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Net Worth

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)

29 June 2009

Whether Deferred Tax Liability should be included in the Net Worth.

If Yes, why??

If No, why??

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6 Replies

MAYANK GUGLANI (CA ) (124 Points)
Replied 29 June 2009

HELLO SIR

No, because deferred tax liability is calculated on timing difference which can be reversal in subsequent years and it has non monetory effects on the balance sheet

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CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 30 June 2009

Dear Mayank,

Yes, deferred tax liability is because of timing difference which can be reversed in subsequent years. But when we are about to calculate the on date net worth i.e. Shareholders wealth it should be considered. Because it has reduced the profit of the Company and will be adjust in subsequent year or years. In my opinion it should be shown in Reserve and Surplus and included in the Net Worth.

As it is the part of profit.

praveen (Chartered Accountant) (6971 Points)
Replied 30 June 2009

Yes it is a part of net worth as it is a savings on tax .

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 16 July 2009

Deferred Tax Liability is the difference between the provision of tax and actual tax. It is the timing difference that arises because of the tax calculated as per Companies Act and Income Tax Act.

Example:- Provision for Tax in the P/L was Rs. 10,00,000/- however, in September when the ITR was filled the actual tax is Rs. 8,00,00/- only. Thus Rs.2,00,000/- is the deferred tax liability.

It is the appropriation of the profit and reduces the actual profit. It is not a liability because it is not required to be paid in future.

2*[(ga) of the Sick Industrial Companies (Special Provisions) Act, 1985 "net worth" means the sum total of the paid-up capital and free reserves.

Explanation.-- For the purposes of this clause, "free reserves" means all reserves credited out of the profits and share premium account but does not include reserves credited out of re-evaluation of assets, write back of depreciation provisions and amalgamation.

Thus includes deferred tax liability.

Under Rule 2(d) of Acceptance of Deposit Rule, 1975 “free reserve” includes the balance in the share premium account, capital and debenture redemption reserve and any other reserves shown or published in the balance sheet of the company and created by appropriation out of the profits of the company, but does not include the balance in any reserve created:

1. For repayment of any future liability or for depreciation in assets or for bad debts:

2. by the revaluation of any assets of the company.

Thus includes deferred tax liability.

THUS IT IS PROVED THAT DEFERRED TAX LIABILITY SHOULD BE INCLUDED IN THE NET WORTH.

CA. ANIL RAI (CHARTERED ACCOUNTANT ) (22 Points)
Replied 18 August 2009

Ankur Srivastava

Whether Deferred Tax Liability should be included in the Net Worth.
If Yes, why??
If No, why??

Dear Friends, we need to go to the basics. Deferred tax liabilities generally arise where tax relief is provided in advance of an accounting expense, or income is accrued but not taxed until received. Deferred tax asset/Liability is recognised as a result of " Matching Concept" i.e. matching of revenue and expenses of the same period to arrive at net profit /loss.

Example:- Provision for Tax in the P/L was Rs. 10,00,000/- however, in September when the ITR was filled the actual tax is Rs. 8,00,00/- only. Thus Rs.2,00,000/- is the deferred tax liability.

You know why?? My friends, because here the company has saved Rs. 2 Lacs Cash( Asset) due to timing difference arising out of difference in treatment of expenses under Accounting Standards and Income Tax Act,1961. Hence the corresponding liability has been created because this Rs. 2 Lacs belongs to tomorrow's expense. Creating Deferred Tax liability is a way to setting aside that portion of Cash which doesn't belongs to this year.

This Deferred Tax liability in Balance Sheet is representing the amount of Cash saved today and lying under "Cash" head in asset column which will be spent in future. A perfect display of "Matching Concept".

This Rs. 2 lacs will be spent in future due to timing difference and the corresponding Deferred tax liability will be reversed. since the cash saved today and cash to be spent in future is same, net effect will be zero for the company over such period. Thus the Deferred Tax Liability is a Claim on the Cash Asset for future expense, which will be satisfied due to timing difference in future. And this is what a liability means , all liabilities are claim on the assets for future satisfaction.

Since we have to deduct all the liabilities to arrive at the Net worth, We have to Deduct Deferred Tax Liability for calculating NetWorth. It can never be a part of Reserves & surplus and thus can never be included in Shareholders' fund due to "Matching Concept",which is the basis of preparation of Financial Statements.

THUS DEFERRED TAX LIABILITY CANNOT BE INCLUDED IN THE NET WORTH.

The Approach will be the same whatever purpose you use, be it Net worth Calculation, takeover, Financing or Mergers etc.