Ind AS 12, Income Taxes | Difference between IndAS 12 and AS 22

Ind AS 12

Ind AS 12, Income Taxes: IndAS 12 prescribes the accounting treatment for income taxes. For the purposes of this Standard, income taxes include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint venture on distributions to the reporting entity.

The principal issue in accounting for income taxes is how to account for the current and future tax consequences of:

CAknowledge
  • the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of financial position; and
  • transactions and other events of the current period that are recognised in an entity’s financial

Ind AS 12 also deals with the recognition of deferred tax assets arising from unused tax losses or unused tax credits, the presentation of income taxes in the financial statements and the disclosure of information relating to income taxes.

Ind AS 12 is based on balance sheet approach. It requires recogn ition of tax consequences of difference between the carrying amounts of assets and liabilities and their tax base.

Recognition

Current tax for current and prior periods shall, to the extent

unpaid, be recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be

recognised as an asset.

It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying amount of  that asset or  liability. If  it  is probable that recovery or settlement of that carrying amount  will  make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, this Standard requires  a n entity to recognise a deferred tax liability (deferred tax asset), with certain limited exceptions.

A deferred tax asset shall be recognised for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses  and  unused tax credits can be utilised.

Measurement

Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and deferred tax assets  shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities shall  not  be discounted

The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of  a  deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or  all  of  that  deferred tax asset to be utilised. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Allocation

This Standard requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognised in profit or loss, any related tax  effects  are  also  recognised in profit or loss. For transactions and other events recognised outside profit or loss (either in other comprehensive income or directly in equity), any related tax effects are also recognised outside profit  or  loss (either in other comprehensive income or directly in equity, respectively). Similarly, the recognition of deferred tax assets and liabilities in a business  combination affects the amount of goodwill arising in that  business combination or the amount of the bargain purchase gain recognised .

Appendix A of Ind AS 12 addresses how an entity should account for the tax consequences of a change in its tax status or that of its shareholders. The Appendix prescribes that a change in the tax status of an entity or its shareholders does not give rise to increases or decreases in amounts recognised outside profit or loss. The current and deferred tax consequences of a change in tax status shall be included in profit or loss for the period,  unless those consequences relate to transactions and events that result, in  the same or a different period, in a direct credit or charge to the recognised  amount of equity or in amounts recognised in other comprehensive income. Those tax consequences that relate to changes in the recognised amount of equity, in the same or a  different period (not  included in profit or loss), shall  be charged or credited directly to equity. Those tax consequences that relate  to amounts recognised in other comprehensive income shall be recognised in other comprehensive income.

Difference between IndAS 12 and AS 22

AS 22 IND AS 12
Less disclosures required as compared to IND AS 12 More disclosures required as compared to AS 22
Provides guidance regarding tax rates to be applied/used for measuring deferred tax assets/liability when a company pays tax under section 115JB. Does not specifically deal with this aspect.
AS 22 explains the concept of virtual certainty, suported by convincing evidence and states that the deferred tax assets, arising as a result of unabsorbed depreciation and carry forward of losses shall be recognised only to the extent that there is virtual certainty, supported by convincing evidence. The concept of virtual certainty has been dispensed with, by IND AS 12 and hence, there is no such explanation under IND AS 12.
AS 22 provides guidance on recognition of deferred tax in case of:

  • Tax Holiday under Sections 80-IA and 80-IB
  • Tax Holiday under Sections 10A and 10B of the Income Tax Act, 1961.
  • Loss under the head ‘capital gains’.
Ind AS 12 does not specifically deal with these situations.
AS 22 does not deal with this aspect. Ind AS 12 provides guidance about how an entity should deal with tax consequences arising as a result of change in its own tax status or in the tax status of its shareholders.
AS 22 follows an “Income statement” approach. It focuses on the differences between taxable profit and accounting profit, which originate in one period and are subject to reversal in subsequent period. Hence, deferred tax expense or benefit is computed first and then the corresponding deferred tax asset or liability is arrived at. IND AS 12 follows “Balance Sheet” approach. It focuses on the differences between the book balance and tax balance of assets and liabilities. Such differences are called timing differences. Hence, deferred tax asset or liability is computed first and then the corresponding deferred tax expense or saving is arrived at.
Deferred taxes are not recognised on such eliminations in IGAAP. Under Ind AS, deferred taxes are recognized on temporary differences that arises from the elimination of profits and losses resulting from intra group transactions.
It does not deal with this aspect. IND AS 12 states that DTA/DTL arising from revaluation of assets shall be measured on the basis of tax consequences arising on the sale of the asset, rather on use.
Existing AS 22 does not specifically deal with this aspect. The current tax expense as well as the deferred tax income/expense is ideally recognised in the statement of profit or loss for the period. But, if the deferred tax income or expense arises from a transaction or an event which is disclosed either in:

  • the Statement of Other comprehensive income or
  • equity

then in such cases, the deferred tax expense or income is also recognised in other comprehensive income or in equity, as appropriate.

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