Deferred tax

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

27 September 2012 Sir
A company is having brought forward losses and unabsorbed depreciation. Due to the uncertainty of future profits company has decided not to make provision of deferred tax assets arising on timing difference due to difference between depreciation as per Income Tax and Companies Act.
Company also having opening balances of deferred tax assets. How would treat this opening balances. Whether to write off as prior period item or to show as it is in the balance sheet. Please reply it is very urgent.

shashikumar

shashikumar (Expert)
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27 September 2012 Irrespective of future profits the company has to make a provision for DTA/DTL and if company decided tofor non provision its violation of section 211 of companies act.

Showing the opening balance as it is advisable instead of writing off.

Querist : Anonymous

Querist : Anonymous (Querist)

27 September 2012 Sashi Kumarji,
But As per AS 22, In case of company having brought forward losses and unabsorbed depreciation, DTA should be provided only when there is virtual certainty supported by convincing evidence that the company would generate profits. In this case there is no certainty. Whether the company has to make the provision.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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20 July 2024 In accordance with Accounting Standard (AS) 22 - "Accounting for Taxes on Income," the treatment of Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTL) should be based on the balance sheet approach. Here’s how you should handle the situation described:

### Opening Balances of Deferred Tax Assets (DTA):

1. **Recognition and Measurement:**
- At the beginning of each reporting period, the company should recognize DTA for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized.
- In your case, if the company has brought forward losses and unabsorbed depreciation (which create deductible temporary differences), it should recognize DTA for these amounts at the beginning of the reporting period, subject to the probability of future taxable profits.

2. **Assessment of Probability:**
- AS 22 requires the company to assess whether sufficient future taxable income will be available against which the DTA can be realized.
- The decision to recognize DTA should be based on the management’s judgment about the future profitability of the company, supported by convincing evidence that future taxable profits will be sufficient.

3. **Treatment of Uncertainty:**
- If there is significant uncertainty about the realization of DTA due to the existence of brought forward losses and unabsorbed depreciation, the company should exercise caution.
- AS 22 allows for recognition of DTA only to the extent that it is probable (more likely than not) that future taxable income will be available.

### Practical Steps:

- **Review of Opening Balances:** Evaluate the existing DTA balances at the beginning of the reporting period.
- **Assessment of Future Profits:** Assess the likelihood of future taxable profits considering the carried forward losses and unabsorbed depreciation.
- **Provision of DTA:** Recognize DTA to the extent it is probable that future taxable profits will be available. This is a judgmental decision based on financial projections and business plans.

### Reporting and Disclosure:

- **Balance Sheet Presentation:** DTA should be presented in the balance sheet separately from other assets.
- **Disclosure Requirements:** Provide disclosures about the nature of the DTA, the factors influencing recognition, and the judgment exercised in determining the amount recognized in the financial statements.

### Resolution of Opening Balances:

- **Prior Period Adjustment:** If, based on the current assessment, it is determined that certain DTA balances are no longer probable of realization (due to lack of future taxable profits), these balances should be written off or adjusted as a prior period item.
- **Continued Recognition:** If the company continues to expect future taxable profits, the existing DTA balances should be maintained on the balance sheet.

### Conclusion:

The company should carefully assess the likelihood of future taxable profits when deciding whether to recognize or adjust DTA balances. This decision should be based on the latest available information and financial projections. Proper documentation and disclosure are crucial to justify the recognition or write-off of DTA, ensuring compliance with AS 22 and transparency in financial reporting.