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Deferred Tax Asset

(Guest)

Hi thr !

i have a query regarding deferred tax assets(DTA). i wish to know how a deferred tax asset is created when there is a loss as per the income statement....

how i see it is that a deferred tax asset is created only when the tax payable is more than the income tax expense. however, if the income statement registers a loss that can be carried foward, then there is no tax payable on the loss, so how come a DTA is created? also, supposing the only info that we have is that the taxable income is negative, is that info enough to infer that a DTA is created?

Can anybody help???

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18 Replies

Ramasubbu K (Sr.GM - Finance & Company Secreta) (685 Points)
Replied 21 September 2007

I give an example of creation of deferred tax. In respect of companies, when the book depreciation is higher than the income tax depreciation, the difference has to credited in P&L account and the debit will become a deferred tax asset. Timing difference in the recognition of certain items only result in deferred tax liability or asset and not the actual tax liability. So when the recognition of expense between IT and book differs, then the deferred tax will be created. In my example, since the recognition of depreciation differs and the DTA has been created.

Ravikumar.G (Consultant) (18525 Points)
Replied 21 September 2007

Deferred Tax Asset which is not to be recognized in the books following the concept of PRUDENCE

Sambu Suresh (CA Job) (564 Points)
Replied 21 September 2007

Dear Ankita,
you had put a valid query.

the answer to your query is :

1)the company incurs loss as per the inocme tax act.
2) creation of deferred tax asset on the above loss.

answer.

as per income tax act you can carryforward the loss to the nex year and can setoff against the future profits. means the current year loss will reduce future tax.

so this is timing differnce . so you can create a defered tax asset.

but u should create defered tax asset only in the situation where their is reasonable certainity that compnay will earn the profits in near future

(Guest)

the answer to your question is that if during the period of audit you find that there would be sufficient profits in the next year then you can create DTA. Now the question is that how we can find out that there would be sufficient profits. This can be checked by asking the party to tell you whether they have got any large contract of sale in the present year.

Prakash Popat (3134 Points)
Replied 21 September 2007

DTA can be booked on the basis of Going concern concepts & Firm Potentials Earning Capacity in Future.

(Guest)

ok.... so this is what i understand now... (please correct me if i'm wrong) first of all, a DTA can be created in two ways: 1) when the tax payable is more than the income tax expense and 2) when there is a timing difference as in case of a loss secondly, when we talk about the loss, we are talking about loss from the point of view of the tax return and NOT the income statement. so this means that if there is a loss as per income statement but not as per tax return, we would have to pay some tax and in this case a deferred tax liability will be created , not a deferred tax asset. Am i getting these concepts right? please help...

Sambu Suresh (CA Job) (564 Points)
Replied 21 September 2007

Iam very sorry, that in my previous example i have given the wrong answer. I will give u the good example 1) income computed as per the companies tax ***** 2)income as per the inocme tax act**** 3) (1) less(2) = Difference now u will get the differnce then divide the into timing difference and permennt difference leave the permenent differenc and provide only for the timing difference. step 1 compute the tax on income arrived as per the companies act- take it as base.( menas this is your liability) step2 then compute the tax on income arrived as per the income tax. then result1) : if step 2 is more than step 1= defered tax asset. result 2) if step 1 is more than step 2= defered tax liability.

(Guest)

@ Sambu Suresh I completely understand what u r saying here. but this is something i already know. coz this is the basic logic behind a DTA or a DTL. i am referring to a special case of loss. consider the following cases using ur own example: Case 1- u report losses in ur P&L, u DON'T compute losses as per tax return Case 2- u DON'T report losses in ur P&L, u compute losses as per tax return Case 3- u report losses in ur P&L, u compute losses as per tax return too. Now please tell me : 1) is it practically possible to have the 3 cases mentioned above, and 2) how would a DTA or a DTL be created (if at all) for each of the cases. please give reasons too. i look forward to ur response. thanks everyone for their help. i appreciate it. hopefully i would get some more helpful inputs now that i have pinpointed my doubts. Regards, Ankita.

Sambu Suresh (CA Job) (564 Points)
Replied 21 September 2007

case1: defered tax asset case2:defered tax liability case3: 1) this was happened in our previou s company , u need not to create any thing either DTL or DTA. but u need to re adjust the existing means the previous year balances 2)but u see u can create either DTL or DTA hope about future profit. but u see when the company get loss( P&L) , we can presume that their is no reasonable evidence providing that the company would get profit in near future.

(Guest)

@ Sambu Suresh that was awesome! thank u so much! i really appreciate it. could u plz tell me what do u mean by readjusting the existing , i.e. the previous year balances in case 3....i mean how would u do that? thanks, anyways...

Anand (481 Points)
Replied 22 September 2007

Hi, I agree with what Mr Sambu Suresh said but the only clarification is that DTA is to be created on Losses only when there is virtual sertainity and not reasonable certainity.

amarjit (article) (21 Points)
Replied 17 May 2011

i want clarifications in detail how to find deferred tax liabiity and deferred tax assets

i am little about confused about the concept

please help me

Anusree Sarkar (Student) (21 Points)
Replied 12 July 2012

Dear all,

If there is loss before taxation according to company act, then we can creat Deferred Tax asset by using Unabsorbed depretiation and business loss. but after charging that Deferred Tax asset to P/L , we are getting a profit for that year. Is that a write approch??? In that situation should I create Deferred Tax asset if there is certainity of profit in next year??

Varun Randhawa (student) (22 Points)
Replied 09 March 2016

hello i want to ask that it is necessary to create DTA when a company is incurring losses. Actually a company incurred losses in the previous year 2014-15 and we created DTL by acknowleding the fact that dep as per IT act is more than dep as per CO Act... but now found that since the company was having loss before dep therefore DTA should hv been created instead of DTL.... Now how can i rectify this?????