Recognition of Deferred Tax Assets and Liabilities under Ind AS 12

Understand Recognition of Deferred Tax Assets and Liabilities

Key rules to remember

Temporary difference

Temporary difference = Carrying amount − Tax base (for an asset)

For an asset: if carrying amount > tax base, the difference is taxable; if carrying amount < tax base, it is deductible. For a liability the position reverses: if carrying amount > tax base, the difference is deductible; if carrying amount < tax base, it is taxable.

Taxable temporary difference (asset)

Carrying amount > Tax base → DTL

Recognise in full unless an exception applies (goodwill, initial recognition, controlled investment differences).

Deductible temporary difference (asset)

Carrying amount < Tax base → DTA

Recognise only to the extent future taxable profit is probable.

Deferred tax balance

Deferred tax = Temporary difference × Tax rate enacted or substantively enacted at the reporting date

The rate applies to the period in which the asset is realised or the liability settled. Do not discount.

Unused tax losses and credits

DTA recognised only if probable future taxable profit exists; if history of recent losses, need convincing other evidence

Convincing evidence includes sufficient taxable temporary differences or specific tax planning opportunities.

Taxable temporary differences as support for DTA

DTA supported by DTL of same taxation authority and same taxable entity, reversing in the same or suitable period

Losses can also be carried back or forward under tax law, so check the period of reversal.

MAT credit

MAT credit entitlement = DTA-type item; recognise when it is probable that future taxable profit will allow the credit to be used within the carry-forward period

Under Ind AS, MAT credit is treated as a deferred tax asset and recognised under Ind AS 12, applying the same probable-taxable-profit test as for other unused tax credits. Present it separately from DTA on temporary differences as MAT credit entitlement, as Schedule III (Division II) requires.

Investment in subsidiaries etc. (DTL)

No DTL if investor controls timing of reversal AND reversal in foreseeable future is not probable

Both conditions must be met to avoid the DTL.

Investment in subsidiaries etc. (DTA)

DTA only to the extent difference will probably reverse in the foreseeable future AND taxable profit is probable

Both conditions must be met to recognise the DTA.

Reassessment

Review unrecognised DTAs and carrying amount of recognised DTAs at each reporting date

Recognise a previously unrecognised DTA when it becomes probable. Reduce a DTA when it is no longer probable.

How to solve Recognition of Deferred Tax Assets and Liabilities questions

1. 1Identify each asset, liability, loss or credit and find its carrying amount and tax base.
2. 2Classify the difference: taxable (DTL), deductible (DTA), or unused loss or credit (DTA).
3. 3Test the exceptions first: goodwill, initial recognition outside a business combination, and investments in subsidiaries, branches, associates and joint arrangements.
4. 4For every DTL, recognise it in full unless an exception applies.
5. 5For every DTA, test probable future taxable profit. Count taxable temporary differences that reverse in the right period and from the same authority and entity. Check loss history and tax planning.
6. 6Compute the amount at the enacted or substantively enacted tax rate. Recognise only the amount supported.
7. 7State where the tax goes: profit or loss, OCI, equity or business combination goodwill, following the underlying item.
8. 8Write the conclusion with the provision and facts, and note that you reassess unrecognised DTAs at each reporting date.

Quickest way: Four-gate check for recognition

Common mistakes in Recognition of Deferred Tax Assets and Liabilities

• Recognising a DTA on unused tax losses in full because losses can be carried forward.

  Students treat carry-forward rights as proof of recovery.

  Fix: Recognise only to the extent taxable profit is probable. If the entity has a recent loss history, you need convincing other evidence, such as taxable temporary differences or tax planning.

• Recognising a DTL on goodwill arising in a business combination.

  Goodwill has a carrying amount and no tax base, so it looks like a taxable difference.

  Fix: Ind AS 12 prohibits recognising a DTL on initial recognition of goodwill. Recognising it would increase goodwill, which is itself a residual.

• Applying the initial recognition exemption to every asset bought outside a business combination.

  Students remember the exemption but skip its conditions.

  Fix: The exemption applies only if the transaction affects neither accounting nor taxable profit at the time and does not give rise to equal taxable and deductible differences. Leases and decommissioning cases create equal and offsetting differences, so recognise both DTA and DTL.

• Skipping deferred tax on a subsidiary's undistributed profits.

  Students assume consolidation removes the tax effect.

  Fix: Recognise a DTL on the outside difference unless the parent controls the timing of reversal and it is probable the difference will not reverse in the foreseeable future. Both conditions must hold.

• Treating MAT credit as a reduction of current tax expense with no asset test.

  Students see MAT credit as a payment already made.

  Fix: Under Ind AS, treat MAT credit as a deferred tax asset under Ind AS 12. Recognise it only when it is probable that future taxable profit will allow the credit to be used within the specified period, and present it separately as MAT credit entitlement per Schedule III. Review it at each reporting date.

• Using the tax rate at the transaction date rather than the reporting date.

  Students copy the rate from the year the item arose.

  Fix: Use the rate enacted or substantively enacted by the reporting date that applies when the item reverses.

Worked examples