Material of as 22

8/9/2019 Material of as 22

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AS 22 - ACCOUNTING FOR TAXES ON INCOME

(Mandatory for all enterprises at all levels from 01.04.06)

Does not deal with taxes on distribution of dividends

Important Definitions

Timing differences are the differences between taxable income and accounting

income for a period that originate in one period and are capable of reversal in one

or more subsequent periods.

Permanent differences are the differences between taxable income and accounting

income for a period that originate in one period and do not reverse subsequently.

Deferred tax is the tax effect of timing differences.

Recognition

The differences between taxable income and accounting income should be

classified into permanent differences and timing differences.

The tax effect of permanent differences should be ignored.

The tax effect of timing differences should be recognized as deferred tax

assets/liabilities and carried forward in the books

(DTAs are carried forward only to the extent that there is a reasonable certainty

that sufficient future taxable income will be available against which such

deferred tax assets can be realized)

Tax expense for the period, comprising current tax and deferred tax, should be

charged/credited in the P/L. Account.

Measurement

ObjectiveTo prescribe accounting treatment for taxes on income under tax effect method

thereby enabling matching of accounting profits and taxes thereon.


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The carrying amount of deferred tax assets should be reviewed at each

balance sheet date.

DTA should be written down if there is uncertainty about sufficient

future taxable income. Such write-down may be reversed when it

becomes reasonably certain that sufficient future taxable income will be

available.

Presentation and Disclosure

An enterprise should offset assets and liabilities representing current tax and

deferred taxes if the enterprise has a legally enforceable right and the

intention to set off .

Break-up of deferred tax assets and deferred tax liabilities into major

components should be disclosed in the notes to accounts.

Nature of the evidence supporting the recognition of deferred tax assets should

also be disclosed

Accounting for Taxes on Income

CURRENT TAX DEFERRED TAX

At rates applicable to the

year

Deferred tax assets and liabilities

should be measured using the tax rates

and tax laws that have been enacted or

substantively enacted by the balance

sheet date.(When different tax rates

apply to different levels of taxable

income, average rate should be used)


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How to get started

Identify TIMING DIFFERENCES between AccountingRecords & Tax records by comparing WDV of assets and

verifying the IT computation statements

Recognise tax effect of timing differences upto the

beginning of the year as DTAs/DTLs

Account for them by credit/charge to Revenue

Reserves

Recognise tax effect of timing differences of the

current year as DTAs/DTLs

Account for them by credit/charge to Profit &

Loss Account Disclose change in accounting policy and the effect

thereof.

Interpretations (ASIs) on AS 22

Treatment during tax holiday period ( Sections 10A/10B, 80 IA/80 IB)


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The deferred tax in respect of timing differences which originate

during the tax holiday period and reverse during the tax holiday

period should not be recognized to the extent the enterprises gross

total income is subject to the deduction/exemption.

The deferred tax in respect of timing differences which originate

during the tax holiday period and reverse after the tax holiday

period should be recognized in the year in which they originate.

The timing differences which originate first should be considered to

reverse first.

Loss under the head Capital Gains

Deferred Tax asset in respect of capital losses should be recognised

and carried forward only to the extent that there is virtual certainty

supported by convincing evidence about future capital gains.

Treatment in a MAT Situation

Deferred Tax arising from timing differences arising during a MAT

period should be measured using the regular rates and not the MATrate.

If an enterprise expects that the timing differences arising in the

current period would reverse in a period in which it may pay tas

under MAT, the DTA/DTL arising in the current period should be

measured using the regular rates and not the MAT rate.

Disclosure

Deferred Tax Assets should be disclosed after Investments but before Current

Assets. Deferred Tax Liabilities should be disclosed after unsecured loans,

separately.

Virtual Certainty

Virtual Certainty should be based on conclusive reliable evidence.

Documents

Material of as 22