Recognition, Measurement and Presentation of Deferred Tax as per Ind AS 12
As per Ind AS 12, Income Taxes-
Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.
Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences;
(b) the carry forward of unused tax losses; and
(c) the carry forward of unused tax credits.
The following steps are to be followed in the recognition, measurement, and presentation of Deferred Tax Liabilities or Assets:
Computation of the carrying amounts of assets & liabilities in the books of accounts
The carrying amount is the amount at which the asset or liability is recognized in the Balance Sheet, after providing necessary adjustments like depreciation, impairment, etc.
Computation of tax base
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. At the end of the day, all differences between the carrying amount and tax base of an asset or liability are reversed.
| Tax base of an asset | Tax base of a liability | |
| 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. If those economic benefits are not taxable, the asset’s tax base is equal to its carrying amount. | The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. In the case of the revenue that 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. | |
| For Example 1. The machine cost Rs. 100. For tax purposes, depreciation of Rs. 30 has already been deducted in the current and prior periods and the remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal. The tax base of the machine is Rs. 70. 2. Trade receivables have a carrying amount of Rs. 100. The related revenue has already been included in taxable profit (tax loss). The tax base of the trade receivables is Rs. 100. |
For Example 1. Current liabilities include accrued expenses with a carrying amount of Rs. 100. The related expense will be deducted for tax purposes on a cash basis. The tax base of the accrued expenses is nil. 2. Current liabilities include interest revenue received in advance, with a carrying amount of Rs. 100. The related interest revenue was taxed on a cash basis. The tax base of the interest received in advance is nil. |
Computation of temporary differences
While AS 22, determines the deferred tax on the basis of ‘timing difference’ & ‘permanent difference’. In Ind AS 12, there is only a concept of a temporary difference.
The temporary difference is the difference between the carrying amount of an asset or liability in the balance sheet and its tax base.
Classification of temporary differences into Taxable temporary difference or Deductible temporary difference
Temporary Differences are further classified into Taxable Temporary Differences and Deductible Temporary Differences.
Taxable Temporary differences are those temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
For example, an entity has an asset that costs Rs. 300 and have a carrying value of Rs. 200. For tax purposes, cumulative depreciation on such asset is Rs. 180 and the tax rate is 30%.
Accordingly, the difference between the carrying value of Rs. 200 and the tax base of Rs. 120 (300 – 180) is the taxable temporary difference of Rs. 80
Deductible temporary differences are those temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
For example, an entity recognises a liability of Rs. 100 for gratuity and leave encashment expenses by creating a provision for gratuity and leave encashment. For tax purposes, any amount with regard to gratuity and leave encashment will be deductible on a payment basis. The tax rate is 25%. The tax base of the liability is nil (carrying amount of Rs. 100, less the amount that will be deductible for tax purposes in respect of that liability in future periods).
In settling the liability for its carrying amount, the entity will reduce its future taxable profit by an amount of Rs. 100 and, consequently, reduce its future tax payments by Rs. 25 (Rs. 100 at 25%).
The difference between the carrying amount of Rs. 100 and the tax base of nil is a deductible temporary difference of Rs. 100. Therefore, the entity recognises a deferred tax asset of Rs. 25 (Rs. 100 at 25%), provided that it is probable that the entity will earn sufficient taxable profit in future periods to benefit from a reduction in tax payments.
Identification of Exceptions
The recognition principle of Deferred Tax Assets and Deferred Tax Liabilities in Ind AS 12 are subject to the following exception items:
a) the initial recognition of goodwill arising in a business combination.
b) the initial recognition of an asset or liability in a transaction which:
i. is not a business combination; and
ii. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)
iii. temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements
Assessment of deductible temporary differences, tax losses, and tax credits
Deductible temporary differences reduce the taxable profits of future periods i.e. less future tax payment by a particular amount. However, if there are no tax payments in the future, that means that deductible temporary differences are of no benefit.
Therefore, an entity should recognize deferred tax assets only if it is probable that taxable profits will be available against which the deductible temporary differences can be utilized.
Determination of tax rate
Deferred Tax shall be measured:
i. At the tax rates that are expected to apply to the period when the asset is realized or the liability is settled
ii. Based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period
‘Expected to apply’ means the tax rates or the tax laws that will apply in the future depend on various factors such as the manner of recovery of assets or settlement of liability.
The measurement of Deferred Tax Liabilities and Deferred Tax Assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities
Calculation and recognition of deferred tax
Subsequent to the determination of taxable temporary differences and deductible temporary differences and the applicable tax rates:
i. Deferred Tax Liability shall be recognized by multiplying the taxable temporary differences with tax rates and
ii. Deferred Tax Asset shall be recognized by multiplying the deductible temporary differences with tax rates.
Accounting of deferred tax
A transaction and the deferred tax effects of a transaction may be accounted for in:
a) Statement of Profit and Loss.
b) Outside Profit and Loss account:
i. In Other Comprehensive income such as revaluation amount in accordance with Ind AS 16
ii. Directly in equity such as correction of an error in accordance with In AS S8.
Offsetting of deferred tax liabilities and deferred tax assets
Offset deferred tax assets and deferred tax liability, if and only if:
a) The entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
b) The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:
i. The same taxable entity; or
ii. Different taxable entities which intend either to settle current tax liabilities and assets on a net basis or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.