Accounting for Taxes on

Income
Accounting Standard – 22 (IGAP)

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 What does the Accounting Standard Talks
About?

Timing Differences

Deferred Taxes

Types of Deferred Taxes

Accounting For Deferred Taxes

Presentation & Disclosures

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 Timing Difference
Timing Difference =
Accounting Income (-) Taxable Income.
There are 2 kinds of Timing Differences:
1.Permanent Timing Differences
2.Temporary Timing Differences

Permanent Timing Differences are those

Timing Differences which originate in One
Period but DO NOT Reverse in Subsequent
Period.

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 Permanent Difference
Example of Permanent Difference :-
Co. incurs Rs.10.00 Lacs on Lions Club
which becomes disallowed u/s 37 of the
I. Tax Act.
Therefore, PERMANENT Difference =>
Rs.10.00Lacs = Rs.10.00Lacs -Rs.0.00.
As No Part of Rs.10.00Lacs would be
considered in the subsequent Year under
I. Tax it results in Permanent Difference.
As Permanent Differences do not reverse
they are not considered for Deferred Taxes.

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 Temporary Difference

Originates in One Period & would reverse in

One or More Subsequent Periods.

Temporary Timing Differences are

considered for the purpose of Deferred
Taxes as these differences (Accounting
Income – Taxable Income) get reversed.

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 Example of Temporary Difference
Say VRS Expense (declared in 2009-10)
amounting to Rs.10,00,000/- .
 Treatment in Books :-
Full Amount Charged to P&L A/C in the
Accounting Year 2009-10.
By P&L A/C (Debit) :Rs.10.00Lacs
To VRS Expense A/C (Credit) :Rs.10.00Lacs

Treatment under I. Tax (u/s 35DDA) :-

Allowed as Deduction in 5 Equal Instalments
i.e. Rs.2.00Lacs in each of the 5 Years
beginning 2009-10.

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 Temporary Difference……..
Figures in Lacs
Sr. F.Year Income In Income under Timing Diff
Books I.Tax
1 2009-10 Rs. 90.00 Rs. 98.00 -Rs. 8.00
2 2010-11 Rs. 100.00 Rs. 98.00 Rs. 2.00
3 2011-12 Rs. 100.00 Rs. 98.00 Rs. 2.00
4 2012-13 Rs. 100.00 Rs. 98.00 Rs. 2.00
5 2013-14 Rs. 100.00 Rs. 98.00 Rs. 2.00
  TOTALS Rs. 490.00 Rs. 490.00 Rs. 0.00
Sr. F.Year VRS In Books VRS under Timing Diff
I.Tax
1 2009-10 Rs. 10.00 Rs. 2.00 Rs. 8.00
2 2010-11 Rs. 0.00 Rs. 2.00 -Rs. 2.00
3 2011-12 Rs. 0.00 Rs. 2.00 -Rs. 2.00
4 2012-13 Rs. 0.00 Rs. 2.00 -Rs. 2.00
5 2013-14 Rs. 0.00 Rs. 2.00 -Rs. 2.00
7   TOTALS Rs. 10.00 Rs. 10.00 Rs. 0.00
 Temporary Difference……..
Thus we can very well see that :-

Timing Difference =>

Rs.8.00 = Rs.10.00Lacs (-) Rs.2.00Lacs
is getting reversed in subsequent Years
(Each Year Rs.2.00Lacs) Starting from
F.Y.2010-11 & becomes ZERO in the 5 th
Year i.e.in 2013-14.

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 Deferred Taxes
Deferred Tax=Timing Difference(x)Tax
Rate

Timing Difference : we have already

understood the concept in our previous
slides.

Tax Rate:(Para 21 of AS-22) mentions that

Deferred Taxes should be measured at the
Tax Rates & Tax Laws that have been
enacted ( or substantively enacted) by the
Balance Sheet Date.
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 Types of Deferred Taxes
1.)Deferred Tax Assets (DTA) =>

DTA = Accounting Income(<)Taxable Income

2.)Deferred Tax Liability (DTL) =>

DTL = Accounting Income(>)Taxable Income

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 Why Should Deferred Taxes be Accounted?

• Under Matching Concept, Taxes Paid should

be matched against the Revenue.

• However in the Books the Revenue is

Accounting Income. Therefore the Taxes Paid
(which has to be Accounted in the Books)
have to be matched to Accounting Income (&
not to taxable Income).

• Hence there arises a need to Account for

Deferred Taxes.

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 Why Asset or Liability?
 Hence, if the Taxes (Paid) computed on Taxable
Income is MORE than that IF computed on
Accounting Income than the EXCESS Taxes
Paid becomes Receivable (in accounting
terminology) & hence is treated as an ASSET
in the Books.

 Similarly,if the Taxes (Paid) computed on

Taxable Income is LESS than that IF computed
on Accounting Income than the SHORT Taxes
Paid becomes Payable (in accounting
terminology) & hence is treated as a
LIABILITY in the Books.

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 Accounting For Deferred Taxes
DTA :-
DTA is Excess Tax Paid (Receivable); hence the
excess amount is Written Back .
Entry for DTA
By DTA A/C (Debit)
To P&L A/C (Credit)
DTL :-
DTL is Short Tax Paid (Payable); hence the short
amount is Written Off or Provision is made for it
.
Entry for DTL
By P&L A/C (Debit)
To DTL A/C (Credit)

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 Presentation & Disclosures
Deferred Tax Assets should be disclosed
on the face of the balance sheet
separately after the head “Investments”.

Deferred Tax Liabilities should be

disclosed on the face of the balance
sheet separately after the head
“Unsecured Loans”.

An Enterprise should offset deferred tax

assets and deferred tax liabilities.

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 Example: VRS Expense
Figures in Lacs
Tax Rate for FY 2009-10 33.99%
Sr. F.Year Income In Income under Timing Diff Deferred
Books I.Tax Tax
1 2009-10 Rs. 90.00 Rs. 98.00 -Rs. 8.00 -2.719200
2 2010-11 Rs. 100.00 Rs. 98.00 Rs. 2.00 0.679800
3 2011-12 Rs. 100.00 Rs. 98.00 Rs. 2.00 0.679800
4 2012-13 Rs. 100.00 Rs. 98.00 Rs. 2.00 0.679800
5 2013-14 Rs. 100.00 Rs. 98.00 Rs. 2.00 0.679800
  TOTALS Rs. 490.00 Rs. 490.00 Rs. 0.00 Rs. 0.00
Sr. F.Year VRS In Books VRS under   Deferred
I. Tax Tax
1 2009-10 Rs. 10.00 Rs. 2.00 Rs. 8.00 2.719200
2 2010-11 Rs. 0.00 Rs. 2.00 -Rs. 2.00 -0.679800
3 2011-12 Rs. 0.00 Rs. 2.00 -Rs. 2.00 -0.679800
4 2012-13 Rs. 0.00 Rs. 2.00 -Rs. 2.00 -0.679800
5 2013-14 Rs. 0.00 Rs. 2.00 -Rs. 2.00 -0.679800
15   TOTALS Rs. 10.00 Rs. 10.00 Rs. 0.00 Rs. 0.00
 Example Contd….
Whether VRS Expense is DTA (or) DTL ?
For Fin. Year 2009-10
Expense Charged in Books : Rs.10.00 Lacs
Expense Charged in I. Tax : Rs. 2.00 Lacs
Therefore ,
Income as Per Books < Income as Per I. Tax
Hence, Tax (Paid) calculated on Income
under I. Tax will be Higher than Tax
calculated on Income as per Books.
Hence excess tax becomes Receivable.
Thus VRS Expense is a DTA.
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 ZUA INDUSTRIES LIMITED Deferred Tax Working
      For the period ended on 31.03.2010 - AY 2010-11

31.03.2009 30.12.2009 Movement

 Deferred Tax Assets (Rs in lacs) (Rs in lacs) (Rs in lacs)
Provision for leave encashment 572.72 643.53 70.81

Provision for wage arrears 32.89 112.57 79.69

Provision for doubtful debts 32.10 32.10 0.00
Super annaution Fund - 108.32 108.32
Expenses disallowed u/s 40 (a) 142.02 142.02 -
VRS expenditure 0.51 0.00 -0.51
Provision on GOI Bonds 478.76 478.76 0.00
DTA 1,259.00 1,517.30 258.30
Deferred tax liability      
Depreciation 2,978.38 3,016.01 37.62
Interest on Income tax refund 48.65 48.65 0.00
DTL 3,027.55 3064.66 37.11
Net Deferred tax
(Liability)/Asset (1,768.55) (1547.36) 221.19

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 Deferred Taxes under IFRS (IAS-12)
Method: Balance Sheet liability method focuses on temporary
differences.

Temporary Difference: A difference between the carrying

amount of an asset or liability & its tax base.
Taxable Temporary Difference: A temporary difference that will
result in taxable amounts in the future when the carrying amount
of the asset is recovered or the liability is settled.

Measurement: DTA & DTL should be measured at the Tax Rates

(substantively enacted by the B/S Date) that are expected to apply
to the period when the asset is realized or the liability is settled
(liability method).

Recognition: Current & Deferred Tax should be recognized as

Income or Expense & included in Net Profit or Loss for the
period to the extent that the tax arises.

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 Understanding as Per IFRS (IAS12)
 Example:-
 M/C Purchased(@start) in2009-10:- Rs.100.00

 Depreciation (Books) in 2009-10:Rs.30.00

 Depreciation (for tax) in 2009-10:Rs.40.00

 Carrying Value (Books) : Rs.70 (100-30)

 Carrying Value (for tax) : Rs.60 (100-40)

 Tax Rate : 30%

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 Example contd……..
As per IFRS (IAS-12):-
Temporary Difference =
Tax Base of Asset/Liability LESS Value of such
Asset/Liability as per Books.
Temp.Diff. = Tax Base (-) As Per Books
Rs.10.00 = 60.00 (-) 70.00
If the Tax Base of an Asset is less that
Results into DTL else it is DTA.
DTL = Temp.Diff. x Tax Rate
Rs.3.00 = Rs.10 x 30%

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 Thank You

Information when Understood &

Applied becomes Knowledge.

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