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Deferred tax

ravi (senior accountant) (507 Points)

12 May 2011

My depreciation as per companies act was less in PY than as per IT Act, (Accounting Income was more than Taxable income) so i created DTL (deferred tax liability) now this year it is reverse (i.e.my depreciation per co's act is more than as per IT act this might be because previous year we have claimed half depreciaton i.e less than 180 days option and also might be lesser WDV's per IT dep calculations this year)so pls clarify me whether I should create DTA (deferred tax asset) or should i reduce DTL. pls explain me with illustrations relating to this deferred tax

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Desperado (Cost And Management Accountant) (129 Points)
Replied 13 May 2011

Dear Ravi,

In this case, you may certainly offset the deferred tax assets and the deferred tax liabilities with each other, and show the related balance amount. Since IAS-12 specifies the conditions for offsetting the two, which have also been adopted by AS-22, which reveals that;

1 – the entity has a legally enforceable right to offset the deferred tax asset with deferred tax liability and vice versa; and,

2- The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority.
The aforesaid two conditions are undoubtedly met.

However, if you have deferred tax asset on all differences EXCEPT revaluation surplus (or gain on available for sale unquoted investment etc) on which you have liability; and you don't estimate to realize deferred tax asset on such (profit or loss related differences) in foreseeable future, you will not recognize it. However, at the same time you will recognize deferred tax liability on items directly charged in equity as per IAS 12. These two cannot be offset.

It means, you will not be offsetting one type of deferred tax asset (not to be recognized) against the deferred tax liability of surplus/directly chargeable in equity.

Let me know if confusion still exists.

Best Regards,

Desperado.