AS 22, Accounting

for Taxes on Income

Applicability

AS 22 applies in accounting for taxes on income

Establish principles for determination of amount of expense or saving related to
taxes on income and disclosure of such amount in financial statements
Taxes on income includes all domestic and foreign taxes based on taxable
income
Mandatory in nature for Level I, Level II and Level III enterprises
Do not specify accounting for taxes payable on distribution of dividends and
other distributions by an enterprise
Notified by central government except ASI 11 w.e.f accounting periods
commencing on or after 7 Dec. 2006
Mandatory for all companies
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Important terms defined

Tax expense (tax saving)

Aggregate of current tax and deferred tax charged/credited to profit and loss

Current tax
Amount of income tax payable (recoverable) in respect of taxable income (loss) for a
period

Deferred tax
Tax effect of timing differences

Accounting income (loss)

Net profit or loss for the period before deducting/adding income tax expense/saving

Taxable income (tax loss)

Amount of income (loss) for a period determined in accordance with the tax laws,
based upon which income tax payable (recoverable) is determined
3

Important terms defined

(Continued)

Timing differences
Differences between taxable income and accounting income originating in one period
and capable of reversal in one or more subsequent periods
Examples

Conversion of capital assets into stock-in-trade

Expenditure allowable in section 43B on payment basis but accrued in

statement of profit and loss on mercantile basis

If for any reason, recognition of income spread over a number of years in

accounts but taxed fully in the year of receipt e.g., non-compete fees taxed u/s
28 in year of receipt but spread over a number of years in accounts

Deduction u/s 33AB for tea development scheme allowed in one year for tax
purposes on basis of deposit made under scheme but expenditure out of
withdrawal from such deposit is debited to profit and loss in subsequent years

Important terms defined

(Continued)

Permanent Differences
Differences between taxable income and accounting income that originate in a period
and do not reverse subsequently
Examples

Donations for which deduction is not available u/s 80G of the Income-tax Act,
1961

Deductions available to exporters u/s 80HHC of the Income-tax Act, 1961

Weighted deduction available for expenditure on scientific research u/s 35 of

the Income-tax Act, 1961

Recognition

Tax
expense

Tax expense, comprising current tax and deferred tax, should be

included in determination of net profit or loss for the period

Taxes on income are expense incurred for earning income

and are accrued in the same period as the revenue and
expenses to which they relate
Deferred
tax asset/
liability

Deferred tax should be recognised for all timing differences,

subject to consideration of prudence for deferred tax assets

Deferred tax assets/liabilities are recognised in the balance

sheet for the tax effects of timing differences
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Consideration of prudence in recognition of a deferred tax asset

For recognition of DTA, certain levels of certainty needs to be established with

regard to availability of sufficient future taxable income against which the DTA
can be realised

DTA that can be realised against DTL

Future reversal of DTL recognised at balance sheet date will give rise to taxable
income for deduction of reversing DTA recognise DTA to the extent of DTL

DTA that cannot be realised against DTL

Consider level of certainty as specified in AS 22
Contd../

Consideration of prudence in recognition of a deferred tax asset

(Continued)

Deferred tax assets should be recognised and carried forward only to the extent
that there is reasonable certainty that sufficient future taxable income will be
available against which they can be realised

Except, if under tax laws, an enterprise has

unabsorbed losses or
carry forward of losses
deferred tax asset should be recognised only to the extent that there is
virtual certainty supported by convincing evidence of their realisation

Reasonable certainty vs. Virtual certainty supported by convincing evidence

Reasonable certainty would normally

be achieved by

examining past records of the

enterprise; or

making realistic estimates of profits

for the future

Virtual certainty
determination is a matter of
judgement to be evaluated on a case
to case basis
should be supported by convincing
evidence, i.e., evidence available at
reporting date in concrete form
cannot be based merely on forecasts
of performance

Re-assessment of Unrecognised deferred tax assets

Unrecognised deferred tax assets should be re-assessed at each

balance sheet date

If it is reasonably certain or virtually certain (as the case may be) that sufficient
future taxable income will be available against which such deferred tax assets can
be realised, recognise previously unrecognised deferred tax asset.

An improvement in trading conditions may make it reasonably certain that an

enterprise will be able to generate sufficient taxable income in future

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Measurement

Current tax

To be measured at the amount

expected to be paid to the taxation
authorities using applicable tax rates
and tax laws

If different tax rates apply to different

levels of taxable income, use
average rates

Deferred tax assets and liabilities

To be measured using the tax rates

and
tax
laws
enacted
or
substantively enacted by the balance
sheet date

Announcements of tax rates and

tax laws by government may
have substantive effect of actual
enactment (measure DTA/DTL
using announced tax rates/laws

Deferred tax assets and liabilities should not be discounted to their present value
11

Review of Deferred Tax Assets

Carrying amount of DTA should be reviewed at each balance sheet date

No longer reasonable certain /virtually

certain that sufficient future taxable
income would be available for realisation
of DTA, write-down carrying amount of
DTA to that extent

Reasonable certain/virtually certain

that sufficient future taxable income
would be available, no write-down is
required

Any write-down may be subsequently

reversed on satisfaction of condition
of reasonable/virtual certainty

12

Presentation and Disclosure Offsetting assets and liabilities

Assets and liabilities representing current tax to be offset if an enterprise

has a legally enforceable right to set off and
intends to settle the asset and the liability on a net basis
E.g. Advance payment of tax for a fiscal year should be set off against the provision
for current tax for that year

Deferred tax assets and liabilities to be offset if:

enterprise has a legally enforceable right to set off assets against liabilities
representing current tax and
deferred tax assets and liabilities relate to taxes on income levied by same
governing taxation laws

13

Presentation and Disclosure

Deferred tax assets and liabilities

To be distinguished from assets and liabilities representing current tax
and to be disclosed separately from current assets and liabilities
In case of company, DTA to be disclosed after the head Investments
and DTL to be disclosed after the head Unsecured Loans
Break-up into major components to be disclosed in notes to
accounts. Nature of evidence to be disclosed for recognition of DTA,
if an enterprise has unabsorbed depreciation or carry forward of
losses

14

Accounting for Taxes on Income in the situations of tax holiday under Sections 80IA and 80-IB of the Income-tax Act, 1961

?
?

Should deferred tax be recognised for timing differences arising during

the tax holiday period but which
a. reverse during the tax holiday period
b. reverse after the tax holiday period

What about timing differences which originate before the tax holiday but
which
a. reverse during the tax holiday period
b. reverse after the tax holiday period

15

ASI 3, Accounting for Taxes on Income in the situations of tax holiday under
Sections 80-IA and 80-IB of the Income-tax Act, 1961

Timing differences which reverse during the tax holiday period (whether
originated in the tax holiday period or before that)

Do not recognise deferred tax

Timing differences which reverse after the tax holiday period (whether originated
in the tax holiday period or before that)

Recognise deferred tax in the year in which the timing differences originate

subject to the consideration of prudence

For above purposes, timing differences originating first should be considered to

reverse first
Illustration

16

ASI 4, Losses under the head capital gains

If for taxation purposes, 'loss' can be set-off in future only against the income
under the head 'capital gains', deferred tax asset should be recognised and
carried forward only to the extent that there is a virtual certainty, supported by
convincing evidence, that sufficient future taxable income will be available under
the head 'Capital Gains'.

Income under Capital gains does not arise in the course of operating activities of an
enterprise. Thus, for recognition of a DTA, the degree of certainty of such an income
arising in future should be higher

Virtual certainty is required for the availability of taxable income under the head
Capital gains in future as per the Income-tax Act

17

ASI 4, Losses under the head capital gains

(Continued)

Examples of situations which satisfy the test are

sale of an asset giving rise to capital gain (eligible to be set-off against the capital
loss) after the balance sheet date but before the financial statements are approved

binding sale agreement which will give rise to capital gain (eligible to be set-off
against the capital loss)
If there is a difference between the amounts of loss recognised for accounting
purposes and tax purposes because of cost indexation under the Act in respect
of long-term capital assets

the DTA should be recognised and carried forward (subject to the consideration of
prudence) on the amount which can be carried forward and set-off in future years as
per the provisions of the Act

18

ASI 5, Accounting for Taxes on Income in the situations of tax holiday under
Sections 10A and 10B of the Income-tax Act, 1961

Timing differences which reverse during the tax holiday period

Do not recognise deferred tax

Timing differences which reverse after the tax holiday period

Recognise deferred tax in the year in which the timing differences originate
subject to the consideration of prudence

For above purposes, timing differences originating first should be considered to

reverse first

19

ASI 6, Accounting for taxes on income in the context of Section 115JB of the
Income-tax Act, 1961
Tax paid under section 115JB is a current tax for the period
Deferred tax assets and liabilities in respect of timing differences arising in the period of
payment of tax under section 115JB should be measured using regular tax rates and not tax
rate under section 115JB

If an enterprise expects that timing differences arising in current period would reverse in a
period in which it may pay tax under section 115JB, deferred tax assets and liabilities
should be measured using regular tax rates and not tax rate under section 115JB

Measurement of DTA using tax rate u/s 115JB would involve

assessment of future taxable income and accounting income and
therefore, is considerably subjective.

20

ASI 11, Accounting for taxes in income in case of an amalgamation

Issue 1
In case of amalgamation in nature of purchase, whether deferred tax should be
recognised for differences between values of assets/liabilities arrived at for accounting
purposes on fair value basis and carrying amounts for tax purposes?
Solution
Recognition of individual assets/liabilities at fair values as per AS 14 does not affect the
statement of profit and loss. If the carrying amounts for tax purposes continue to be the
same as that of the transferor enterprise, deferred tax should not be recognised for such
differences as this constitutes a permanent difference. Consequent differences in
amounts of depreciation for such assets in subsequent years would also be a
permanent difference.

21

ASI 11, Accounting for taxes in income in case of an amalgamation

(Continued)

Issue 2
If the transferor enterprise has not recognised any DTA including in respect of
unabsorbed depreciation and carry forward of losses since conditions relating to
prudence were not fulfilled, whether transferee enterprise can recognise it if conditions
relating to prudence are satisfied on a subsequent date?
Solution
Yes, the transferee enterprise can recognise the DTA not recognised by transferor
enterprise if the conditions relating to prudence as per AS 22 are satisfied. The
accounting treatment depends on nature of amalgamation as well as the accounting
treatment adopted for amalgamation in accordance with AS 14.

Contd../

22

ASI 11, Accounting for taxes in income in case of an amalgamation

(Continued)

Solution (Contd..)
Where amalgamation is in the nature of purchase, DTA should be recognised by the
transferee enterprise subject to timing of satisfaction of conditions of prudence as below:

if at the time of amalgamation, recognise DTA that will automatically affect the
amount of goodwill/capital reserve arising on amalgamation

if by the first annual balance sheet date, recognise DTA with corresponding
adjustment made to goodwill/capital reserve arising on amalgamation

if subsequent to the first annual balance sheet

withcorresponding effect to the statement of profit and loss

date,

recognise

DTA

If amalgamation is in the nature of purchase and the transferee enterprise incorporates

assets/liabilities at their existing carrying amounts, DTA should not be recognised at
amalgamation since as per AS 14, assets not appearing in balance sheet of transferor
enterprise at amalgamation cannot be recognised.

23

ASI 11, Accounting for taxes in income in case of an amalgamation

(Continued)

Solution (Contd..)
Where amalgamation is in the nature of merger, DTA should be recognised by the
transferee enterprise subject to timing of satisfaction of conditions of prudence
as below:

If by the first annual balance sheet date, recognise DTA with corresponding
adjustment made to revenue reserves arising on amalgamation

If subsequent to the first annual balance sheet date, recognise DTA with
corresponding effect to the statement of profit and loss

DTA should not be recognised at the time of amalgamation since AS 14 requires recognition
of assets/liabilities at their existing carrying amounts in balance sheet of transferee
enterprise and assets not appearing in balance sheet of transferor enterprise at
amalgamation cannot be recognised.

24

Q&A

Should deferred tax expense be considered for the purposes of declaring dividend as
per the requirements of the Companies Act, 1956, and computing Earnings Per Share
(EPS) as per Accounting Standard (AS) 20, Earnings Per Share?
Solution
Yes, deferred tax expense should be considered as an expense in arriving at the profit
for the year for the purposes of Section 205 of the Companies Act, 1956. Further, EPS
should be computed after considering the tax expense comprising the current tax and
deferred tax.

25

Q&A

(Continued)

Issue
How should the diminution in the value of a current investment, recognised in the
statement of profit and loss as per the requirements of AS 13, Accounting for
Investments, be dealt with keeping in view the requirements of AS 22?
Solution
Diminution in the value of investments recognised in the statement of profit and loss is a
timing difference. DTA for the said timing difference should be recognised when there is
reasonable/virtual certainty that sufficient future taxable income will be available against
which DTA can be realised. The normal tax rate should be applied for computation of
deferred tax asset since the investment is classified as current investment.

26

Q&A

(Continued)

Issue
What is the tax effect of an upward revaluation of fixed assets where increase in net
book value arising on revaluation is credited directly to revaluation reserve as per AS
10?
Solution
If additional depreciation due to upward revaluation is met by transfer from revaluation
reserve, no difference would arise.
If additional depreciation not adjusted against revaluation reserve, difference would arise
between accounting income and taxable income since depreciation would be on
revalued amount in accounts whereas for tax purposes, it would be on WDV, i.e.
ignoring revaluation.
No deferred tax to be recognised since it would be a permanent difference.

27

Q&A

(Continued)

Issue
Is it permissible not to recognise deferred tax liability on the ground that an enterprise
intends to carry out a major capital expansion progamme in near future?
Solution
No, deferred tax should be recognised for all timing differences, subject to consideration
of prudence in respect of deferred tax assets. The financial statements for a period
should recognise the tax effect, whether current or deferred, of all transactions occurring
in that period.

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Major differences between AS 22 and IAS 12,

Income Taxes

29

Difference in approach

AS 22

IAS 12

Follows income statement

approach

Follows balance sheet approach

DTA/DTL created for timing differences

between accounting income and
taxable income subject to concept of
prudence

Basis for deferred tax assets and

liabilities is the difference between
carrying amounts and tax base of
assets and liabilities

In few cases, DTA/DTL are created under balance sheet approach only,
e.g. upward revaluation of assets and no equivalent adjustment made for
tax purposes
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Deferred Tax Assets - Recognition

AS 22

IAS 12

More stringent criteria for recognition

of deferred tax assets e.g., virtual
certainty where tax losses and/or
unabsorbed depreciation

Recognise deferred tax assets when

recovery is probable.

The term probable is understood to be similar to the term reasonable certainty

but at a lower level of likelihood than virtual certainty. Thus, fewer deferred tax
assets would be recognised under AS 22 as compared to IAS 12

31

Deferred tax expense in consolidated financial statements

IAS 12
In determining tax expense in consolidated financial statements, temporary
differences arising from elimination of unrealised profits and losses resulting
from intra-group transactions should be considered.

AS 22
No specific guidance. ASI 26 provides that tax expense to be shown in
consolidated financial statements will be the aggregate of tax expense appearing
in separate financial statements of parent and its subsidiaries

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Additional Disclosures under IAS 12

Tax expense (income) relating to extraordinary items

Explanation of relationship between tax expense (income) and accounting profit in a

prescribed manner

Explanation of changes in applicable tax rate compared to previous accounting period

Amount (and expiry date, if any) of deductible temporary differences, unused tax losses,
and unused tax credits for which no DTA is recognised in balance sheet

Aggregate amount of temporary differences associated with investments in subsidiaries,

associates and interests in joint ventures, for which DTL have not been recognised

For discontinued operations, tax expense relating to gain/loss on discontinuance and

profit or loss from ordinary activities of that operation with corresponding amounts for
each prior period presented

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Thank you