Income Tax and Accounting Standards

CMA S. VENKANNA
Practicing Cost Accountant

C
orporate Reporting is a core business activity. An  Indian Accounting Standard 12
Accountant necessarily to play an important role
 International Accounting Standard 12
every year during the course of finalization of
annual accounts regarding various disclosures for the use The above Accounting Standards requires recognition of
of stakeholders. tax consequences of difference between carrying amounts
of assets and liabilities and its tax bases.
For this purpose, the country has GAAP, Accounting
Standards, Companies Act 2013, Income Tax Act 1961 and Two important disclosures, are the Deferred Tax Asset
other guidelines. and Deferred Tax Liability which are necessarily to be
reported in the financial statements.
In our country, separate set of books of accounts are not
maintained, i.e., that is one for Financial Reporting and Deferred Tax liability is the amount of income tax payable
another for Income Tax purposes. in future periods with respect to the taxable temporary
differences.
In the United States, laws allow companies to maintain
two sets of books for financial and tax purposes. Because Deferred tax asset is the income tax amount recoverable
the rules that govern financial and tax accounting differ. in future periods in respect of the deductible temporary
differences, carry forward of unused tax losses, and carry
Differences in tax liabilities are simply temporary
forward of unused tax credits.
imbalances between a reported amount of income and
its tax basis: The accounting disparities appear when Tax differences occur on account of difference between
there are differences between the taxable income and the the books of accounts and income tax provisions.
pre-tax financial income or when the bases of assets or
The objective of Ind AS 12 is to prescribe the accounting
liabilities differ for financial accounting and tax purposes.
treatment for income taxes. The important issue in
A simple example, amount due on a current receivable accounting for income taxes is how to account for the
account cannot be taxed until collection is actually made, current and future tax consequences of:
but the sale needs to be reported in the current period as
(a) the future recovery (settlement) of the carrying
per the financial reporting practices.
amount of assets (liabilities) that are recognised in an
In order to comply with the corporate reporting practices, entity’s balance sheet; and
we have accounting standards. There bound tooccur
(b) transactions and other events of the current period
differences in the Income as per financial accounts and
that are recognised in an entity’s financial statements.
Income Tax Act.
A deferred tax asset is an item on a company’s Profit &
The purpose of both Accounting Standards is to find out
Loss Account reduces its taxable income in the future.
the True and Fair View of the financial statements and the
purpose of Income Tax Act 1961 determine the income the Deferred tax liability arises when there is a difference
real income and not fictitious. between what a company can deduct as tax and the tax
that is there for accounting purposes. A deferred tax
Under the disclosure requirement in financial statements
liability signifies that a company may in the future pay
vis-à-vis that of income and its tax liability, we have
more income tax because of a transaction in the present.
important accounting standards, viz.,
Financial Reporting Statements necessarily require to
 Accounting Standard 22
report future events for the information of stakeholders

TAX BULLETIN - 4TH ANNIVERSARY EDITION - THE INSTITUTE OF COST ACCOUNTANTS OF INDIA 25
keeping in view the reporting concept of Going Concern The company will pay lower taxes in the current year
for a continued relationship with the entity. Compliance resulting increased tax liability in the future years.
required as per Ind AS 37 (AS 29) regarding provisions
and contingencies. Company Acquires a Capital Asset for Rs.100000 with
a life of 5 years
However, the provisions of Income Tax Act 1961
Details As per As per Difference
considers only current year transactions for deductions in Books Income
computing the taxable income of an entity in accordance Tax
with Sec.37 of the Income Tax Act 1961. Though Sec.145
Profit Before
of the Income Tact 1961 provides for accrual method of
Depreciation and 1,00,000 1,00,000
accounting, future losses are not allowed as deductions. Tax
In view of this there bound happen difference in the tax Less:
liability as per Financial Statements and Income Tax. Depreciation 20,000 40,000
Ind AS 12 (IAS 12) or AS 22 require reporting of the impact Profit Before Tax 80,000 60,000 20,000
of income taxes on income in the form of Deferred Tax Tax Liability at 6,000
Asset and Deferred Tax Liabilities. This is mainly because 30% 24,000 18,000
of timing differences between reporting date and income Profit After Tax 6,000 42,000 14,000
tax.
Deferred Tax Liability will be saving in Tax (Rs.24,000
Deferrred Tax Asset results in excess payment of income - Rs.18,000)
tax and Deferred Tax Liability results in liability of income It is to be noted that both deferred tax asset and deferred
tax in future period. This two important accounting tax liability are created for the temporary differences
disclosures is explained with the following examples. only. These differences are temporary in nature and with
Deferred Tax Asset the lapse of time the impact of these differences gets
eliminated.Other Items in financial statements that results
As per Financial Statements in DTA/DTL, in addition to depreciation, are provisions
Particulars Amount in Rs. bad and doubtful debts /unrealized receivables, employee
benefits, when goods are sold on instalments, etc.
Revenue as per P & L Account 1,00,00,000
Less: Impact of Book Profit (Sec.115JB)
Expenses Debited 70,00,000 In computing the Book Profit, the Deferred Tax Asset
(Expenses including Selling and credited to P&L Account will result in reduction in Book
Distribution Expenses Profit and Deferred Tax Liability debited to P&L Account
including Provision for Warranty for will result in increase of book profit. The tax impact will
after sales service be at 15%.

amounting to Rs.15,00,000 Conclusion

Profit Before Tax 30,00,000 It is emphasised that there is no need to calculate deferred
Tax Liability at 30% 9,00,000 tax on each and every item of financial statement. The
Profit After Tax 21,00,000 Deferred Tax is calculated yearlybycomparing book profit
and taxable income. The Deferred Tax Liability or Deferred
As per Income Tax
Tax Asset is derived from the Profit& Loss A/c and Balance
Revenue as per P&L Account 1,00,00,000 sheet.
Less: Expenses
Inadmissible expenses as per Income Tax debited to
(Rs.70,00,000 - Rs.15,00,000 - Not 45,00,000 Profit& Loss A/c will create Deferred Tax Asset. Admissible
allowed under IT Act) expenses willresult in Deferred Tax Liability.
Taxable Income 55,00,000
The net difference of DTA / DTL is computed and
Tax Liability at 30% 16,50,000 transferred to Profit & Loss A/c. The Balance of DTLA/
Tax Difference - Deferred Tax Asset 7,50,000 DTL is reflected in Balance sheet under Current Assets/
Current Liabilities respectively.
Deferred Tax Liability
Deferred Tax Liability arises due to timing differences.

26 TAX BULLETIN - 4TH ANNIVERSARY EDITION - THE INSTITUTE OF COST ACCOUNTANTS OF INDIA