Ind AS 12: Income Taxes – A Comprehensive Guide

Ind AS 12, the Indian Accounting Standard (Ind AS) for Income Taxes, provides guidance on the recognition, measurement, and presentation of income taxes. Income taxes are a significant component of an entity’s financial statements, as they can have a material impact on the reported profit or loss and financial position.

The standard follows the balance sheet liability method, which means that income taxes are recognized as a liability or asset on the balance sheet, based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases.

Scope And Objective:

Ind AS 12, applies to all entities that prepare financial statements in accordance with Ind AS. It covers the recognition, measurement, and presentation of income taxes, including both current and deferred taxes.

The objective of Ind AS 12 is to establish principles for the recognition and measurement of income taxes that are applicable to the various tax jurisdictions in which an entity operates. The standard aims to ensure that the accounting treatment of income taxes is consistent and transparent, providing users of financial statements with relevant and reliable information about an entity’s income tax liabilities, assets, expenses, and income.

Recognition of Current Tax Liabilities and Assets:

Ind AS 12 requires entities to recognize current tax liabilities and assets for the amount of taxes payable or recoverable in the current period. This is based on the applicable tax rates and laws.

Current Tax Liability:

Current tax liability refers to the amount of tax that a company is obligated to pay to the tax authorities for the current financial year. It represents the estimated tax expense based on the taxable income computed as per the applicable tax laws and rates. The current tax liability is recognized and reported in the financial statements in accordance with the Ind AS 12 (Income Taxes) guidelines.

Companies calculate their current tax liability by applying the tax rates applicable to the specific jurisdictions where they operate. This liability is generally determined by considering the taxable profit or loss for the period, after considering any available tax deductions, exemptions, and credits.

Current Tax Assets:

Current tax assets are the tax benefits that a company expects to receive in the current period as a result of overpayment of taxes or tax credits available for offsetting against current-period tax liabilities. These assets represent the excess tax payments or credits that can be used to reduce the company’s tax liabilities in the current period.

Companies have to make tax payments throughout the year based on their estimated tax obligations. However, the actual tax liability is determined when the company files its tax return. If the tax liability calculated on the tax return is lower than the payments made, the excess tax paid becomes a current tax asset.

Offsetting of Current Tax Assets and Liabilities:

The standard allows the offsetting of current tax assets and liabilities when there is a legally enforceable right to set off and the entity intends to settle the amounts on a net basis.

Measurement of Deferred Tax Liabilities and Assets:

Deferred tax liabilities and assets are recognized for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. These temporary differences give rise to taxable or deductible amounts in future periods. The measurement of deferred tax liabilities and assets considers the expected manner of recovery or settlement and the tax rates that are expected to apply in the future.

Deferred Tax Liability:

Deferred tax liability is the tax amount that is expected to be paid in future periods as a result of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases. These temporary differences arise when the recognition or measurement of certain items for financial reporting purposes differs from their tax treatment. Examples of temporary differences that give rise to deferred tax liabilities include depreciation methods, provisions, and unrealized gains on certain financial instruments.

Deferred Tax Assets:

Deferred tax assets represent the potential future tax benefits that a company can enjoy due to temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases. These temporary differences can result in tax deductions or credits in future periods, which can offset the company’s tax liabilities.

Deferred tax assets are recognized when it is probable that there will be sufficient taxable profits available in the future against which the deferred tax assets can be utilized. This recognition is based on the principle of prudence, ensuring that tax benefits are only recognized when they are more likely to be realized. Examples of temporary differences that give rise to deferred tax assets include tax losses, provisions, and unrealized losses on certain financial instruments.

Presentation and Disclosure:

Ind AS 12 requires entities to disclose significant judgments and estimates made in applying the standard. This includes information about the carrying amount of deferred tax assets and liabilities. It sets out the presentation requirements for income tax assets and liabilities, including the classification as current or non-current in the balance sheet.

Companies need to disclose the nature and amount of deductible temporary differences, unused tax losses, and other tax carryforwards that have given rise to deferred tax assets. It also requires companies to disclose significant information related to current tax liabilities and deferred tax liabilities in their financial statements. This includes the reconciliation between the accounting profit and the tax expense, the nature and amount of temporary differences giving rise to deferred tax liabilities, and the utilization of tax losses and other tax carryforwards.

Companies also need to disclose the amount of any unprovided deferred tax liability that may arise if they distribute the retained earnings of their subsidiaries.

Conclusion:

In conclusion, Ind AS 12 provides guidance on the reporting of income taxes. It sets out the principles for accounting for current and deferred tax liabilities and assets and requires entities to provide relevant disclosures. By following the standard, entities can ensure consistency and transparency in reporting income tax-related information, providing users with a clearer understanding of an entity’s financial position and performance. It also helps Entities to meet certain tax regulations.

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