CA.CS.CMA.MBA: Naveen.

Rohatgi
Analysis of Financial statement-NMIMS SAMSOE

IND AS : ACCOUNTING FOR TAXES ON INCOME

IND AS ACCOUNTING FOR TAXES ON INCOME

1) Until recently the amount of tax provision was determined on the profit or loss calculated on per
Income Tax laws. As per INDAS tax should be accounted by following the principle of matching
concept i.e. tax should be accounted in the period in which the corresponding revenue and expenses
are accounted.

2) The concept of Taxes on income as per AS – 22 can be well explained as follows: For Example lets say
the company has provided for the doubtful debts in year 1. This means income as per P/L will be less
after this provision of doubtful debts. But for tax purpose it is disallowed. Hence in the year 1 the
company is paying more taxes as compared to the taxes computed on accounting income. This excess tax
is a type of prepaid taxes. When in the next year the company actually suffers bad-debt loss then
deduction can be claimed. But in the year 2 income as per P/L will be more the taxable income hence the
prepaid taxes of last year can be recouped.

3) There is a difference between accounting profit (i.e. profit calculated on the basis of accounting
policies) and taxable profit (i.e. profit calculated as per Income Tax laws). There are two main reasons
for this difference.
a) Timing difference: These difference originate in one period and is capable of reversal in one or
more subsequent periods. E.g.
* Difference in rate and method of depreciation
* Expenses debited in the statement of profit and loss account for accounting purpose but allowed
for tax purpose in the subsequent year. Like Sec 43B of income tax act
* Provision for doubtful debts.

Measurement of Timing Differences: For the measurement of T.D. lets say Depreciation as per I. tax is ₹
1,00,000 and Depreciation as per Companies Act is ₹ 70,000, then T.D. = ₹ 30,000. Further such
difference should reserve in the subsequent years then only it can be TD.
b) Permanent Difference: These difference originate in one period and do not reverse subsequently
e.g., expenses charged to Profit & Loss but not allowed for tax purpose at all in any year or incomes
credited to Profit & Loss but exempt from tax

4) Timing difference will lead to either Deferred Tax Asset or Deferred Tax Liability. When
accounting profit is more than taxable profit, a deferred tax liability is created. However when
accounting profit is less than taxable profit, a Deferred Tax Asset is created e.g.

• Accelerated depreciation allowed by income Tax Act leads to creation of Deferred Tax
Liability.
• Provision for doubtful debts will leads to creation of Deferred Tax Asset.

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CA.CS.CMA.MBA: Naveen. Rohatgi
Analysis of Financial statement-NMIMS SAMSOE

Permanent Differences (P.D) = These are the differences in the Accounting income and Taxable income
which arises in one year and is not capable of reversal in the subsequent years. In other words these
difference are of permanent nature.
Example of Permanent Differences: = Agricultural Income, Personal Expenses. Lets say agricultural
income reduces income (by claiming exemption) and this creates a difference between accounting income
and taxable income. In subsequent years accounting income will never get an exemption, in which the
difference will be a permanent difference.

Illustration: Hinduja Limited prepares its accounts annually on March 31. On April 1, 2002, it
purchases a machine at a cost of Rs 1,50,000. The machine has a useful life of three years and an
expected Scrap value is Zero. Although it is eligible for 100% first year depreciation allowance
for the tax purpose, the straight line method of depreciation is considered appropriate for
accounting purpose. Hinduja limited has a profit before depreciation and tax Rs 2,00,000 each
year and corporate tax rate is 40%.

Solution:

Statement of profit and loss account for three years ending March 31, 2003, 2004, 2005

(Rs in 000)
Particulars 2003 2004 2005
Profit before depreciation and tax 200 200 200
Less: Depreciation (50) (50) (50)
Profit before tax 150 150 150
Less: Tax expense

Current tax 0.40 (200-150) 20

0.40 *200 80 80
Deferred tax
Tax effect of timing difference originating 40
during the year 0.40 * (150-50)
Tax effect of timing difference reversing (20) (20)
during the year. 0.40 (0-50)

Tax expense 60 60 60
Profit after tax 90 90 90
Deferred tax Liability (DTL) 40 20 0
DTL is shown on the liability side of the
balance sheet after head unsecured loan
under separate head

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CA.CS.CMA.MBA: Naveen. Rohatgi
Analysis of Financial statement-NMIMS SAMSOE

Year 2003:

Profit and loss a/c Dr 20,000

To Current tax a/c 20,000

Profit and loss account a/c Dr 40,000

To Deferred tax a/c 40,000

Year 2004:

Profit and Loss a/c/ Dr 80,000

To current tax a/c 80,000

Deferred tax a/c Dr 20,000

To Profit and loss a/c 20,000

Year 2005:

Profit and Loss a/c/ Dr 80,000

To current tax a/c 80,000

Deferred tax a/c Dr 20,000

To Profit and loss a/c 20,000

Illustration: Hinduja Limited prepares its accounts annually on March 31. The company has incurred
a loss of Rs 1,00,000 in the year 2003 and made a profit of Rs 50,000 and Rs 60,000 in year 2004 and
2005 respectively. It is can be assumed that under tax laws, loss can be carried forward for 8 years and
tax rate is 40% and at end of the year 2003. It is virtually certain, supported by convincing evidence,
that company would have sufficient evidence taxable income in future year against which unabsorbed
depreciation and carry forward losses can be set off. It is assumed that there is no difference between
taxable profit and accounting profit except for set off losses.

Solution
Statement of profit and loss account for three years ending 2003, 2004, 2005
(Rs in 000)
2003 2004 2005
Profit(loss) (100) 50 60
Less: Current tax -- -- (4)
Tax effect of timing difference 40
originating during the year
(1,00,000*0.40)

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CA.CS.CMA.MBA: Naveen. Rohatgi
Analysis of Financial statement-NMIMS SAMSOE

Tax effect of reversing the timing (20) (20)

difference during the year (50*40%)
Profit and loss after tax. (60) 30 36
DTA 40 20 0

Year 2003: (deferred tax )

Deferred tax asset a/c dr 40,000

To Profit and loss a/c 40,000

Year 2004 and Year 2005 : (Reversal of deferred tax )

Profit and loss a/c dr 20,000

To DTA 20,000

5) Permanent difference are difference that always remain and are of permanent nature.
Permanent differences do not create Deferred Tax Asset / Deferred Tax Liability.
These are excluded for determining of tax expenses.

Why We Are Learning TD and PD?

We are learning TD and PD to provide for differed taxes. This is because Deferred taxes are provided only
on TD and PD and not on PD.
Deferred Taxes: Deferred taxes are taxes on timing differences. Deferred taxes indicate either taxes
payable in future. If today more taxes have been paid against tax expense, this mean for future we have
created a Deferred tax Assets (DTA). If today less taxes have been paid against tax expense, then a
liability is accrued which is Deferred tax Liability (DTL)

Deferred Taxes = Tax rate % x Timing Differences

Illustration 1:

Trimurthy Pan Masala (P) Ltd. was incurring heavy losses in the last several years since it could not
withstand the competition in the market. The state in which the company had its registered office and also
its major sales had moved bill in the State Assembly to ban manufacture and sale of all kinds of Pan Masala
in the state. While finalizing the accounts for the year ended 31-03-2004., the CFO of the company created
a Deferred Tax Asset for the benefits that would arise in future years from the earlier years losses that had
remained unabsorbed in Income Tax.

Solution: Creation of Deferred Tax Asset: Accounting Standard 22 on “Accounting for Taxes” requires that
Deferred Tax Asset (DTA) should be recognised for all timing differences, subject to the consideration of
prudence. The Standard further states that unabsorbed losses of the business can be considered for creation
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 CA.CS.CMA.MBA: Naveen. Rohatgi
Analysis of Financial statement-NMIMS SAMSOE

of DTA provided there no virtual certainty supported by convincing evidence that sufficient future taxable
income will be available against which such DTA can be realised.

In view of this, the DTA created by the CFO of Trimurthy Pan Masala (P) Ltd. is not in order since the
company which is in the business of manufacturing of pan masala has been incurring heavy losses and in
addition to the State in which the company is having its major sales is proposing the ban on sale and
manufacture to pan masala, the statutory auditor would, therefore, have to qualify his report and mention
the extent of amounts of loss and reverses which are under and overstated respectively.

Illustration 2:

Following is the P/L Statements for various years of Oil Palm Limited.
2004 – 2005 2005 – 2006 2006 – 2007
Net profit before taxes 10,00,000 12,00,000 15,00,000

(1) Company purchased fixed assets at the beginning of 2004-2005 for Rs. 20, 00,000.
Depreciation as per Income tax is 30% WDV and depreciation as per Company Act is 40%
SLM basis.
(2) Sales tax provide in 2005-2006 but deduction received in 2006-07 Rs. 25,000.
(3) Heavy advertisement expenses Rs. 5,00,000. Companies Policy is to defer advertisement
for the period of 5 years. Advertisement expenses incurred in the year 2005-2006. As per
income tax act the deduction is allowed in the first year itself.
(4) Tax rate 35%.
You are required to: (1) Compute Timing Differences, (2) Deferred Taxes, (3) tax expenses, (4) Pass
necessary journals:

Illustration 3 : Following is the P/L Statement for two years of Nuclear Limited.
2004 – 2005 2005 – 2006
Net Profit before Taxes 3,35,000 3,55,000

(1) Depreciation as per I. tax is 75,000 & 25,000 for two years. Depreciation as per Co.
Act is 50,000 each year.
(2) Sales tax provide in 2004 – 2005 but deduction received in 2005-06 Rs. 35,000.
(3) Penalties not allowed under I. Tax Rs. 10,000 – For the year 2005-2006
(4) Company received Income from Bonds Rs. 10,000 in the year 2004-2005 (exempt).
(5) Tax rate 40%.

You are required to: Compute Timing Differences, (2) Deferred Taxed, (3) Tax expenses, (4) pass
necessary journals.

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 CA.CS.CMA.MBA: Naveen. Rohatgi
Analysis of Financial statement-NMIMS SAMSOE

Illustration 4 Following is the P/L Statement for three Years of PQR Limited.
31.03.2001 31.03.2002 31.03.2003
Net Profit before taxes (2,00,000) (1,00,000) (1,20,000)
(1) Losses can be c/f. in the next 8 years as per I/ Tax.
(2) By the end of 31.03.2001 company feels that in future sufficient taxable
income is available.
(3) Tax rate 40%.

You are required to : (1) Compute Timing Differences, (2) Deferred Taxes, (3) Tax Expenses, (4) Pass
necessary journals.

Solution :

Journal

Year 2001 (deferred tax )

Deferred tax asset a/c dr 80,000

To Profit and loss a/c 80,000

Year 2002 (deferred tax )

Deferred tax asset a/c dr 40,000

To Profit and loss a/c 40,000

Year 2003 (deferred tax )

Deferred tax asset a/c dr 48,000

To Profit and loss a/c 48,000

Illustration 5 The following particulars are stated in the balance sheet of M/s. Excel Limited as on
31.03.2005.
1) Deferred Tax Liability b/d ₹ 20,00,000 (Cr.)
2) Deferred Tax Assets b/d ₹ 10,00,000 (Dr.)
Current Year Transactions are as follows:
1) Depreciation as per Books 50,00,000 and as per I. Tax 30,00,000.
2) Items disallowed last year now allowed ₹ 10, 00,000.
3) Interest of Financial ins. provided in books by payments made on 30.09.2005 ₹ 20, 00,000.
4) Donation to Private trusted ₹ 10, 00,000.
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 CA.CS.CMA.MBA: Naveen. Rohatgi
Analysis of Financial statement-NMIMS SAMSOE

5) Share issue expenses Amortized u/s 35D of the I. Tax Act for the year 2004-2005 (1/10th of ₹
50,00,000 incurred in 1999 – 2000) ₹ 5,00,000. As per accounts 100% deduction is received in the
first year itself.
6) Repairs incurred during the year amounted to ₹ 1,00,00,000 and to be amortized in two years. But
I Tax Allows 100% deduction in the current year.
7) Tax rate 50%.
You are required to show the impact of the above transaction on Deferred Taxes.

Extra Questions for practice

Illustration 1 The following particulars are stated in the balance sheet of M/s. Blue Bird Limited as on
31.03.2022.

(1) Deferred Tax Liability b/d ₹ 10,00,000 (Cr.)

(2) Deferred Tax Assets b/d ₹ 5,00,000 (Dr.)
(3) Current Year Transactions are as follows:
(4) Depreciation as per Books 30,00,000 and as per I. Tax 50,00,000.
(5) GST disallowed last year now allowed ₹ 5,00,000.
(6) Interest of Loan from Bank of Baroda , provided in books by payments made on 30.09.2022 ₹
4,00,000.
(7) Donation to Helpage India ₹ 1,00,000.
(8) Penalty paid for not filing income tax return within the due date Rs 10,000
(9) Income from NABARD Bonds (exempt) Rs 3,50,000.
(10) Share issue expenses amortized u/s 35D of the I. Tax Act (1/10th of ₹ 50,00,000). In
accounts entire deduction in the year itself.
(11) Repairs incurred during the year amounted to ₹ 50,00,000 and to be amortized in two years.
But I Tax Allows 100% deduction in the current year.
(12) Tax rate 40%.
You are required to show the impact of the above transaction on Deferred Taxes.

Illustration 2
Following is the P/L Statements for various years of Green Acres Limited.
2018 – 2019 2019 – 2020 2020 – 2021
Net profit before taxes 12,00,000 15,00,000 18,00,000

(1) Company purchased fixed Assets at the beginning of 2018-19 for Rs. 30, 00,000.
Depreciation as per Income tax act is 25% WDV and depreciation as per Company act is
30% SLM basis.

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 CA.CS.CMA.MBA: Naveen. Rohatgi
Analysis of Financial statement-NMIMS SAMSOE

(2) Interest on loan from Kotak Mahindra Bank provide in 2019-20 but deduction received in
year 2020-21 Rs. 40,000.
(3) Preliminary expenses Rs. 4,00,000. Companies Policy is to defer preliminary expenses for
the period of 4 years. Preliminary expenses incurred in the year 2018-19. As per income
tax act the deduction is allowed in the first year itself.
(4) Penalty for violation for FEMA Act Rs 8,000 in the year 2019-2020.
(5) Agriculture income Rs 50,000 each for all the three years (exempt)
(6) Tax rate 25%.
You are required to: (1) Compute Timing Differences, (2) Deferred Taxes, (3) tax expenses, (4) Pass
necessary journals: