Significant judgement is involved in recognition, measurement and disclosure of Income Taxes, in particular Deferred Tax Assets (“DTA”) and Deferred Tax Liabilities (“DTL”) in the financial statements.

A DTA or DTL is created when there are temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Common examples are higher depreciation under tax laws while books of accounts follow a lower depreciation rate, and disallowance of certain expenses under the tax laws.

The need:

Ind AS 12 prescribes recognition, measurement and related disclosure requirements of Current Taxes, DTA, DTL and uncertain tax treatments.

The directive:

Key considerations for ACs:

Auditors and AC - Illustrative discussion points on this topic:

• Relevant Income Tax Laws, tax rate, significant changes in Income Tax Laws and tax rate.
• Effectiveness of internal controls over computation of current tax and deferred tax.
• Calculation and measurement of DTA and DTL.
• Process followed by Auditor in relation to DTA and DTL, including assessing probability of future taxable profits for utilization of DTA, changes in previous estimates.

• Key reconciling items in the effective tax rate reconciliation prepared by the Company.
• Current tax provision and impact of assessment orders from income tax authorities.
• Contingent liabilities and contingent assets arising due to unresolved disputes with income tax authorities.
• Method used by the Company to reflect the effect of the uncertain tax treatments.