26 November 2013
Net worth means equity . equity is defined as residual interest in the assets of the enterprise after deducting all its liabilities . thus , equity is the excess of aggregate assets of an enterprise over its aggregate liabilities . It is calculated as Fixed assets + investments + current assets and loans and advances +deferred tax asset- all outside liabilities including deferred tax liability OR Share Capital + Reserves and Surplus - Miscellaneous Expenditure ( to the extent not written off ) deferred tax liability/asset is a liability which arise in the current period due to timing difference and will reverse in future . therefore the same is required to be considered while calculating Net Worth
26 November 2013
Hello The formula that you mentioned is not appropriate i.e. Net Worth = Shared Capital + Reserves and Surplus. You should not make any adjustment for Deferred Tax Assets or Liabilities. Regards
- **Deferred Tax Assets**: Represent taxes that are recoverable in future periods. They arise due to timing differences between the accounting income and taxable income. - **Deferred Tax Liabilities**: Represent taxes that are payable in future periods. They arise due to differences between the accounting and taxable income.
### **Inclusion of Deferred Tax in Net Worth Calculation**
**Deferred Tax Assets** are generally not subtracted directly from shareholders' equity in calculating net worth. Instead, they are reflected in the financial statements and may affect the company's net worth indirectly. Here's how it works:
1. **Net Worth Calculation**: \[ \text{Net Worth} = \text{Share Capital} + \text{Reserves and Surplus} - \text{Accumulated Losses} \] In this formula, deferred tax assets and liabilities are considered in the overall calculation of total assets and liabilities but are not deducted separately from shareholders' equity.
2. **Deferred Tax Assets and Liabilities Impact**: - **Deferred Tax Assets**: Should be included in the total assets. - **Deferred Tax Liabilities**: Should be included in the total liabilities.
### **Amalgamation Impact**
In the case of **amalgamation** (merger or consolidation of companies), the following considerations apply:
1. **Calculation of Net Worth Post-Amalgamation**: - The net worth of the amalgamated entity will be the sum of the net worths of the merging entities, adjusted for the treatment of deferred tax assets and liabilities as per the amalgamation accounting principles.
2. **Deferred Tax Treatment in Amalgamation**: - Deferred tax assets and liabilities will be carried forward as part of the amalgamated entity's financials. The treatment should follow the accounting standards and regulatory requirements applicable to amalgamations.
**Deferred Tax**: - **Deferred Tax Assets** are included in total assets. - **Deferred Tax Liabilities** are included in total liabilities.
**In Amalgamation**: - The treatment of deferred taxes in the context of amalgamation should follow the accounting standards relevant to business combinations (e.g., Ind AS 103 or IFRS 3). Deferred tax assets and liabilities are accounted for as part of the fair value adjustments in the amalgamated entity's financial statements.
### **Conclusion**
**Deferred Tax Assets** are not directly deducted from shareholders' equity in the net worth calculation. Instead, they are part of the total assets and their impact is considered in the overall financial statement analysis. During amalgamation, the deferred tax balances should be treated according to the applicable accounting standards and regulations.
If there are specific accounting standards or regulatory requirements related to your jurisdiction, ensure to review them for precise application.