Understanding Deferred Tax under Ind AS 12

In the field of financial reporting, deferred tax plays an integral part in assisting businesses to coordinate with tax liabilities with accounting income. Ind AS 12 – Income Taxes offers assistance on identifying, calculating, and showing deferred tax assets and liabilities in financial statements. Deferred tax occurs because of the temporary differences between the carrying value of assets and liabilities in financial statements and their taxable basis.

What is Deferred Tax?

Deferred tax represents future tax consequences of temporary differences. These differences occur when an item is recognized in accounting profit in one period but in taxable profit in another. Deferred tax is classified into:

Deferred Tax Liabilities (DTL): Taxes payable in the future due to taxable temporary differences.

Deferred Tax Assets (DTA): Taxes recoverable in the future due to deductible temporary differences.

Key Features of Deferred Tax:

Below are some features of the Deferred Tax

• Arises due to temporary differences between book value and tax value.
• Can be an asset or liability, depending on whether it increases or decreases future tax payments.
• Based on tax rates enacted or substantively enacted at the reporting date.
• Recognized in profit or loss, other comprehensive income (OCI), or equity, depending on the nature of the underlying transaction.

Recognition of Deferred Tax

Ind AS 12 mandates recognizing deferred tax assets and liabilities based on temporary differences.

Recognition of Deferred Tax Liabilities (DTL)

A deferred tax liability is recognized for all taxable temporary differences, except in cases where:

• It arises from the initial recognition of goodwill.
• It arises from the initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit.

Recognition of Deferred Tax Assets (DTA)

A deferred tax asset is recognized for all deductible temporary differences, provided that:

• There is probable future taxable profit to utilize the deductible temporary difference.
• The deferred tax asset does not arise from the initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit.

If an entity has unused tax losses or credits, a deferred tax asset is recognized only when there is convincing evidence that sufficient taxable profit will be available.

Investments in Subsidiaries, Associates, and Joint Arrangements

The predicted reversal of transitory differences serves as the basis for the recognition of deferred tax obligations and assets for investments in subsidiaries, branches, associates, and joint arrangements.

Measurement of Deferred Tax

Deferred tax assets and liabilities are measured using the following principles:

Use of Enacted Tax Rates

Deferred tax is measured at tax rates expected to apply when the asset is realized or liability is settled, based on laws enacted or substantively enacted by the reporting date.

Consideration of Future Taxable Profits

A deferred tax asset is recognized only to the extent that sufficient taxable profit is probable in the future.

Reassessment of Deferred Tax

At the end of each reporting period, entities must reassess unrecognized deferred tax assets and recognize them if future taxable profit is probable.

No Discounting of Deferred Tax

Deferred tax assets and liabilities are not discounted as per Ind AS 12.

Presentation of Deferred Tax in Financial Statements

Deferred tax must be properly classified and disclosed in financial statements to ensure transparency.

Profit or Loss Statement

• Deferred tax expense (or income) is presented as part of total tax expense.
• Any adjustments related to prior periods are included in the current period’s tax expense.

Balance Sheet

• Deferred tax liabilities are recorded under non-current liabilities.
• Deferred tax assets are recorded under non-current assets.

Other Comprehensive Income (OCI) and Equity

• If deferred tax arises from items recorded in OCI or equity, the tax effects must also be recognized in OCI or equity.

Disclosure Requirements for Deferred Tax

Ind AS 12 requires detailed disclosures regarding deferred tax to provide clarity to financial statement users.

Key Disclosures Include:

Breakdown of Deferred Tax Expense

1. • Separate disclosure of deferred tax expense and current tax expense.

Reconciliation of Tax Expense and Accounting Profit

1. • A reconciliation must be provided between the tax expense computed based on accounting profit and the actual tax expense recognized.

Unrecognized Deferred Tax Assets

1. • Entities must disclose unused tax losses and tax credits for which no deferred tax asset is recognized.

Impact of Changes in Tax Rates

1. • Any impact due to changes in tax rates or tax laws must be disclosed separately.

Deferred Tax Relating to Business Combinations

1. • Disclosure of deferred tax liabilities and assets recognized in a business combination.

Investments in Subsidiaries and Joint Arrangements

1. • Details of temporary differences related to investments in subsidiaries, associates, and joint ventures.

Importance of Deferred Tax Accounting

Proper deferred tax accounting ensures:

• Accurate financial reporting by aligning tax expenses with accounting income.
• Better financial planning for tax liabilities and refunds.
• Transparency in tax-related transactions, aiding stakeholders in financial analysis.
• Compliance with accounting standards, reducing risks of misstatement.

Questions to understand your ability

Q1.) Why does deferred tax even exist under Ind AS 12?

A) Because of differences between accounting income and net profit
B) Because assets and liabilities don’t match their tax bases
C) Because the tax laws keep changing
D) Due to a difference in tax rates

Q2.) When do you recognize a deferred tax liability (DTL)?

A) When there’s a taxable temporary difference
B) When the tax law changes
C) For all deductible temporary differences
D) Only when an asset is sold

Q3.) How is a deferred tax asset (DTA) calculated under Ind AS 12?

A) Using the tax rates that apply when you finally realize the asset or settle the liability
B) By applying a fixed rate
C) Based on the current tax you’ve paid
D) You never calculate deferred tax assets

Q4.) Where do you find deferred tax liabilities (DTLs) in the balance sheet?

A) In current liabilities
B) In non-current liabilities
C) Under equity
D) In the cash flow statement

Q5.) What if a company has unused tax losses or credits but hasn’t recognized a deferred tax asset?

A) They must disclose the amount and the reason for not recognizing it
B) Just disclose the amount of unused losses
C) Only disclose why the asset wasn’t recognized
D) No need to disclose anything

Conclusion

Deferred tax plays a vital role in financial reporting, ensuring alignment between accounting and tax treatment. Under Ind AS 12, companies must recognize, measure, and disclose deferred tax assets and liabilities appropriately. Proper application of deferred tax principles enhances financial transparency and helps businesses manage their tax obligations effectively.

Understanding deferred tax accounting is crucial for financial professionals, investors, and regulators, as it directly impacts an entity’s financial statements and tax planning strategies.