Deferred tax is often taught as a mechanical calculation, but the harder professional question is deciding which difference creates deferred tax and why. That answer changes depending on whether the financial statements follow Accounting Standards or Indian Accounting Standards. Under AS 22, the analysis is built around timing differences between accounting income and taxable income. Under Ind AS 12, it is built around temporary differences between the carrying amount of an asset or liability and its tax base.
A finance team should first identify the reporting framework applicable to the entity and then apply the deferred-tax model under that framework consistently. ICAI's AS 22 publication and its Educational Material on Ind AS 12 are useful first-party references.
AS 22 and Ind AS 12: the core difference
AS 22 uses an income-statement approach. It focuses on differences between accounting income and taxable income for a period. Timing differences originate in one period and are capable of reversal in one or more later periods. Permanent differences do not reverse and therefore do not create deferred tax under AS 22.
Ind AS 12 uses a balance-sheet approach. It compares the carrying amount of an asset or liability with its tax base. The resulting temporary difference may be taxable or deductible. ICAI's official Ind AS 12 educational material explains this balance-sheet approach and the definitions of taxable and deductible temporary differences.
- AS 22 question: Has an item affected accounting income and taxable income in different periods, with the difference capable of reversing later?
- Ind AS 12 question: Is the carrying amount of an asset or liability different from its tax base, and what future tax consequence will arise when that carrying amount is recovered or settled?
Timing differences under AS 22
Under AS 22, deferred tax is the tax effect of timing differences. A common example is depreciation. If depreciation allowed for tax purposes is higher than depreciation charged in the books in the current year, taxable income is temporarily lower than accounting income. The difference is expected to reverse in later years as the tax and accounting depreciation patterns converge. That timing difference can create a deferred tax liability.
By contrast, a permanent difference does not reverse. If an expense is permanently disallowed for tax purposes, the difference between accounting profit and taxable profit affects current tax but does not create deferred tax. ICAI's current Accounting Standards resource page links the current compendium containing AS 22.
Temporary differences under Ind AS 12
Ind AS 12 starts from the balance sheet rather than only from the current period's profit reconciliation. A temporary difference is the difference between an asset or liability's carrying amount and its tax base. A taxable temporary difference generally leads to a deferred tax liability, subject to the Standard's exceptions. A deductible temporary difference can support a deferred tax asset when the recognition conditions are satisfied.
Ind AS 12 also includes unused tax losses and unused tax credits within the deferred-tax framework. ICAI's 2025-26 Ind AS compendium page links the current Ind AS 12 text.
Worked example: one asset, two ways to think
Assume a machine has a carrying amount of 800 at the reporting date and a tax base of 600. Under Ind AS 12, the starting point is the balance-sheet difference: the carrying amount exceeds the tax base by 200. The entity then evaluates the future tax consequence of recovering that carrying amount and measures the resulting deferred tax using the basis required by the Standard.
Under AS 22, the accountant instead examines how the tax treatment caused accounting income and taxable income to differ across periods and whether that difference will reverse later.
Deferred tax assets: the recognition hurdle matters
A deferred tax asset should never be created merely because a spreadsheet shows a deductible amount. Recognition depends on whether the asset is sufficiently supportable under the applicable framework.
AS 22 applies a prudence-based recognition test. In the ordinary case, recognition depends on reasonable certainty of sufficient future taxable income. Where there is unabsorbed depreciation or carry-forward of losses, AS 22 applies the higher threshold of virtual certainty supported by convincing evidence. ICAI's Expert Advisory Committee guidance on virtual certainty explains that optimistic forecasts or management confidence alone do not establish that higher threshold.
Ind AS 12 uses its own recognition model. Deferred tax assets for deductible temporary differences and unused tax losses or credits are recognised to the extent the relevant conditions are met, including the availability of probable future taxable profit, subject to specified exceptions. An AS 22 deferred-tax working should therefore not be copied mechanically into Ind AS financial statements.
Where the two frameworks can produce different work
- Revaluation and fair-value items: Ind AS 12's balance-sheet approach can identify temporary differences even when there is no simple current-year timing difference visible in the tax reconciliation.
- Items recognised outside profit or loss: Ind AS 12 links tax recognition to where the underlying transaction or event is recognised, including other comprehensive income or equity where applicable.
- Unused tax credits: Ind AS 12 expressly includes unused tax credits within deferred tax assets, subject to recognition requirements.
- Loss situations: Both frameworks require careful support before recognising deferred tax assets, but the recognition language and thresholds are not identical.
A practical year-end deferred-tax workflow
- Confirm the reporting framework. Determine whether the entity prepares financial statements under Accounting Standards or Ind AS. Do not choose AS 22 or Ind AS 12 transaction by transaction.
- Build the correct source schedule. For AS 22, reconcile accounting income and taxable income and identify reversing timing differences. For Ind AS 12, prepare carrying-amount and tax-base schedules for relevant assets and liabilities.
- Separate permanent items. Under AS 22, permanent differences should not be converted into deferred tax merely because they appear in the tax reconciliation.
- Test DTA recoverability. Link each material deferred tax asset to evidence supporting future taxable income or other recovery logic required by the applicable standard.
- Review losses and credits separately. Brought-forward losses, unabsorbed depreciation and unused tax credits often require more careful recognition analysis than routine reversing differences.
- Check measurement and presentation. Use the tax rates and tax laws required by the applicable standard, assess recovery or settlement assumptions where relevant, and reconcile the movement from opening to closing deferred tax.
Common mistakes to avoid
- Using timing difference and temporary difference as if they are interchangeable.
- Creating deferred tax on a permanent difference under AS 22.
- Recognising a deferred tax asset from losses only because management expects future profits, without meeting the applicable evidence threshold.
- Preparing Ind AS 12 solely from the tax-computation reconciliation instead of examining carrying amounts and tax bases.
- Rolling forward last year's deferred-tax schedule without reassessing changes in tax law, tax rates, recovery assumptions or supporting evidence.
Practical takeaway
The simplest way to remember the distinction is this: AS 22 asks when accounting income and taxable income differ and reverse; Ind AS 12 asks how carrying amounts differ from tax bases and what future tax consequence follows. For any material year-end position, use the current ICAI standard and supporting guidance instead of relying only on an old working-paper template.
