deferred tax liability
This query is : Resolved
28 August 2016
how to calculate deferred tax liability for companies
28 August 2016
Dear Sreevathsa,
DTL and DTA is calculated on the basis of transaction occurred. Like if your accounting income is more and taxable income is less than it will result in Deffered Tax liability as u have to pay it in future and vice versa
Hope your query is resolved
Kindly like if my response has helped you
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28 August 2016
Difference should be temporary (Time difference like depreciation ) and not permanent .
28 August 2016
Thank you sir
but how much percentage DTL to be made
28 August 2016
percentage is depend upon the actual fact
28 August 2016
it depends on turnover or profit
20 July 2024
Calculating Deferred Tax Liability (DTL) for companies involves understanding the timing differences between accounting profits (as per financial statements) and taxable profits (as per tax laws). Here’s a step-by-step outline of how to calculate DTL:
### Step-by-Step Calculation of Deferred Tax Liability:
1. **Identify Timing Differences:**
- Timing differences arise when the recognition of income or expenses in financial statements differs from their recognition for tax purposes.
- Common examples include:
- Depreciation: Different rates or methods allowed under tax laws versus accounting standards.
- Revenue Recognition: Recognition criteria under accounting standards might differ from those under tax laws.
- Provisions and Reserves: Tax laws may allow deductions only when paid, while accounting standards may require recognition based on certain conditions.
- Inventory Valuation: Different methods (like FIFO, LIFO, average cost) for financial statements versus tax calculations.
2. **Calculate Temporary Differences:**
- Temporary differences are the differences between the carrying amount of an asset or liability in the financial statements and its tax base.
- For each timing difference identified, calculate the amount of the temporary difference. This involves comparing the carrying amount (as per financial statements) with the tax base (as per tax laws).
3. **Determine Tax Rates:**
- Identify the applicable tax rates that will be used to compute future tax payable/receivable when the temporary differences reverse.
- Consider enacted or substantively enacted tax rates. These are the rates that have been passed into law or are virtually certain to be enacted.
4. **Calculate Deferred Tax Asset or Liability:**
- Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL) is computed using the following formula:
\[
\text{DTA or DTL} = \text{Temporary Difference} \times \text{Tax Rate}
\]
- If the temporary difference is deductible in determining taxable profit of future periods (creates a future tax benefit), it results in a DTA.
- If the temporary difference is taxable in determining taxable profit of future periods (creates a future tax liability), it results in a DTL.
5. **Record and Disclose:**
- Record the DTA or DTL on the balance sheet under current or non-current assets/liabilities based on the timing of expected reversal of the temporary differences.
- Ensure proper disclosure in the financial statements, including the nature of the temporary differences, the applicable tax rates used, and any uncertainties affecting the recognition of DTA or DTL.
6. **Review and Update:**
- Regularly review DTA and DTL balances to reflect changes in tax laws, rates, and business circumstances.
- Adjust calculations as needed to ensure compliance with accounting standards (such as AS-22) and accurate representation of the company’s financial position.
### Example Calculation:
Assume a company has a temporary difference of Rs. 100,000 due to accelerated depreciation methods used in tax calculations compared to straight-line depreciation in financial reporting. The applicable tax rate is 30%.
\[
\text{DTL} = Rs. 100,000 \times 0.30 = Rs. 30,000
\]
Therefore, the company would recognize a Deferred Tax Liability of Rs. 30,000 in its financial statements.
### Important Considerations:
- **Tax Base vs. Carrying Amount:** Ensure accurate determination of the tax base and carrying amount for each asset and liability.
- **Tax Rates:** Use enacted or substantively enacted tax rates for future periods when calculating DTA or DTL.
- **Disclosure:** Properly disclose DTA and DTL in the financial statements to provide transparency to stakeholders and auditors.
By following these steps, companies can calculate and manage Deferred Tax Liabilities in compliance with accounting standards and tax regulations. If in doubt, consulting with tax experts or auditors familiar with your company’s specific circumstances is advisable.
### Step-by-Step Calculation of Deferred Tax Liability:
1. **Identify Timing Differences:**
- Timing differences arise when the recognition of income or expenses in financial statements differs from their recognition for tax purposes.
- Common examples include:
- Depreciation: Different rates or methods allowed under tax laws versus accounting standards.
- Revenue Recognition: Recognition criteria under accounting standards might differ from those under tax laws.
- Provisions and Reserves: Tax laws may allow deductions only when paid, while accounting standards may require recognition based on certain conditions.
- Inventory Valuation: Different methods (like FIFO, LIFO, average cost) for financial statements versus tax calculations.
2. **Calculate Temporary Differences:**
- Temporary differences are the differences between the carrying amount of an asset or liability in the financial statements and its tax base.
- For each timing difference identified, calculate the amount of the temporary difference. This involves comparing the carrying amount (as per financial statements) with the tax base (as per tax laws).
3. **Determine Tax Rates:**
- Identify the applicable tax rates that will be used to compute future tax payable/receivable when the temporary differences reverse.
- Consider enacted or substantively enacted tax rates. These are the rates that have been passed into law or are virtually certain to be enacted.
4. **Calculate Deferred Tax Asset or Liability:**
- Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL) is computed using the following formula:
\[
\text{DTA or DTL} = \text{Temporary Difference} \times \text{Tax Rate}
\]
- If the temporary difference is deductible in determining taxable profit of future periods (creates a future tax benefit), it results in a DTA.
- If the temporary difference is taxable in determining taxable profit of future periods (creates a future tax liability), it results in a DTL.
5. **Record and Disclose:**
- Record the DTA or DTL on the balance sheet under current or non-current assets/liabilities based on the timing of expected reversal of the temporary differences.
- Ensure proper disclosure in the financial statements, including the nature of the temporary differences, the applicable tax rates used, and any uncertainties affecting the recognition of DTA or DTL.
6. **Review and Update:**
- Regularly review DTA and DTL balances to reflect changes in tax laws, rates, and business circumstances.
- Adjust calculations as needed to ensure compliance with accounting standards (such as AS-22) and accurate representation of the company’s financial position.
### Example Calculation:
Assume a company has a temporary difference of Rs. 100,000 due to accelerated depreciation methods used in tax calculations compared to straight-line depreciation in financial reporting. The applicable tax rate is 30%.
\[
\text{DTL} = Rs. 100,000 \times 0.30 = Rs. 30,000
\]
Therefore, the company would recognize a Deferred Tax Liability of Rs. 30,000 in its financial statements.
### Important Considerations:
- **Tax Base vs. Carrying Amount:** Ensure accurate determination of the tax base and carrying amount for each asset and liability.
- **Tax Rates:** Use enacted or substantively enacted tax rates for future periods when calculating DTA or DTL.
- **Disclosure:** Properly disclose DTA and DTL in the financial statements to provide transparency to stakeholders and auditors.
By following these steps, companies can calculate and manage Deferred Tax Liabilities in compliance with accounting standards and tax regulations. If in doubt, consulting with tax experts or auditors familiar with your company’s specific circumstances is advisable.
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