Ind AS 12 Income Taxes Explained: Scope, Recognition and Deferred Tax

Introduction to Ind AS 12 Income Taxes

Ind AS 12 Income Taxes prescribes the accounting treatment for income taxes, including both current tax and deferred tax. The objective of the standard is to ensure that the tax consequences of transactions and events are appropriately reflected in the financial statements. In practice, this means aligning tax-related recognition and measurement with the carrying amounts of assets and liabilities reported in the books. Within a broader financial reporting and assurance context, Ind AS 12 plays an important role in presenting a more accurate view of post-tax financial performance and position.

Scope of Ind AS 12 Income Taxes

Applicability

• Ind AS 12 applies to entities preparing financial statements under Indian Accounting Standards.
• It covers income taxes based on taxable profits, capital gains, and other forms of taxable income.

Exclusions

• Ind AS 12 does not apply to taxes that are not based on income, such as sales tax, value-added tax, or similar indirect levies.

Key Definitions under Ind AS 12

Current Tax

• Current tax is the amount of income tax payable or recoverable in respect of taxable profit or loss for the current period.

Deferred Tax

• Deferred tax represents the amount of income tax payable or recoverable in future periods arising from taxable temporary differences and deductible temporary differences.

Tax Base

• The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

Recognition of Current and Deferred Tax

Current Tax Recognition

• Current tax is recognized as income or expense in the statement of profit and loss based on taxable profit for the reporting period.

Deferred Tax Recognition

• Deferred tax is recognized for temporary differences arising between the carrying amount of assets and liabilities in the financial statements and their respective tax bases.

This recognition principle is central to the standard because financial reporting under Ind AS is not limited to current-period tax payable. It also reflects future tax consequences that arise from timing differences in accounting and tax treatment, often requiring careful interpretation through financial reporting process and audit support.

Measurement of Current and Deferred Tax

Current Tax Measurement

• Current tax is measured using tax rates and tax laws enacted or substantively enacted at the end of the reporting period.

Deferred Tax Measurement

• Deferred tax is measured using the tax rates expected to apply when the related asset is realized or the liability is settled.

Temporary Differences in Tax Accounting under Ind AS

Taxable Temporary Differences

• These are temporary differences that will result in taxable amounts in future periods when the carrying amount of an asset or liability is recovered or settled.
• They generally arise where the carrying amount of an asset exceeds its tax base, creating future taxable consequences.

Deductible Temporary Differences

• These are temporary differences that will result in deductible amounts in future periods when the carrying amount of an asset or liability is recovered or settled.
• They typically arise where the tax base exceeds the carrying amount, leading to potential future tax deductions.

Deferred Tax Assets and Deferred Tax Liabilities

Recognition Criteria for Deferred Tax Assets

Deferred tax assets represent amounts of income taxes recoverable in future periods in respect of:

• deductible temporary differences
• carry forward of unused tax losses
• carry forward of unused tax credits

Recognition Criteria for Deferred Tax Liabilities

• Deferred tax liabilities are recognized for amounts of income taxes payable in future periods in respect of taxable temporary differences.

Offsetting Deferred Tax Assets and Liabilities

• Deferred tax assets and liabilities may be offset where they relate to the same taxable entity and the same taxation authority, subject to the requirements of the standard.

Presentation and Disclosure Requirements

Presentation

• Current tax and deferred tax should be presented separately in the financial statements.

Disclosure

• Disclosure should include the major components of tax expense, covering both current tax and deferred tax.
• Entities should explain the effective tax rate and reconcile it to the applicable statutory tax rate.
• Financial statements should also disclose information relating to unrecognized deferred tax assets and other material tax positions where relevant.

Given the judgment involved in deferred tax recognition, recoverability assessment, and disclosure quality, Ind AS 12 often requires careful evaluation alongside broader accounting advisory services and financial reporting review.

Additional Resources

• Understanding Ind AS 7 and Ind AS 12: Key insights for financial reporting
• Applicability of Indian Accounting Standards and their benefits
• Demystifying enhanced financial reporting disclosures and ratio analysis
• Auditor reporting considerations for audit trail requirements
• Applicability and relevance of internal audit in the current scenario