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Explainer2 min readPublished

Why deferred tax computations are wrong more often than people expect

A deferred tax computation is built on a line-by-line comparison between book and tax carrying values that almost nobody actually maintains in real time — so the computation at year-end is usually reconstructed, and reconstruction is where it breaks.

Deferred tax computations are wrong more often than expected because the underlying requirement — a complete, item-by-item comparison of every asset's and liability's book carrying value against its tax base — is not something most companies track continuously through the year; it's reconstructed at year-end from the fixed asset register, the tax depreciation schedule, and whatever temporary differences someone remembers to list, under the same deadline pressure as the rest of the close, which is exactly the condition under which reconstructed figures go wrong.

The specific places the computation breaks

  • Fixed assets with different useful lives for book and tax depreciation, where the cumulative difference is recalculated from the current year's numbers instead of rolled forward and checked against last year's closing balance.
  • Unabsorbed losses and unused tax credits recognized as a deferred tax asset without a fresh, current assessment of whether future taxable profit is actually probable.
  • Temporary differences that reverse unevenly over time, computed at a single current tax rate instead of the rate expected to apply when each specific difference actually reverses.
  • MAT credit treated as automatically recoverable without reassessing whether the company is still likely to move out of MAT within the permitted period.
  • Items that look like permanent differences but are actually temporary (or vice versa) — getting this classification wrong at the outset means every subsequent period's movement is wrong too.

A deferred tax balance that moves smoothly year over year isn't evidence the underlying computation is right — a consistent methodology applied to the wrong base produces a smooth, wrong number. The check that actually catches errors is tracing a sample of individual temporary differences back to their source documents, not just reviewing the roll-forward schedule for internal consistency.

Why this keeps recurring year after year

Because the computation is rebuilt rather than maintained, an error introduced in one year's reconstruction becomes next year's opening balance, and gets carried forward and compounded rather than caught. Reviewing the deferred tax working against the actual asset register and tax schedules — not just checking that this year's closing balance looks reasonable relative to last year's — is what actually breaks that cycle.

This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.

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