What changed
Earlier, banks could avoid creating DTL on Special Reserve if they had Board resolutions stating no intent to withdraw. Now, RBI mandates DTL creation as a matter of prudence, overriding such resolutions. For past reserves up to March 2013, any shortfall in DTL can be adjusted directly from reserves with disclosure; from March 2014 onwards, DTL must be charged to the Profit and Loss account.
What it means for you
Banks must now recognize a deferred tax liability on Special Reserve, reducing reported profits or reserves. However, the full Special Reserve (gross of DTL) can be included in Tier-I capital computation, which may offset some capital impact. This aligns accounting with prudential norms and ensures consistency across banks.
What you must do
- Calculate DTL on Special Reserve as per AS 22 for all periods, irrespective of withdrawal intent.
- For DTL shortfall as of March 31, 2013, adjust directly from reserves and disclose in Notes to Accounts for FY 2013-14.
- From FY 2013-14 onwards, charge DTL on annual transfers to Special Reserve to the Profit and Loss account.
- Update Tier-I capital computation to include full Special Reserve (gross of DTL) as per the circular.
Who it affects
All commercial banks (excluding RRBs), Bank finance and accounting teams, Bank treasury and capital management teams
Can we still avoid DTL if our Board has passed a resolution not to withdraw from Special Reserve?
No. RBI has clarified that DTL must be created as a matter of prudence, regardless of any Board resolution or intent to not withdraw.
How should we treat the DTL shortfall for Special Reserve created before March 31, 2013?
If the DTL expense was not fully charged to Profit and Loss, you can adjust the shortfall directly from reserves. This adjustment must be disclosed in the Notes to Accounts for FY 2013-14.
Does creating DTL affect our Tier-I capital calculation?
Yes, but positively. The circular allows banks to reckon the entire Special Reserve (gross of DTL) for Tier-I capital, so the full reserve amount counts, not just the net-of-tax portion.