall be applied for that earlier period.
In accordance with IFRS 2 Share-based Payment, an entity has recognised an expense for the consumption of employee services received as consideration for share options granted. A tax deduction will not arise until the options are exercised, and the deduction is based on the options' intrinsic value at exercise date.
As explained in paragraph 68B of the Standard, the difference between the tax base of the employee services received to date (being the amount the taxation authorities will permit as a deduction in future periods in respect of those services), and the carrying amount of nil, is a deductible temporary difference that results in a deferred tax asset. Paragraph 68B requires that, if the amount the taxation authorities will permit as a deduction in future periods is not known at the end of the period, it should be estimated, based on information available at the end of the period. If the amount that the taxation authorities will permit as a deduction in future periods is dependent upon the entity's share price at a future date, the measurement of the deductible temporary difference should be based on the entity's share price at the end of the period. Therefore, in this example, the estimated future tax deduction (and hence the measurement of the deferred tax asset) should be based on the options' intrinsic value at the end of the period.

     X4    X5    X6    X7
Deferred tax (income)    -    (30)    (33)    (37)
     -    45    50    54

As explained in paragraph 23 of the Standard, at 31 December X4, the enterprise recognises the resulting deferred tax liability by adjusting the initial carrying amount of the equity component of the convertible liability. Therefore, the amounts recognised at that date are as follows:
Liability component    751
Deferred tax liability    100
Equity component (249 less 100)    149
     1,000
Subsequent changes in the deferred tax liability are recognised in the income statement as tax income (see paragraph 23 of the Standard). Therefore, the enterprise's income statement is as follows:

     Year
     X4    X5    X6    X7
Carrying amount of liability component    751    826    909    1,000
Tax base    1,000    1,000    1,000    1,000
Taxable temporary difference    249    174    91    -
Opening deferred tax liability at 40%    0    100    70    37
Deferred tax charged to equity    100    -    -    -
Deferred tax expense (income)    -    (30)    (33)    (37)
Closing deferred tax liability at 40%    100    70    37    -

Example 4 - Compound Financial Instruments
An enterprise receives a non-interest-bearing convertible loan of 1,000 on 31 December X4 repayable at par on 1 January X8. In accordance with IAS 32, Financial Instruments: Disclosure and Presentation, the enterprise classifies the instrument's liability component as a liability and the equity component as equity. The enterprise assigns an initial carrying amount of 751 to the liability component of the convertible loan and 249 to the equity component. Subsequently, the enterprise recognises imputed discount as interest expense at an annual rate of 10% on the carrying amount of the liability component at the beginning of the year. The tax authorities do not allow the enterprise to claim any deduction for the imputed discount on the liability component of the convertible loan. The tax rate is 40 %.
The temporary differences associated with the liability component and the resulting deferred tax liability and deferred tax expense and income are as follows:

If A expects to sell the investment in B, or that B will distribute its retained profits in the foreseeable future, A recognises a deferred tax liability to the extent that the temporary difference is expected to reverse. The tax rate reflects the manner in which A expects to recover the carrying amount of its investment (see paragraph 51 of the Standard). A credits or charges the deferred tax to equity to the extent that the deferred tax results from foreign exchange translation differences which have been charged or credited directly to equity (paragraph 61 of the Standard). A discloses separately:
(a) the amount of deferred tax which has been charged or credited directly to equity (paragraph 81(a) of the Standard); and
(b) the amount of any remaining temporary difference which is not expected to reverse in the foreseeable future and for which, therefore, no deferred tax is recognised (see paragraph 81(f) of the Standard).

If A has determined that it will not sell the investment in the foreseeable future and that B will not distribute its retained profits in the foreseeable future, no deferred tax liability is recognised in relation to A's investment in B (see paragraphs 39 and 40 of the Standard). Note that this exception would apply for an investment in an associate only if there is an agreement requiring that the profits of the associate will not be distributed in the foreseeable future (see paragraph 42 of the Standard). A discloses the amount (40) of the temporary difference for which no deferred tax is recognised (see paragraph 81(f) of the Standard).

At 31 December X5, the carrying amount of A's underlying investment in B, excluding the accrued dividend receivable, is as follows:
Net assets of B    520
Goodwill    150
Carrying amount    670
The temporary difference associated with A's underlying investment is 70. This amount is equal to the cumulative retained profit since the acquisition date.
If A has determined that it will not sell the investment in the foreseeable future and that B will not distribute its retained profits in the foreseeable future, no deferred tax liability is recognised in relation to A's investment in B (see paragraphs 39 and 40 of the Standard). Note that this exception would apply for an investment in an associate only if there is an agreement requiring that the profits of the associate will not be distributed in the foreseeable future (see paragraph 42 of the Standard). A discloses the amount of the temporary difference for which no deferred tax is recognised: ie 70 (see paragraph 81(f) of the Standard).

Because, at the acquisition date, the taxbase in A's tax jurisdiction of A's investment in B is 600, no temporarydifference is associated in A's tax jurisdiction with the investment.
During X5, B's equity (incorporating thefair value adjustments made as a result of the business combination) changed asfollows:

At 1 January X5	450
Retained profit for X5 (net profit of150, less dividend payable of 80)	70
At 31 December X5	520

A recognises a liability for anywithholding tax or other taxes that it will incur on the accrued dividendreceivable of 80.