Skip to content

Financial Reporting · Ind AS 12 Income Taxes

Measurement of Deferred Tax and Tax Rate Changes under Ind AS 12

Updated 5 October 2026 · Fact-checked

Under Ind AS 12, you measure deferred tax assets and liabilities at the tax rates expected to apply when the asset is realised or the liability settled, using rates enacted or substantively enacted at the reporting date. Reflect the expected manner of recovery, never discount, and review asset carrying amounts at every reporting date.

Understand Measurement of Deferred Tax and Tax Rate Changes

Recognising deferred tax is only half the job. You must also measure it. Ind AS 12 gives a few clear rules, and exam questions test each one.

Which rate? Use the rate that is expected to apply in the period when the asset is realised or the liability is settled. Base it on rates (and tax laws) enacted or substantively enacted by the end of the reporting period. Substantively enacted means the remaining steps of enactment will not change the outcome. A rate only announced or proposed is not enough.

Which manner of recovery? The tax consequences depend on how the entity expects to recover the asset or settle the liability. Recovery through use may be taxed differently from recovery through sale. For example, one rate may apply to business income and another to capital gains. You measure deferred tax using the rate and tax base that match the expected manner. If different rates apply to different levels of taxable income, use the average rates expected to apply in the periods when the differences reverse.

No discounting. Deferred tax assets and liabilities are never discounted, even if reversal is far away. Discounting would need detailed scheduling of reversals, which is often impracticable.

Review at each reporting date. The carrying amount of a deferred tax asset is reviewed at the end of each reporting period. Reduce it to the extent it is no longer probable that enough taxable profit will be available. Reverse that reduction if it later becomes probable again. Also reassess unrecognised deferred tax assets, and recognise them to the extent it has become probable that future taxable profit will allow recovery.

Change in rate. When the rate changes, remeasure the opening deferred tax balances at the new rate. Recognise the effect in profit or loss, unless it relates to items earlier recognised outside profit or loss (in OCI or directly in equity). Then the effect goes to the same place. For a revalued non-depreciable asset such as freehold land, deferred tax follows the tax consequences of recovering the carrying amount through sale.

Key rules to remember

Deferred tax liability / asset
Deferred tax = Temporary difference × Tax rate expected to apply on reversal
Use enacted or substantively enacted rate at the reporting date and the rate for the expected manner of recovery.
Effect of rate change
Adjustment = Opening temporary difference × (New rate − Old rate)
Increase in rate raises a DTL or DTA; a cut lowers both. Recognise in profit or loss unless the original item was in OCI or equity.
Discounting rule
Deferred tax is not discounted
Applies to both assets and liabilities, whatever the reversal period.
Review of DTA
Carrying amount of DTA reduced to the extent that sufficient taxable profit is no longer probable
Reduction is reversed if sufficient taxable profit becomes probable again.
Revalued asset
Deferred tax on revaluation = (Revalued carrying amount − Tax base) × Rate for expected manner of recovery
Where the revaluation is in OCI, the related deferred tax is also recognised in OCI (revaluation surplus).

How to solve Measurement of Deferred Tax and Tax Rate Changes questions

Use this order for any measurement or tax-rate question.

  1. 1List each asset and liability with its carrying amount and tax base, and work out the temporary difference.
  2. 2Decide whether each difference is taxable or deductible, and so whether it gives a DTL or a DTA.
  3. 3Identify the expected manner of recovery (use or sale) and pick the rate and tax base that match it.
  4. 4Confirm the rate is enacted or substantively enacted at the reporting date. Ignore merely proposed rates.
  5. 5Compute deferred tax = difference × rate, with no discounting.
  6. 6For a DTA, test whether sufficient taxable profit is probable. Write down or reverse earlier write-downs as needed.
  7. 7If the rate changed, remeasure the opening balance and take the adjustment to profit or loss, or to OCI or equity where the original item was recognised there.
  8. 8Show the closing balance, the movement and the journal entry, then state the presentation.

Quickest way: Rate, Manner, Probable: three-check shortcut

When to use it: Use when a written question gives many figures and you have limited time.

  1. Write the temporary difference in one line per item.
  2. Tick three checks next to each: rate enacted by the reporting date, manner of recovery, probable profit for any DTA.
  3. Compute closing balance at the correct rate, then find the movement against the opening balance.
  4. Put the movement where the original item went: profit or loss, OCI or equity.
  5. Add one line: no discounting.

Common mistakes in Measurement of Deferred Tax and Tax Rate Changes

  • Using a rate announced in a Budget speech or draft bill.

    Students treat any announcement as law.

    Fix: Use only enacted or substantively enacted rates at the reporting date. A tax rate change enacted after the reporting date is a non-adjusting event under Ind AS 10, to be disclosed if material.

  • Discounting a deferred tax liability that reverses in 10 years.

    Students carry over present-value thinking from provisions.

    Fix: Ind AS 12 prohibits discounting of deferred tax. State this explicitly in the answer.

  • Taking a rate change adjustment always to profit or loss.

    Students forget the backward tracing principle.

    Fix: If the deferred tax arose on an item recognised in OCI or equity, such as a revaluation surplus, the rate-change effect goes there too.

  • Ignoring the expected manner of recovery for a revalued asset.

    Students apply one blanket rate to every asset.

    Fix: State how the asset will be recovered and use the corresponding rate and tax base, for example the capital gains rate for land to be sold.

  • Writing down a DTA once and never reviewing it again.

    Students treat the review as a one-time test.

    Fix: Review at every reporting date. Reverse an earlier write-down when sufficient taxable profit becomes probable.

  • Remeasuring only the closing balance and forgetting the opening balance effect.

    Students compute year-end deferred tax at the new rate and take the whole change as current-year charge.

    Fix: Split the movement: remeasurement of opening balance due to the rate change, plus the origination or reversal of the year's differences.

Worked examples

Example 1

Case: Veda Ltd recognised a deferred tax liability of ₹6,00,000 on depreciation differences at 31 March 20X1, computed at 30%. All the differences arose through profit or loss. During the year ended 31 March 20X2, a law is enacted that reduces the rate to 25% for the periods when the differences will reverse. Assume no new differences arose in the year. Compute the opening taxable temporary difference, the remeasured DTL at 31 March 20X2 and the accounting.

Show the solution
  1. Opening taxable temporary difference = ₹6,00,000 ÷ 30% = ₹20,00,000.
  2. Remeasured DTL at the enacted 25% = ₹20,00,000 × 25% = ₹5,00,000.
  3. Reduction in DTL = ₹6,00,000 − ₹5,00,000 = ₹1,00,000. Equivalent check: ₹20,00,000 × (30% − 25%) = ₹1,00,000.
  4. The original differences went through profit or loss, so the reduction is also recognised in profit or loss as a deferred tax credit.
  5. Journal entry: Deferred tax liability Dr ₹1,00,000 to Deferred tax expense (profit or loss) Cr ₹1,00,000.

Answer: The DTL is remeasured to ₹5,00,000, and a deferred tax credit of ₹1,00,000 is taken to profit or loss.

Example 2

Case: Arka Ltd holds freehold land bought for ₹40,00,000. At 31 March 20X2 it revalues the land to ₹70,00,000 under the revaluation model of Ind AS 16, with the surplus taken to OCI. Arka expects to recover the land only through sale. Tax on sale of land is at 20% on the gain. Business income is taxed at 30%. Assume the tax law allows no indexation or other cost adjustment, so the tax base is the cost of ₹40,00,000. Compute the deferred tax on the revaluation and show the accounting.

Show the solution
  1. Revaluation surplus = ₹70,00,000 − ₹40,00,000 = ₹30,00,000.
  2. The tax base for a land sale should reflect any indexation or cost adjustment the tax law allows. Here none is allowed, so the tax base is ₹40,00,000. If indexation were allowed, the tax base would be higher and the temporary difference lower.
  3. Land is non-depreciable and will be recovered through sale, so use the 20% rate: taxable temporary difference = ₹70,00,000 − ₹40,00,000 = ₹30,00,000.
  4. DTL = ₹30,00,000 × 20% = ₹6,00,000. The 30% business rate is not used because the expected manner of recovery is sale.
  5. The revaluation was taken to OCI, so the deferred tax is also taken to OCI. Journal entry: Revaluation surplus (OCI) Dr ₹6,00,000 to Deferred tax liability Cr ₹6,00,000. The net surplus in equity is ₹30,00,000 − ₹6,00,000 = ₹24,00,000.

Answer: The DTL on the land revaluation is ₹6,00,000, charged to OCI (revaluation surplus), leaving a net surplus of ₹24,00,000 in equity.

Example 3

Case: Arka Ltd has a deductible temporary difference that gave a DTA of ₹2,00,000, fully recognised last year and arising through profit or loss. At this reporting date Arka expects taxable profit to be sufficient to recover only ₹1,20,000 of it. Compute the DTA adjustment and show the accounting.

Show the solution
  1. Carrying amount of the DTA is ₹2,00,000, but only ₹1,20,000 is probable of recovery.
  2. Write-down = ₹2,00,000 − ₹1,20,000 = ₹80,000.
  3. The DTA arose through profit or loss, so the write-down is recognised in profit or loss: Deferred tax expense Dr ₹80,000 to Deferred tax asset Cr ₹80,000.
  4. The write-down can be reversed in a later period if sufficient taxable profit becomes probable.

Answer: The DTA is reduced by ₹80,000 through profit or loss, leaving ₹1,20,000.

Exam tips

  • Always state the three tests in your answer: enacted or substantively enacted rate, expected manner of recovery, and no discounting. Each earns a mark in written questions.
  • In case-scenario MCQs, look for the trap word: proposed, announced or expected rate means do not use it until it is enacted or substantively enacted.
  • For rate-change questions, work out the temporary difference from the old DTL first, then apply the rate difference. Do not rebuild the balance from scratch.
  • Always say where the adjustment goes. Tracing back to OCI or equity for revalued assets is a favourite examiner check.
  • Write a short line on the DTA review: reduce when profit is no longer probable, reverse when it becomes probable again.

Practice questions from Ind AS 12 Income Taxes

Measurement of Deferred Tax and Tax Rate Changes in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Measurement of Deferred Tax and Tax Rate Changes: frequently asked questions

Which tax rate is used to measure deferred tax under Ind AS 12?

Use the rate expected to apply when the asset is realised or the liability is settled, based on rates enacted or substantively enacted by the end of the reporting period. Proposed or announced rates that are not yet enacted are ignored.

Can deferred tax be discounted under Ind AS 12?

No. Deferred tax assets and liabilities must not be discounted. The standard bars it because reliable scheduling of reversals is often impracticable and would be subjective.

Where is the effect of a change in tax rate recognised?

Recognise it in profit or loss, except to the extent it relates to items previously recognised outside profit or loss. Those effects go to OCI or directly to equity, matching the original recognition.

How often must the carrying amount of a deferred tax asset be reviewed?

At the end of every reporting period. Reduce it if sufficient taxable profit is no longer probable, and reverse the reduction if sufficient profit later becomes probable.