Indian Accounting Standard (IND AS) 12 – Accounting on Income Taxes

Narendra Kumar

21 Aug, 2019

The Indian Accounting Standard has been prescribed by the Institute of Chartered Accountant of India where the IND AS 12 has been specifically prescribed for accounting treatment on Income Tax. In any entity there are current and future tax consequences for which accounting treatments related to taxation have to be applied as per Indian Accounting Standard.

IND-AS 12 Inclusions and Applicability

• It shall be applied in accounting for income taxes.
• It includes all domestic and foreign taxes based on taxable profits.

How to do the accounting for the future and current tax?

• Future Settlement of carrying a number of assets and liabilities that are recognized in the Balance sheet and if it is found that while settlement of carrying amount will result in a variance of tax amount which should then be recognized as deferred tax.
• A transaction that is identified in the current period, the treatment for the tax related to the transaction will be considered for the current period.

Fundamental Principle of IND-AS 12

Firstly it is to recognize the deferred tax liability or asset. Then recovery or settlement of the carrying amount of an asset or liability would make future tax payments higher or lower than such recovery or settlement to have tax consequences.

Also, Read: Overview of AS-14: Accounting for Amalgamation.

Recognition of Deferred Tax Liabilities

A deferred tax liability must be recognized for all taxable temporary differences unless the deferred tax liability arises from:

• The initial recognition of goodwill, or
• The initial recognition of an asset or liability in a transaction which is not a business combination or neither it affects accounting profit nor taxable profit at the time of the transaction

Recognition of Deferred Tax Assets;

Deferred tax assets must be recognized only to the extent that future taxable profits will be available.

The factors to be considered for the recognition of Deferred Tax assets arising from the unused losses:

• Existence of sufficient taxable temporary difference
• Losses incurred from the identifiable causes, which are unlikely to recur.

At the end of each reporting period, a Company should unrecognized Deferred Tax Assets.

• The Company should recognize previously unrecognized Deferred Tax^[1] assets to the extent that future taxable profit will be allowed the deferred tax to be recovered.

Definitions:

“Deferred Tax Assets” The amount of income taxes recoverable in future periods in respect of;

• Deductible temporary differences
• The carryforward of unused tax losses and credits.

“Deferred Tax Liabilities” The amount of income taxes payable in future periods in respect of taxable temporary difference

“Accounting Profit” Profit or loss for a period as per the books of account

“Taxable Profit” The profit/loss for a period, determined by the rules established by the taxation authorities, upon which income taxes are payable.

“Tax Expense” The aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax.

“Current Tax” The amount of income taxes payable in respect of the taxable profit (loss) for a period

Disclosure required to be mentioned in the Financial Statement

Major Component of tax expense (income) to be separately disclosed such as:

• Current Tax Expense
• Prior period adjustment
• Deferred expense/income
• Amount of the benefit arising from a previously unrecognized tax loss, tax credit or temporary difference for a prior period that is used to reduce current tax or deferred tax expense.
• Cumulative current and deferred tax relating to items charged or credited directly.
• Income tax relating to each component of other income.
• An explanation of the relationship between the tax expense(income) and accounting profit in either or both of the following forms:
• A numerical reconciliation between tax expense(income) and the product of accounting profit multiplied by the applicable tax rate, and also disclose the basis on which the applicable tax rate is computed or
• A numerical reconciliation between the average effective tax rate and the applicable tax rate and also disclose the basis on which the applicable tax rate is computed.
• Disclosure of changes in the applicable tax rate compared to the previous financial year.
• Amount (and expiry date, if any) of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax is recognized.
• The Deferred tax liabilities which have not been recognized due to temporary differences associated with an investment in subsidiaries, branches, or joint venture.
• If there are any discontinued operations, then the tax expense relating to;
• The gain or loss on discontinuance; and
• The profit or loss from the ordinary activities of discontinued operation for the period and corresponding amounts for each prior period presented.
• Change in amount recognized for pre-acquisition deferred tax asset.
• Description of the event or change in circumstances that cause deferred tax benefits to be recognized after the acquisition date.
• Amount of deferred tax asset recognized and evidence supporting its recognition, when:
• The utilization of the deferred tax asset depended on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary difference; and
• The entity has suffered the losses either in the current period or previous period

How to do the set-off of Tax as per IND-AS 12?

According to IND-AS 12, an entity shall set off current tax assets and liabilities:

• If it is legally enforceable right to set off the recognized amounts;
• If it intends either to settle on a net basis or to realize the asset or liability simultaneously.

According to IND-AS 12 an entity shall setoff deferred tax and liabilities:

• If it has the legal right to set off the current tax assets and current tax liability.
• The deferred tax assets and liabilities relate to income tax levied by the same taxation authority on either the same taxable entity or different taxable entities that intend either to settle current tax liabilities and assets on a net basis or to realize the asset and settle the liability accordingly.

Hence, if the Company falls under the applicability of the Indian Accounting Standard then it becomes mandatory to adopt the Standard and shall prepare the Financial Statements of the entity and give the taxation treatment accordingly.

Also, Read: Applicability of Indian Accounting Standards.