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Deferred tax is a crucial concept in income tax accounting. It arises due to temporary differences between accounting and taxable profits of a company that lead to deferred tax assets or liabilities on the balance sheet.
The Indian Accounting Standard (Ind AS) 12 governs the measurement and reporting of deferred taxes for companies in India. This article explains the meaning of deferred tax, reasons for deferred tax assets and liabilities, recognition and measurement principles, presentation in financial statements, accounting for changes in tax rates, and the importance of deferred tax under Ind AS 12. Understanding deferred tax meaning as per accounting standards and regulations is essential for proper financial reporting and analysis.
Deferred tax refers to the accounting treatment of temporary differences between book value and tax base of assets and liabilities. This arises when there is a difference in the timing of recognition of income and expenses as per accounting standards and tax laws.
For example, accounting standards may require recognising an expense earlier than tax laws. This would result in lower accounting profits compared to taxable profits in the current year, creating a deferred tax asset. On the other hand, if tax laws allow faster depreciation than accounting standards, it would result in lower taxable profits than accounting profits in the current year, leading to a deferred tax liability.
The company records deferred tax to account for the tax impact of these temporary differences. The deferred tax is calculated by applying the enacted or substantively enacted tax rate to the cumulative temporary differences.”
Some common examples of deferred tax assets and liabilities are:
The Ind AS 12 on income taxes requires deferred tax assets and liabilities to be recognised for all temporary differences, with some exceptions. For example, deferred taxes are not recorded for goodwill or assets/liabilities arising from initial recognition of transactions that do not affect accounting or taxable profits.
Tax deferred is measured based on the tax rates enacted or substantively enacted by the balance sheet date. These rates are expected to apply when the related deferred tax balances reverse. The carrying amount of deferred tax assets needs to be reviewed at each balance sheet date. It is reduced to the extent that it is no longer probable that related tax benefits will be realised.
Recording deferred taxes is important for a company for the following reasons:
Accounting for deferred taxes as per Ind AS 12 is mandatory for companies following Ind AS. Proper calculation and disclosure of deferred taxes help stakeholders analyse the financial statements better and make informed decisions.
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