25 March 2013
If the company is making book loss, is it necessary for the company to provide for deferred tax? Is it compulsory to provide for deferred tax? If it is compulsory, how to provide for it?
20 July 2024
When a company is making a book loss (i.e., its accounting profit is negative or there is a loss), the question of providing for deferred tax arises because deferred tax assets (DTA) are recognized based on temporary differences between accounting profit and taxable profit. Here’s a detailed explanation to address your queries:
### Is it Necessary to Provide for Deferred Tax in Case of Book Loss?
1. **Compulsory Provision for Deferred Tax:** - According to accounting standards (such as Ind AS 12 or AS 22), deferred tax should be recognized for all temporary differences unless either of the following conditions are met: - It is probable that sufficient future taxable profit will be available against which the temporary differences can be utilized (realization test). - The company can demonstrate that it is not probable that it will have sufficient taxable profit in the future (enactment test).
2. **Recognition of Deferred Tax Assets (DTA):** - Even if a company is currently making a book loss, it should recognize DTA to the extent that it is probable that sufficient future taxable profit will be available against which the DTA can be utilized.
3. **Measurement of Deferred Tax:** - Deferred tax assets and liabilities are measured based on the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. - The measurement involves estimating the future tax consequences of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases.
### How to Provide for Deferred Tax in Case of Book Loss:
1. **Identify Temporary Differences:** - Temporary differences arise when the carrying amount of an asset or liability differs from its tax base (the amount attributed to it for tax purposes).
2. **Calculate Deferred Tax Asset (DTA):** - For a book loss scenario, if there are deductible temporary differences (e.g., depreciation in excess of tax depreciation), calculate the DTA using the tax rate expected to apply when the asset is realized or the liability is settled.
3. **Recognition and Measurement:** - Recognize DTA to the extent that it is probable that sufficient taxable profit will be available against which the DTA can be utilized. - Measure DTA at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled, based on the tax laws and rates enacted or substantively enacted by the balance sheet date.
### Example Calculation:
- Suppose a company has temporary differences resulting in a DTA of Rs. 100,000. - If it is probable that sufficient future taxable profit will be available to utilize this DTA, recognize the full Rs. 100,000 as a DTA. - If not probable, recognize a portion based on the expected utilization.
### Conclusion:
- **Compulsory Provision:** It is generally compulsory to provide for deferred tax assets and liabilities unless it is probable that future taxable profit will not be available. - **Recognition:** Recognize DTA to the extent that it is probable that future taxable profit will be available for utilization. - **Calculation:** Calculate DTA based on expected future tax rates and the timing of utilization against future taxable profits.
It is crucial for companies to adhere to accounting standards and seek professional advice to ensure compliance and accurate reporting of deferred tax in case of book losses or any other financial position.
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