Should the Classification of Deferred Tax Liability of Rate Regulated Entity is Done as per Ind AS 12?

Should the classification of Deferred Tax Liability of Rate Regulated Entity is done as per Ind AS 12?

A company engaged in the business of scheduling and despatch of electricity is governed by the Electricity Act and is a rate-regulated entity. The company recovers its multiple expenditures such as interest, depreciation, and other administrative charges along with a return on equity from its customers.

Since all these charges are recovered from customers and the company is engaged in the regulatory industry, the auditor believes that the company may recover its tax expenses from its customers by increasing future tariffs. Thus, the auditor is of the opinion that the company’s Deferred Tax Liability shall be separately disclosed under “Regulatory Deferral Account Balance” as per Ind AS 114, Regulatory Deferral Accounts.

However, the company’s management does not agree with the auditor’s opinion and contended that Ind AS 114 is not applicable to the company. Grossing up for return on equity of the base rate with the effective rate results in the creation of Deferred Tax Liability (DTL) and should be recognized as per Ind AS 12. Thus, the management of the company believes that their accounting treatment in respect of Deferred Tax Liability is true and correct.

Since there is a conflict between the opinions of the auditor and management on the presentation of Deferred Tax Liability (DTL), the company sought the opinion of the Expert Advisory Committee on the same.

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