📘 Tax Accounting Across Frameworks: Ind-AS 12, Indian GAAP, IFRS (IAS 12), US GAAP (ASC 740), and UK GAAP (FRS 102 Sec. 29)
Accounting for income taxes connects accounting profit with taxable profit, making it one of the most technical yet practical topics in financial reporting. While all major frameworks — **Ind-AS 12, Indian GAAP (AS 22), IFRS (IAS 12), US GAAP (ASC 740), and UK GAAP (FRS 102 Sec. 29)** — use the temporary difference approach, they differ in how they recognise, measure, and disclose current tax (CT), deferred tax (DT), deferred tax liabilities (DTL), deferred tax assets (DTA), and valuation allowance (VA).
This guide explains each concept in simple words, gives journal entries, lists real-life examples, compares frameworks in detail, and explains how these items appear in the Profit & Loss Account (P&L) and Balance Sheet (B/S). 📈
💰 Current Tax
👉 Meaning: Tax payable or refundable for the current reporting year as per tax laws.
📌 Example: Taxable profit = ₹10,00,000, Tax rate = 30% → Current Tax = ₹3,00,000
Journal Entry:
Future impact: Current tax is settled in cash with the government in the same year.
⏳ Deferred Tax
👉 Meaning: Future tax payable or recoverable because tax laws and accounting standards recognise income/expenses at different times.
- **DTL (Deferred Tax Liability):** Future tax payment (because tax was saved earlier).
- **DTA (Deferred Tax Asset):** Future tax saving (because extra tax was paid earlier or deductions are available later).
Future impact:
- DTL reverses when book income is less than taxable income in later years.
- DTA reverses when book expenses become deductible in tax later, or losses are set off.
🔍 Essence of DTL and DTA (Easy Explanation)
- DTL = “Pay Later” → Tax benefit came earlier (e.g., tax depreciation higher now). Future tax will increase when books catch up.
- DTA = “Save Later” → Extra tax paid now or losses carried forward. Future tax will reduce when deductible.
📌 Examples of DTL (future tax increase):
- Tax depreciation > Book depreciation.
- Income taxed earlier than accounting recognition.
- Capitalised development costs allowed for tax now.
📌 Examples of DTA (future tax saving):
- Provisions disallowed now but deductible later.
- Employee benefit expenses (gratuity, leave) deductible only on payment.
- Unabsorbed depreciation / carry-forward losses.
- MAT credit entitlement in India (if probable).
🛡️ Valuation Allowance (US GAAP ASC 740 Only)
👉 Meaning: If a company records a DTA but may not earn enough future profits to use it, **US GAAP** requires reducing it by a **Valuation Allowance (VA)**.
Journal Entry:
Future impact: If future profits arise, the VA is reduced and DTA is increased, lowering tax expense.
📝 Journal Entries for Deferred Tax
For DTL (Depreciation difference):
For DTA (Provision disallowed currently):
For US GAAP with VA:
📊 Detailed Comparison of Tax Accounting Frameworks
| Aspect | Ind-AS 12 (India) | Indian GAAP (AS 22) | IFRS (IAS 12) | US GAAP (ASC 740) | UK GAAP (FRS 102 Sec. 29) |
|---|---|---|---|---|---|
| Approach | Temporary difference approach (aligned with IAS 12). | Timing difference approach (older model). | Temporary difference approach (IAS 12). | Temporary difference approach with explicit Valuation Allowance. | Temporary difference approach, simpler disclosure. |
| Current Tax | Recognised as per law. | Same. | Same. | Same. | Same. |
| DTL | Recognise all taxable temporary differences except goodwill/initial recognition. | Recognise timing differences (narrower). | Same as Ind-AS. | Recognise all taxable differences. | Same as Ind-AS. |
| DTA | Recognise if probable future profits. | Recognise if reasonable/virtual certainty. | Recognise if probable. | Recognise gross DTA, reduce with VA if not “more likely than not.” | Recognise if probable. |
| Valuation Allowance | ❌ Not applicable. | ❌ Not applicable. | ❌ Not applicable. | ✅ Required. | ❌ Not applicable. |
| Measurement of DT | Enacted or substantively enacted rates. | Enacted rates only. | Enacted or substantively enacted rates. | Enacted rates only. | Enacted or substantively enacted rates. |
| Classification (B/S) | Always non-current. | Based on underlying item. | Always non-current. | Non-current net (since ASU 2015-17). | Always non-current. |
| Offsetting (Netting) | Allowed if same tax authority & legal right. | Same. | Same. | Same. | Same. |
| Disclosure in P&L | Tax expense = CT + DTL – DTA; reconciliation required. | Simpler note disclosure. | Detailed reconciliation required. | Reconciliation, VA disclosure, uncertain tax positions. | Simpler disclosure, reconciliation encouraged. |
| Disclosure in B/S | DTAs and DTLs non-current, netted if allowed. | Current/non-current based on item. | Non-current, netting permitted. | Net after VA. | Non-current, netted; detail in notes. |
| Tax Credits | Recognise if probable. | Similar, with certainty test. | Recognise if probable. | Recognise as DTA, subject to VA. | Recognise if probable. |
| Uncertain Tax Positions | No specific model; judgement-based. | Not addressed. | Governed by IFRIC 23. | FIN 48 two-step model. | Less prescriptive, disclosure-focused. |
| Future Impact of DTA/DTL | Reverse automatically as timing differences settle. | Same. | Same. | Same, adjusted via VA if required. | Same. |
| Special Indian Rule (MAT Credit) | Recognised as asset if probable utilisation. | Same under AS 22. | Not applicable. | Not applicable. | Not applicable. |
📄 How Tax Accounting Appears in Financial Statements
📌 In Profit & Loss (P&L):
- Line item “Tax Expense” = **Current Tax + DTL – DTA.**
- **Detailed breakdown in notes:** Current tax expense, Deferred tax (DTL and DTA movements), and Effective tax rate reconciliation.
- Deferred tax on OCI items → reported in **OCI**, not P&L.
📌 In Balance Sheet (B/S):
- **Current Tax:** Shown as current liability or asset.
- **Deferred Tax:** Always non-current (except AS 22).
- **Offsetting:** Permitted only under strict conditions.
- **US GAAP:** DTAs shown net of VA.
💡 Final Takeaway
- Current Tax = Tax payable for the year.
- Deferred Tax = Future tax effect of timing differences.
- DTL = Pay Later, DTA = Save Later.
- Valuation Allowance = US GAAP rule to reduce doubtful DTAs.
- **Future of DTA/DTL:** They reverse naturally as timing differences unwind.
👉 Across frameworks:
- **Ind-AS 12 & IFRS (IAS 12):** Aligned, detailed disclosures.
- **Indian GAAP (AS 22):** Older, stricter certainty for DTA.
- **US GAAP (ASC 740):** Unique VA model + detailed uncertain tax rules.
- **UK GAAP (FRS 102 Sec. 29):** Simpler version of IAS 12.
Deferred tax is non-current, affects Tax Expense in P&L, and is critical for understanding the real effective tax rate of companies.