As 22 deferred taxes


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As 22 deferred taxes

  1. 1. Accounting forTaxes on Income- AS 22   14 April 2012 CA  Siddharth  Ranjan  
  2. 2. Agenda1.  Back ground2.  A case study3.  Scope4.  Definitions5.  Recognition6.  Re-assessment of Unrecognized Deferred Tax Assets7.  Measurement8.  Review of Deferred Tax Assets9.  Presentation & Disclosure10.  Transitional provisions     CA Siddharth Ranjan 2
  3. 3. Back groundTaxable profit and accounting profit fora period may be different for thefollowing two reasons:(a) differences between items ofrevenue and expenses as appearing inthe statement of profit and loss and theitems which are considered as revenue,expenses or deductions for tax CA Siddharth Ranjan 3
  4. 4. Back ground (contd.)(b) differencesin amount withrespect to a particular item ofrevenue or expense asrecognized in the statement ofprofit and loss for accountingand as recognized for Taxpurposes CA Siddharth Ranjan 4
  5. 5. Back ground (contd.)Matching principle:In accordance with thematching concept; taxes onincome should be accrued(matched) in the same periodas the revenue and expenses. CA Siddharth Ranjan 5
  6. 6. 2. A Case StudyCase Study -1 Computer Pur. value Depreciation Rate Tax Rate (Rs. In Crores) Cos Act IT Act 50 40% 60% 30%As as 31st March 1 2 3 4 5 6 7 8 9 10PBT - AI 100 100 100 100 100 100 100 100 100 100 1000Add: Depreciation - A/cs 20 12 7 4 3 2 1 1 0 0 50Less: Depreciation - IT 30 12 5 2 1 0 0 0 0 0 50Total Income - TI 90 100 102 102 102 101 101 101 100 100 1000TD-being Depn differential -10 0 2 2 2 1 1 1 0 0 0CT -30% of IT 27 30 31 31 31 30 30 30 30 30 300DT-30% of TD -3 0 1 1 1 0 0 0 0 0 0Tax Exp.(CT-DT) 30 30 30 30 30 30 30 30 30 30 300TE= IT on (AI+/-PD) 30 30 30 30 30 30 30 30 30 30 300 CA Siddharth Ranjan 6
  7. 7. 2. Case Study- Exact workings: yr     1   2   3   4   5   6   7   8  WDV-­‐Asset   (Acc)   50   30   18   10.8   6.48   3.89   2.33   1.40  WDV-­‐Asset   (Tax)   20   8   3.2   1.28   0.51   0.20   0.08  Acc   Depn:Rate   0.4  Tax   Depn:Rate   0.6                              Depn     Acc   20   12   7.2   4.32   2.592   1.56   0.93   0.56  Depn     Tax   30   12   4.8   1.92   0.768   0.31   0.12   0.05  Diff   -­‐10   0   2.4   2.4   1.824   1.25   0.81   0.51  Tax  Savings  ,@  30%   -­‐3   0   0.72   0.72   0.5472   0.37   0.24   0.15   CA Siddharth Ranjan 7
  8. 8. 3. ScopeTaxes on income include all domesticand foreign taxes which are based ontaxable income.Exclusion:This Standard does not specify when, orhow, an enterprise should account fortaxes that are payable on distribution ofdividends and other distributions madeby the enterprise. CA Siddharth Ranjan 8
  9. 9. 4.DefinitionsTax expense (tax saving) is theaggregate of current tax anddeferred tax charged orcredited to the statement ofprofit and loss for theperiod. CA Siddharth Ranjan 9
  10. 10. Definitions (contd.)Deferred tax is the tax effect of timingdifferences.OR, said otherwise:Deferred Taxes are Income Taxwhich arise in one period but becauseof Timing Difference will have to beactually paid/ adjusted in later years. CA Siddharth Ranjan 10
  11. 11. Definitions (contd.)Timing differences are thedifferences between taxableincome and accounting incomefor a period that originate inone period and are capable ofreversal in one or moresubsequent periods. CA Siddharth Ranjan 11
  12. 12. Examples of Timing differencesDifference in net block of fixed assetsbetween tax and accounts - –  Difference in Depreciation due to •  Different rates / methods •  Pro rata treatment Vs. 180 days (in I year) •  Exchange fluctuation of FC liability incurred for FA purchase. - As-11 (R) Vs. Sch.VI Vs. S. 43A •  Up to Rs. 5000 assets write off under Companies Act CA Siddharth Ranjan 12
  13. 13. Examples of Timing differences (contd.) – Impairment Loss as per AS-28 – Sale Proceeds Cr. to Block of Asset as per IT Act Vs. Profit / Loss on sale of FA s recognised in P&L A/c – P u r c h a s e o f S c i e n t i f i c Research Assets [35(2)] CA Siddharth Ranjan 13
  14. 14. Examples of Timing differences (contd.) Expenses debited to P & L A/c on accrual basis but allowed on actual payment. – Payments made/ accrued to non- residents without TDS, but disallowed for tax purposes u/s 40 (a)(i) / (ia) and allowed when relevant tax is deducted & paid subsequently CA Siddharth Ranjan 14
  15. 15. Examples of Timing differences (contd.) – Expenditure U/s 43B(e.g. taxes, duty, cess, fees, etc.) of Income Tax Act, 1961; accrued in the statement of profit and loss on mercantile basis but allowed for tax purposes in subsequent years on payment basis. CA Siddharth Ranjan 15
  16. 16. Examples of Timing differences (contd.) – Provision for Gratuity u/s 40A (7) (when it is not funded nor has crystalized) – Provisions made in the statement of profit and loss in anticipation of liabilities where the relevant liabilities are allowed in subsequent years when they crystallize.CA Siddharth Ranjan 16
  17. 17. Examples of Timing differences(contd.) •  Provision for doubtful debts / advance •  Provision for warranties •  Preliminary expenses written off fully when incurred (U/s 35D) •  Expenses amortized in books of Accounts over a period of years but a shorter or longer period is allowable for tax purposes CA Siddharth Ranjan 17
  18. 18. Definitions (contd.)Permanent differences are thedifferences between taxableincome and accountingincome for a period thatoriginate in one period anddo not reverse subsequently. CA Siddharth Ranjan 18
  19. 19. Examples of PermanentDifference•  Amortization of goodwill considered as disallowable expense•  Personal expenditure disallowed by tax authorities•  Penalty (Not being compensatory)•  Payments disallowed U/s 40(A)(3)•  Donations disallowed U/s 80G•  R e m u n e r a t i o n t o p a r t n e r s disallowed U/s 40(b) CA Siddharth Ranjan 19
  20. 20. Examples of PermanentDifference (Contd.)•  Scientific research expenditure. (only weighted element)•  Exemptions u/s 10/10A/10B•  Deductions U/s 80IA / IB / IC•  Additional Depreciation on Revaluation CA Siddharth Ranjan 20
  21. 21. 5. RecognitionTax expense for the period,comprising current tax anddeferred tax, should beincluded in thedetermination of the netprofit or loss for the period. CA Siddharth Ranjan 21
  22. 22. 5. Recognition (contd.)Deferred tax should berecognised for all the timingdifferences, subject to theconsideration of prudencein respect of deferred taxassets CA Siddharth Ranjan 22
  23. 23. 5. Recognition(Explanation:)(a)The deferred tax in respect of timingdifferences which reverse during thetax holiday period is not recognised tothe extent the enterprise’s gross totalincome is subject to the deductionduring the tax holiday period as perthe requirements of sections 80-IA/80-IB of the Income-tax Act, 1961 . CA Siddharth Ranjan 23
  24. 24. 5. Recognition(Explanation- contd.)The deferred tax in respect of timingdifferences- u/s 10A/ 10B- whichreverse during the tax holiday period isnot recognised to the extent deductionfrom the total income of an enterpriseis allowed during the tax holidayperiod as per the provisions of the saidsections. CA Siddharth Ranjan 24
  25. 25. 5. Recognition(Explanation- contd.)(b) Deferred tax in respect oftiming differences which reverseafter the tax holiday period isrecognised in the year in whichthe timing differences originate.However, recognition of deferredtax assets is subject to theconsideration of prudence. CA Siddharth Ranjan 25
  26. 26. 5. Recognition (contd.)Except, in the case of unabsorbeddepreciation or carry forward of losses,allowed under tax laws; deferred taxassets should be recognised andcarried forward only to the extent thatthere is a reasonable certainty thatsufficient future taxable income will beavailable against which such deferredtax assets can be realised. CA Siddharth Ranjan 26
  27. 27. 5. Recognition (contd.)In the case of unabsorbed depreciationor carry forward of losses, allowedunder tax laws, deferred tax assetsshould be recognised only to the extentthat there is virtual certainty supportedby convincing evidence that sufficientfuture taxable income will be availableagainst which such deferred tax assetscan be realised. CA Siddharth Ranjan 27
  28. 28. 5. Recognition(Explanations)Virtual certainty cannot be basedmerely on forecasts of performancesuch as business plans.Evidence is a matter of fact.To be convincing, the evidence shouldbe available at the reporting date in aconcrete form. CA Siddharth Ranjan 28
  29. 29. 6. Re-assessment of Unrecognized Deferred Tax AssetsAt each balance sheet date, an enterprise re-assesses and recognises previously unrecogniseddeferred tax assets to the extent that it hasbecome reasonably certain or virtually certain,as the case may be, that sufficient future taxableincome will be available against which suchdeferred tax assets can be realised. CA Siddharth Ranjan 29
  30. 30. 7. MEASUREMENTCurrent tax should bemeasured at the amountexpected to be paid to (orrecovered from) the taxingauthorities, using theapplicable tax rates and taxlaws. CA Siddharth Ranjan 30
  31. 31. 7. MEASUREMENT (contd.)Deferred tax assets andliabilities should bemeasured using the taxrates and tax laws that havebeen enacted orsubstantively enacted by thebalance sheet date. CA Siddharth Ranjan 31
  32. 32. 7. MEASUREMENT (contd.)When different tax ratesapply to different levels oftaxable income, deferred taxassets and liabilities aremeasured using averagerates. CA Siddharth Ranjan 32
  33. 33. 7. MEASUREMENT (contd.)Deferred tax assets and liabilities shouldnot be discounted to their present value.RationaleDiscounting would render deferred tax assets andliabilities unfit for comparisons between enterprises. CA Siddharth Ranjan 33
  34. 34. 8. Review of Deferred Tax AssetsThe carrying amount of deferred tax assets shouldbe reviewed at each balance sheet date.An enterprise should write-down the carryingamount of a deferred tax asset to the extent that it isno longer reasonably certain or virtually certain, asthe case may be, that sufficient future taxableincome will be available against which deferred taxasset can be realised. CA Siddharth Ranjan 34
  35. 35. 8. Review of Deferred Tax Assets (Contd.) Any such write-down may be reversed to the extent that it becomes reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available. CA Siddharth Ranjan 35
  36. 36. •  Not a prior period item as per AS-5 unless it was a mistake•  AS 22 does not mention review or re-assessment of DTL- Why? Re-Assessment v/s Review Re-Assessment Review (Right) (Duty) Relates to DTA Relates to DTA Previously unrecognized Previously recognized CA Siddharth Ranjan 36
  37. 37. 9. PRESENTATION AND DISCLOSUREAn enterprise should offset deferred tax assetsand deferred tax liabilities if:(a) the enterprise has a legally enforceableright to set off assets against liabilitiesrepresenting current tax; and(b) the deferred tax assets and the deferredtax liabilities relate to taxes on income leviedby the same governing taxation laws. CA Siddharth Ranjan 37
  38. 38. 9. PRESENTATION AND DISCLOSURE (Contd.) Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. Deferred tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and current liabilities. CA Siddharth Ranjan 38
  39. 39. 8. PRESENTATION AND DISCLOSURE (Contd.)Deferred tax assets (net of the deferred taxliabilities, if any, ) is disclosed on the face ofthe balance sheet separately after the head‘Investments’ and deferred tax liabilities (netof the deferred tax assets, if any, is disclosedon the face of the balance sheet separatelyafter the head ‘Unsecured Loans’. CA Siddharth Ranjan 39
  40. 40. Under  Revised  Schedule-­‐VI   Equity & Liabilities Share Non Current Current Shareholders’ funds application Liabilities Liabilities money Reserve pendingShare Money Long Term Short Term & allotmentCapital received Borrowings Borrowings Surplus against share warrants Deferred Tax Trade Liabilities ( Net ) Payables Other Other Long Term Current Liabilities Liabilities Long Term Short Term Provisions Provisions
  41. 41. Under  Revised  Schedule-­‐VI   Non Current Assets Current Assets Fixed Assets Current Investment Non Current Inventories Investments Deferred Tax Assets Trade Receivables ( Net ) Long Term Loans & Cash & Cash Advances Equivalents Other Non Current Short Term Loans & Assets Advances Other Current Assets
  42. 42. 9. PRESENTATION AND DISCLOSURE (Contd.)The break-up of deferred tax assets and deferredtax liabilities into major components of therespective balances should be disclosed in the notesto accounts.The nature of the evidence supporting therecognition of deferred tax assets should bedisclosed, if an enterprise has unabsorbeddepreciation or carry forward of losses under taxlaws. CA Siddharth Ranjan 42
  43. 43. 10. Transitional ProvisionsOn the first occasion that the taxes on income areaccounted for in accordance with this Standard, theenterprise should recognise, in the financial statements, thedeferred tax balance that has accumulated prior to theadoption of this Standard as deferred tax asset/liability witha corresponding credit/charge to the revenue reserves,subject to the consideration of prudence in case of deferredtax assets. The amount so credited/charged to the revenuereserves should be the same as that which would haveresulted if this Standard had been in effect from thebeginning. CA Siddharth Ranjan 43
  44. 44. Financial Implication ofDeferred Tax:(1) Effect of Deferred tax on Income Tax(2)  Effect on Current Ratio(3)  Affects Net Worth – Thereby affecting-  Limits under Companies Acceptance of Deposits Rules-  Eligibility to make investments-  Determination of Sickness for BIFR purposes(4)  Affects Debt -Equity Ratio and TOL / TNW (Double edged sword) CA Siddharth Ranjan 44
  45. 45. Financial Implication ofDeferred Tax (Contd.)(6) Affects Net Profit Ratio (PAT/Net Sales)(7) Affects EPS(8) A ffects Dividend declaration - No specific reference in the Company Law on DT.(9) (PBT loss V PAT Profit position – Impact on dividend and Audit report)(10)  Affects Capital Adequacy Norms in case of banks (Tier-I & Tier-II Capital) - Capital to Risk Weighted Assets Ratio (CRAR) CA Siddharth Ranjan 45
  46. 46. Emerging  Issues:  CA Siddharth Ranjan 46
  47. 47. Comparison with IFRS CA Siddharth Ranjan 47
  48. 48. Practical problems faced: CA Siddharth Ranjan 48
  49. 49. Teaching tips: CA Siddharth Ranjan 49
  50. 50. References   The  Internet. Books:  CA Siddharth Ranjan 50
  51. 51. CA Siddharth Ranjan 51