Decoding Indian Accounting Standard (Ind AS) - 12 - Part I

This Ind AS explains the process of aligning a business's profit with its taxable profit as required by tax laws. In order to make this technical topic easier to understand, I have broken the blog into several parts and included practical examples. I will try to keep the parts as short as possible to make the information more accessible.

Be sure to save this blog as I will include links to the additional parts at the end of this blog when they are published.

Let's begin.

What are the objectives of implementing this Ind AS 12?

One of the key challenges while preparing the financial statements is determining how to allocate the tax expense between accounting periods. This is because recognition of transactions is governed by the applicable standards but the timing of recognition of the transactions for the purpose of measuring tax profit is governed by the applicable tax laws. So, in order to address this discrepancy, Ind AS 12 has been implemented.

Relevance of Ind AS - 12.

Ind AS 12 addresses the timing differences that arise from complying with financial reporting standards and tax laws. It specifically deals with temporary taxable differences, which can further be classified into two, 

• Taxable temporary differences &
• Deductible temporary differences.

Temporary differences occur when the accounting balances of assets and liabilities differ from their tax bases as defined by tax laws. These differences may result in a tax asset or liability.

What are the basic points that should be kept in mind while implementing this Ind AS?

1) The tax base of an asset refers to the amount that can be deducted from taxes on any taxable profits that an entity will receive when it recoups the asset's carrying value.

2) The tax base of a liability is the amount that is used to calculate the tax liability associated with the liability. It is equal to the carrying amount of the liability, minus any amounts that can be deducted for tax purposes in future periods. In other words, the tax base of a liability is the amount that will be subject to tax when the liability is settled or extinguished.

3) CSR expenditure is considered a permanent difference as per Ind AS 12 because it can never be deducted for tax purposes.

4) Recognition of Deferred tax – Deferred tax should be recognized for most temporary differences, and prudence should be exercised before recognizing deductible differences.

5) Initial Recognition Exception – Deferred tax should not be recognized on the following temporary differences on initial recognition:

• Goodwill
• Transactions that are not business combinations and do not affect either the accounting profit or taxable profit through the assets and liabilities involved in the transaction.

Continue reading Part II on Decoding Ind AS 12 here.

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