No present-value option for deferred tax
Ind AS 12 paragraph 53 prohibits discounting deferred tax assets and liabilities. Paragraph 54 explains that the standard neither requires nor permits it. A distant reversal, reliable cash-flow schedule or group discounting policy does not create an exception. This article focuses on removing inappropriate present-value overlays from the deferred-tax working, rather than on the separate initial recognition or tax-rate determination tests.
Read the applicable text: ICAI Ind AS 12: paragraphs 53–56.
Start with the correct underlying carrying amount
Paragraph 55 determines temporary differences by reference to the asset or liability’s carrying amount, including where that amount is itself measured on a discounted basis. Therefore, do not undo an appropriate source-liability discount simply because deferred tax is undiscounted. Equally, do not apply a second discount factor to the tax amount after using the correct carrying amount and tax base.
Recognition and measurement still need their own review
The prohibition does not justify recognising every potential tax asset at its full mathematical amount. Establish the tax base, applicable rate and recognition conditions before applying the no-discounting rule. For a deferred tax asset, recoverability analysis and later carrying-amount review are separate from discounting. A failure of recognition support should not be disguised as an arbitrary present-value reduction.
Inspect imported models for hidden overlays
Look for present-value multipliers, treasury yield curves, WACC inputs and formulas that discount an already measured deferred tax amount. Label reversal schedules as supporting timing evidence rather than permission to discount. Remove the overlay only after confirming what the source figure represents, so that the correction does not inadvertently gross up an underlying discounted provision.
Reconcile movement without invented unwinding
A deferred-tax model should explain changes through the actual applicable recognition and measurement drivers. Do not introduce an annual discount-unwinding entry solely because an inappropriate deferred-tax present value was used earlier. If correcting an existing reporting error, determine the applicable error-correction requirements and reporting destination separately. The examples do not prescribe a journal entry or retrospective-restatement conclusion.
Use the numerical assumptions carefully
All examples use ₹ lakh and fictional assumed composite rates or model factors. They assert no statutory corporate rate. The stated temporary differences and recognition support are assumed already established. Examples of rejected discounts demonstrate the error; they are not permitted alternatives. The final working should tie source carrying amounts, tax bases, recognised tax and corrections to the actual financial statements.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Reject a liability discount factor
A recognised taxable temporary difference ₹100 lakh at assumed 25% gives DTL ₹25 lakh. A model applies a 0.80 present-value factor and reports ₹20 lakh. Paragraph 53 requires no deferred-tax discount: the measured DTL remains ₹25 lakh, with ₹5 lakh model understatement on these assumptions.
Illustrative example 2: Asset also remains undiscounted
An otherwise fully recognisable deductible difference ₹80 lakh at assumed 25% gives DTA ₹20 lakh. A 0.75 factor reduces the draft to ₹15 lakh. Removing that impermissible overlay restores ₹20 lakh, a ₹5 lakh difference; it does not replace the recognition assessment.
Illustrative example 3: Do not gross up the source provision
Assume a correctly discounted source liability carrying amount ₹90 lakh, tax base zero and a fully recognisable deductible difference on these stipulated facts. At assumed 25%, DTA is ₹22.5 lakh. Using an undiscounted future cash payment ₹120 lakh instead would produce ₹30 lakh, overstating this assumed tax amount by ₹7.5 lakh.
Illustrative example 4: Portfolio reconciliation
Three recognised tax amounts before any overlay are ₹5 lakh, ₹8 lakh and ₹12 lakh. Correct total ₹25 lakh becomes ₹22.5 lakh if a 0.90 factor is incorrectly applied to all. Difference ₹2.5 lakh is a model correction population, not automatically the prescribed accounting entry.
Illustrative example 5: Recognition is a different issue
A potential DTA calculation is ₹40 lakh, but only ₹24 lakh is assumed supported for recognition under the actual applicable tests. Recognise the supported ₹24 lakh without a discount; do not call the unsupported ₹16 lakh a discount adjustment. Nor does paragraph 53 alone authorise recognising ₹40 lakh.
Illustrative example 6: No invented unwinding
A draft recognised DTL is incorrectly reduced from ₹30 lakh to ₹27 lakh by a 0.90 factor, then increased by ₹1 lakh described as discount unwinding, to ₹28 lakh. The correct undiscounted amount on the unchanged assumed measurement facts is ₹30 lakh; the remaining difference is ₹2 lakh. Analyse the original error and reporting treatment rather than perpetuating that unwinding model.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Validate the source carrying amounts | Approved asset and liability measurement schedules. |
| 2 | Establish the tax bases | Applicable tax treatment and computation evidence. |
| 3 | Calculate temporary differences | Source-to-tax-base bridge. |
| 4 | Determine applicable tax rates | Period-specific supported rates, not treasury discount rates. |
| 5 | Complete recognition tests | DTA support and applicable exceptions. |
| 6 | Inspect model discount formulas | Factors, WACC links and present-value columns. |
| 7 | Remove deferred-tax overlays | Undiscounted recognised tax measurement. |
| 8 | Preserve valid source discounting | No inappropriate gross-up of carrying amounts. |
| 9 | Review movement and error treatment | No invented unwind; applicable correction analysis. |
| 10 | Tie final tax balances | Gross schedules, reporting destinations and financial statements. |
Sixteen practitioner FAQs
1. Does paragraph 53 allow deferred tax discounting?
No. It prohibits discounting deferred tax assets and liabilities.
2. Is discounting optional if scheduling is reliable?
No. Paragraph 54 does not permit an optional discounted basis.
3. Does a long reversal period create an exception?
No exception is created merely by distance of reversal.
4. Can WACC be used to reduce the DTL?
Not as a deferred-tax present-value overlay.
5. Does the prohibition apply to assets too?
Yes, both deferred tax assets and liabilities.
6. Must an underlying discounted liability be grossed up?
No. Paragraph 55 uses the actual relevant carrying amount, even if itself discounted.
7. What causes double discounting?
Using a discounted source balance and then discounting the resulting tax amount again.
8. Does no discounting mean every DTA is recognised?
No. Recognition conditions remain separate.
9. Can unsupported DTA be labelled a discount?
No. Explain the actual recognition restriction.
10. Does a reversal schedule have any role?
It may support relevant recognition and timing analyses, but does not permit deferred-tax discounting.
11. Are the example tax rates statutory rates?
No. They are expressly fictional arithmetic assumptions.
12. Can a general group policy override Ind AS 12?
No. Apply the standard governing the tax balance.
13. Should a deferred-tax discount unwind be invented?
No. Analyse actual measurement drivers and any error rather than perpetuating an impermissible model.
14. Does this article prescribe prior-error journal entries?
No. Applicable correction requirements and reporting destinations need separate analysis.
15. What should a model review inspect?
Discount factors, yield-curve links, present-value formulas and source-balance definitions.
16. What is the final reconciliation?
Correct carrying amount less tax base, supported tax measurement and recognition, with no deferred-tax discount overlay.