Deferred tax
This query is : Resolved
26 May 2015
IS DEFERRED TAX CREATED ON AMOUNT TRANSFERRED/DEBITED TO RETAINED EARNING DUE TO DEPRECIATION AS PER NEW COMPANIES ACT?
26 May 2015
yes deferred tax shall be created. and that is a very good question. please refer Dolphy D Souza for further explanation.
20 July 2024
Deferred tax is indeed created on temporary differences arising from depreciation as per the Companies Act, which can impact retained earnings. Here’s how deferred tax is typically handled in relation to depreciation under the Companies Act:
### Depreciation and Deferred Tax
1. **Temporary Differences:**
- **Definition:** Temporary differences arise when the carrying amount of an asset or liability differs from its tax base. In the case of depreciation:
- **Book Depreciation:** This is the depreciation charged in the financial statements as per the Companies Act.
- **Tax Depreciation:** This is the depreciation allowable as per the income tax rules.
2. **Impact on Deferred Tax:**
- **Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL):** Depending on the temporary differences between book depreciation and tax depreciation:
- **DTA:** If book depreciation is higher than tax depreciation (timing difference results in a future tax saving).
- **DTL:** If book depreciation is lower than tax depreciation (timing difference results in a future tax liability).
3. **Creation of Deferred Tax:**
- **Recognition:** Under accounting standards (like Ind AS 12 or AS 22), deferred tax is recognized on temporary differences.
- **Measurement:** It is measured based on the tax rates that are expected to apply when the asset is realized or the liability is settled, using the tax bases of assets and liabilities.
4. **Impact on Retained Earnings:**
- **Adjustment:** When deferred tax is recognized, it affects the tax expense (or benefit) in the income statement and the deferred tax asset or liability is reflected in the balance sheet.
- **Transfer to Retained Earnings:** Any adjustment due to deferred tax impacts retained earnings, as it reflects the cumulative net income or loss of the company.
### Specific to the Question:
- **Amount Transferred to Retained Earnings:** If there is a transfer or adjustment to retained earnings due to depreciation (such as adjusting for tax effects or changes in accounting policies under the Companies Act), it can lead to the recognition or adjustment of deferred tax assets or liabilities.
- **New Companies Act:** Changes in depreciation rates or methods under the new Companies Act may lead to adjustments in the deferred tax balances, depending on how these changes affect the temporary differences between book and tax depreciation.
### Conclusion:
Deferred tax is created on temporary differences arising from depreciation as per the Companies Act. These differences impact the calculation of taxable income and are recognized in the financial statements based on the expected future tax consequences. Any adjustments due to changes in depreciation rates or policies under the Companies Act can affect the deferred tax balances, thus impacting the retained earnings of the company. It's essential for companies to adhere to accounting standards (Ind AS or AS) and seek professional advice to ensure proper recognition and measurement of deferred tax liabilities or assets.
### Depreciation and Deferred Tax
1. **Temporary Differences:**
- **Definition:** Temporary differences arise when the carrying amount of an asset or liability differs from its tax base. In the case of depreciation:
- **Book Depreciation:** This is the depreciation charged in the financial statements as per the Companies Act.
- **Tax Depreciation:** This is the depreciation allowable as per the income tax rules.
2. **Impact on Deferred Tax:**
- **Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL):** Depending on the temporary differences between book depreciation and tax depreciation:
- **DTA:** If book depreciation is higher than tax depreciation (timing difference results in a future tax saving).
- **DTL:** If book depreciation is lower than tax depreciation (timing difference results in a future tax liability).
3. **Creation of Deferred Tax:**
- **Recognition:** Under accounting standards (like Ind AS 12 or AS 22), deferred tax is recognized on temporary differences.
- **Measurement:** It is measured based on the tax rates that are expected to apply when the asset is realized or the liability is settled, using the tax bases of assets and liabilities.
4. **Impact on Retained Earnings:**
- **Adjustment:** When deferred tax is recognized, it affects the tax expense (or benefit) in the income statement and the deferred tax asset or liability is reflected in the balance sheet.
- **Transfer to Retained Earnings:** Any adjustment due to deferred tax impacts retained earnings, as it reflects the cumulative net income or loss of the company.
### Specific to the Question:
- **Amount Transferred to Retained Earnings:** If there is a transfer or adjustment to retained earnings due to depreciation (such as adjusting for tax effects or changes in accounting policies under the Companies Act), it can lead to the recognition or adjustment of deferred tax assets or liabilities.
- **New Companies Act:** Changes in depreciation rates or methods under the new Companies Act may lead to adjustments in the deferred tax balances, depending on how these changes affect the temporary differences between book and tax depreciation.
### Conclusion:
Deferred tax is created on temporary differences arising from depreciation as per the Companies Act. These differences impact the calculation of taxable income and are recognized in the financial statements based on the expected future tax consequences. Any adjustments due to changes in depreciation rates or policies under the Companies Act can affect the deferred tax balances, thus impacting the retained earnings of the company. It's essential for companies to adhere to accounting standards (Ind AS or AS) and seek professional advice to ensure proper recognition and measurement of deferred tax liabilities or assets.
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