[Opinion] The Five-Step Model to determine Deferred Tax Asset & Liability under Ind AS 12

Abstract

The implementation of Indian accounting standards, or Ind AS, in India during the year (2016–17), is still in its very early stages. As on date, the Ministry of Corporate Affairs (MCA) has notified 40 Ind AS. One of them is Ind AS12, the only instance of an Ind AS that addresses income tax. Income taxes can be a current or deferred tax, which can be an expense or an income. To be more precise, it also deals with deferred tax assets and liabilities. The article uses a five-step model to determine the deferred tax asset and liability in a straightforward manner, with both a theoretical and practical approach. The balance sheet provides an insolvency professional with information about the company’s financial situation at a particular time. Ind AS12 follows the balance sheet approach.

Introduction

Ind AS12 deals with deferred tax assets and liabilities. Ind AS12 is based on the balance sheet approach. The difference between the profit as per financial statements and the profit calculated as per Income Tax laws is one of the main reasons for introducing this standard. Why differences?

a. The accrual basis is followed for calculating the income (loss), whereas tax law does not follow the accrual system of accounting for all expenses and revenue.

b. Tax laws allow more depreciation than accounting principles.

c. Provision for expenses is accounted for on an accrual basis in accounting, whereas in tax, these expenses are allowed only on a cash basis by the tax authority.

The Five-Step Model:

STEP 1:
Calculate the book value, which is the carrying amount, accordingly using respective Ind AS of assets and liabilities.

STEP 2:
Calculate the tax base for assets and liabilities.

STEP 3:
Calculate the temporary difference.

STEP 4:
Calculate deferred tax asset (DTA) or calculate deferred tax liability (DTL).

STEP 5:
Recognize it in the profit and loss statement (P&L) or Other Comprehensive Income (OCI) or Statement of Change in Equity (SOCIE), as the case may be.

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