Scope and objective:-
This standard prescribes accounting treatment for taxes on income. It is applicable to Level I, Level II and Level III companies. The income accrued as shown in the financial statements may not be the same as taxable income. Accounting is done on the basis of matching concept and accrual concept whereas; taxable income has a different purview which may not allow certain incomes or expenses as recognized in the accounting statement. This difference in the calculation of accounting income and taxable income brings out the whole purpose of deriving this standard.
The taxes on income are accounted for in accordance with this Standard. The enterprise should recognise, in the financial statements, the deferred tax balance that has accumulated prior to the adoption of this Standard as deferred tax asset/liability with a corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in case of deferred tax assets. The amount so credited/charged to the revenue reserves should be the same as that which would have resulted if this Standard had been in effect from the beginning.
Mainly, difference between Profit before tax (accounting profit) and taxable income shall be identified. If there are any differences, these differences are classified into timing differences and permanent differences.
Timing differences are temporary in nature. Such differences aroused in current period shall be subsequently reversed in future period. The timing difference in taxes paid on accounting income and the actual tax liability gives rise to deferred tax assets or deferred tax liabilities, as the case may be; subject to consideration of prudence. An expense accrued or provision made in the statement of profit and loss of current year but allowed for tax purposes in subsequent years on payment basis.
For eg: difference in depreciation rates, difference in depreciation method, differences in methods of calculation.
Permanent differences as the name suggests are permanent in nature which means it cannot be subsequently reversed in future period. An expense accrued or provision made in the statement of profit and loss of current year but not allowed for tax purposes in current as well as future period. It does not result in deferred tax assets or deferred tax liabilities.
For eg: an expense or income not allowed for tax purpose.
Tax expense of a certain period, comprising current tax and deferred tax, should be included in the determination of the net profit or loss for that period. Taxes on income are considered to be an expense incurred by the enterprise in earning income and are accrued in the same period as the revenue and expenses to which they relate. Such matching may result into timing differences. The tax effects of timing differences are included in the tax expense in the statement of profit and loss and as deferred tax assets, subject to the consideration of prudence or as deferred tax liabilities, in the balance sheet.
Deferred tax assets are recognised and carried forward only to the extent that there is a reasonable certainty of their realisation. This reasonable level of certainty would normally be achieved by examining the past record of the enterprise and by making realistic estimates of profits for the future. Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realized.
Current tax should be measured at the amount expected to be paid to the taxation authorities, using the applicable tax rates and tax laws. Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
Disclosure of deferred tax assets / deferred tax liabilities:-
Deferred tax assets or deferred tax liabilities should be disclosed and presented distinctly from other assets and other liabilities under a separate heading in the balance sheet.