20 May 2021

Upgrading Accounting Standards - ICAI issued exposure draft of AS 12: Income Taxes

Indian Accounting Standards (Ind AS) are applicable to specified classes of companies as notified by the Ministry of Corporate Affairs (MCA). Accounting Standards (AS) notified under Companies (Accounting Standards) Rules, 2006 and those issued by the Institute of Chartered Accountants of India (ICAI) apply to entities to whom Ind AS are not applicable. Standard setting forums like the ICAI, MCA, and National Financial Reporting Authority (NFRA) have decided to revise AS. This revision of AS will enable them to add higher value to financial reporting and disclosure of financial information. The Accounting Standards Board (ASB) of ICAI has initiated the process of upgrading AS. With this process they aim to maintain consistency with the numbering of standards of Ind AS.

In light of the above background, the ASB of ICAI has finalized AS 12: Income Taxes by taking AS 22: Accounting for taxes on income as the base.

In this article, we bring to you highlights from:

Major differences between the exposure draft of revised AS 12 and Ind AS 12: Income Taxes
Major differences between the exposure draft of revised AS 12 and AS 22

Major differences between the exposure draft of revised AS 12 and Ind AS 12: Income Taxes

	Ind AS 12	Revised AS 12
Approach	Based on Balance Sheet approach. It requires recognition of tax consequences of differences between the carrying amounts of assets and liabilities and their tax base.	Based on Income Statement approach. It requires recognition of tax consequences of differences between taxable income and accounting income. For this purpose, differences between taxable income and accounting income are classified into permanent and timing differences.
Recognition of deferred tax	Deferred tax is recognized on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Current and Deferred tax are recognized as income or expense and included in profit or loss for the period. This happens in all cases except in cases of when tax arises from a transaction or event which is recognized outside profit and loss, either in other comprehensive income or directly in equity. In such exceptional cases, recognition happens either in other comprehensive income or directly in equity.	Deferred taxes are recognized as the tax effect of timing differences which are the differences between taxable income and accounting income for a period that originate in one period and can be reversed in one or more subsequent periods. Deferred tax assets and liabilities are disclosed under a separate heading in the entity’s balance sheet, separately from current assets and current liabilities.
Deferred tax on elimination of profit /loss on intragroup transactions	Deferred tax should be recognized on temporary differences that arise from eliminating profit and losses resulting from the intra- group transactions.	Revised AS 12 does not specifically deal with this subject
Recognition of deferred tax liabilities - specific guidance	Deferred tax liability is recognized for all taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, if certain conditions are satisfied.	Revised AS 12 does not specifically deal with this subject.
Revaluation of non-depreciable assets	Deferred tax asset/liability arising from the revaluation of non-depreciable assets is measured based on tax consequences from asset sale rather than through use.	Revised AS 12 does not specifically deal with this subject.
Change in tax status of reporting entity or its shareholders	Provides guidance as to how an entity should account for the tax consequences of a change in its tax status or that of its shareholders.	Revised AS 12 does not specifically deal with this subject.
Uncertainty over income tax treatment	Specifically provides guidance on Uncertainty over Income Tax treatment.	Revised AS 12 does not specifically deal with this subject.
Specific guidance on matters in the Income Tax Act, 1961	Ind AS 12 does not specifically deal with this subject.	Specific guidance is provided on: Recognition of deferred tax in situations of tax holiday under Sections 80-IA, 80-IB, 10A and 10B. Recognition of deferred tax asset in case of loss under the head "Capital Gains." Tax rates applicable in measuring deferred tax assets/liabilities where companies pay tax under Section 115JB.
Comprehensiveness of disclosures	More detailed compared to revised AS 12.	Not as comprehensive as Ind AS 12.

Major differences between the exposure draft of revised AS 12 and AS 22

	Revised AS 12	AS 22
Recognition of deferred tax assets	Deferred tax asset is recognized for all timing differences to the extent that it is probable that sufficient taxable profit will be available against which the timing difference can be realized.	Deferred tax assets are recognized and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized.
Recognizing deferred tax assets from unabsorbed depreciation	The criteria for recognizing deferred tax assets arising from unabsorbed depreciation and carried forward losses are same as recognizing deferred tax assets arising from timing differences. However, the existence of unabsorbed depreciation and carried forward losses is strong evidence that future taxable profit may not be available. Therefore, when an entity has a history of recent losses, the entity recognizes a deferred tax asset arising from unabsorbed depreciation and carried forward losses only to the extent that it has timing differences, reversal of which will result in sufficient income or there is other convincing evidence that sufficient taxable income will be available against which such deferred tax assets can be realized.	Where deferred tax asset is recognized against unabsorbed depreciation or losses carried forward under tax laws, it is recognized only to the extent that there is virtual certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized.

The exposure draft issued by the ICAI can be found on: https://resource.cdn.icai.org/64776asb51975.pdf

Our Comments
Ind AS has resulted in specified classes of companies adopting comprehensively substance-based accounting practices prescribed under International Financial Reporting Standards (IFRS). On the other hand, AS has not undergone an exercise in convergence with higher accounting framework and guidance. While India's economic and financial landscape evolves, the need for more substance-based financial reporting shall arise by reporting entities as well as their stakeholders. The ASB of ICAI has undertaken a mammoth initiative of upgrading the existing AS. This exercise in upgradation will see clarificatory prescriptions, guidance on accounting areas where AS were earlier silent and flavors of Ind AS being infused into existing AS. Eventually, the differences between Ind AS and AS will be brought down to a negligible minimum with time. However, considering the costs of compliance that such exercises can result in, the ICAI is mindfully releasing exposure drafts of a 'Standard' at a time rather than changing all the AS in one go. This will enable smaller companies to adapt to better accounting practices at a pace that does not disrupt their activities and budgets. Training, learning and development, and refresher exercises in AS will eventually become a necessity.

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