CA AKASH AGARWAL
ACCOUNTING STANDARDS
ACCOUNTING STANDARD – 22 ACCOUNTING FOR
TAXES ON INCOME
OBJECTIVE OF AS 1. Income tax liability is determined in accordance with the prevailing
22 tax laws
2. A business entity may recognise various items of income or expense in
an accounting period
3. But for tax purposes, they may be considered in a different period
4. Results in a tax expense/liability not matching with the items of
income/expense recognized in that period
NOT APPLICABLE This Standard does not specify when, or how, an enterprise should
TO account for taxes that are payable on distribution of dividends and
other distributions made by the enterprise.
DEFINITIONS 1. Accounting income : is the Net Profit or Loss for a period, as
reported in the statement of profit and loss, before deducting
income tax expense or adding income tax saving.
2. Taxable income (tax loss):is the amount of the income (loss) for a
period, determined in accordance with the tax laws, based upon which
income tax payable (recoverable) is determined.
3. Current tax:is the amount of Income tax determined to be payable
(recoverable) in respect of the taxable income (tax loss) for a period.
4. Deferred tax:is the tax effect of timing differences
5. 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.
6. Permanent differences: are the differences between taxable income
and accounting income for a period that originate in one period and do
not reverse subsequently. Permanent differences do not result in
deferred tax assets or deferred tax liabilities.
7. Tax Expense (Tax Saving): is the aggregate of Current tax and
Deferred tax charged or credited to the statement of profit and
loss for the period.
Tax Expense = Current Tax Expense + Deferred Tax Expense – DT
Income
EXAMPLES OF 1. Depreciation as per Companies Act different from Depreciation as
TIMING per Income Tax (Sec 32 of IT Act) – Resulting DTA or DTL
DIFFERENCES 2. Sec 43B of Income Tax Act (Deductions available on cash basis not
on provision basis – Bonus, Interest, PF etc) – resulting DTA
3. Preliminary Expenses deduction allowed in 5 years as per Income Tax,
but as per AS 26 fully written off – resulting DTA
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4. Scientific Research Expenses or Specified Expenses allowed 100% in
the same year however in the Books only part is written off.
5. Provision for Doubtful debts disallowed under IT Act until actual
bad debts occur.
EXAMPLES OF 1. Personal Expenses disallowed always, never allowed in the Future
PERMANENT 2. Donations to unspecified trust – Disallowed always
DIFFERENCES
UNABSORBED (a) Unabsorbed depreciation and
DEPRECIATION (b) Carry forward of Losses
AND CARRY which can be set off against future taxable income are also considered
FORWARD OF as timing difference and result in deferred tax assets, subject to
LOSSES consideration of prudence.
RECOGNITION Current Tax: Amount of income-tax determined to be payable
(recoverable) in respect of the taxable income (tax loss) for a period
Deferred Tax: Deferred tax is the tax effect of timing difference.
Tax expenses (on accrual basis) - current tax liability (as per income-tax
act) = Deferred tax (assets / liability)
MEASUREMENT Current Tax: Measured at the amount expected to be paid to
(recovered from) taxation authorities using applicable tax rates and tax
laws.
Deferred Tax: Deferred tax should be measured using the rates and
tax laws that have been enacted or substantially enacted by the balance
sheet date.
REVIEW OF The carrying amount of deferred tax assets should be reviewed at each
DEFERRED TAX balance sheet date.
ASSETS
ACCOUNTING FOR Situation Status
TAXES ON (i) Accounting Income > Create Deferred Tax Liability
INCOME: Taxable Income Profit & Loss Account Dr.
To Deferred Tax Liability A/c
(ii) Accounting Income < Create Deferred Tax Assets Deferred
Taxable Income Tax Assets A/c Dr.
To Profit & Loss A/c
RE-ASSESSMENT At each balance sheet date, an enterprise re-assesses unrecognised
OF deferred tax assets. The enterprise recognises previously unrecognised
UNRECOGNISED deferred tax assets to the extent that it has become reasonably
DEFERRED TAX certain or virtually certain, as the case may be , that sufficient future
ASSETS
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CA AKASH AGARWAL
ACCOUNTING STANDARDS
taxable income will be available against which such deferred tax assets
can be realised.
TAX HOLIDAY 1. The deferred tax in respect of timing differences which reverse
during the tax holiday period, should not be recognized to the extent
the gross total income of the enterprise is subject to such
deductions
2. The deferred tax in respect of timing difference which reverse
after the tax holiday period should be recognized in the year in which
the timing differences originate, subject to consideration of
prudence
3. Timing differences which originate first should be considered as
reversing first.
DISCLOSURE • The break-up of deferred tax asset / liability should be disclosed.
• In case of deferred tax asset arises out of unabsorbed depreciation
or loss, evidence supporting recognition should be disclosed.
• Deferred tax asset / liability should be disclosed separately from
current asset / liabilities.
• Deferred tax asset and liability should be set off if permissible
under the tax laws but to be shown separately if not permissible
LETS PRACTICE SOME QUESTION:
QUESTION 1:
Classify the following as Timing Difference and Permanent Difference and also state
whether they would result in Deferred Tax Asset or Deferred Tax Liability:
(a) Unabsorbed depreciation
(b) Income tax penalty
(c) Interest on loan taken from scheduled bank accounted in the books, but not paid till
the date of filing Return of Income.
Solution:
Particulars Nature of difference DTA/ DTL
Unabsorbed depreciation Timing Difference DTA
Income tax penalty Permanent Difference Neither DTA nor
DTL to be created
Interest on loan taken from Permanent Difference Neither DTA nor
scheduled bank accounted in DTL to be created
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ACCOUNTING STANDARDS
the books, but not paid till the
date of filing Return of Income.
QUESTION 2:
Parshuram Ltd., which commenced its operations in 2019-20, provides the following
details:
Financial Profit before Timin Permanent Corporate Remarks
year tax Difference Difference tax rate
2019-20 28,00,000 + + 3,50,000 40% Reversible
3,15,000 in 2022-23
2020-21 31,50,000 + + 2,80,000 38% Reversible
2,10,000 in 2021-22
2021-22 35,00,000 - 70,000 + 3,15,000 35% Reversible
in 2022-23
2022-23 24,50,000 Nil + 4,20,000 30% --
You are required to calculate the amount of Current Tax for the four financial years.
Solution: Calculation of Current Tax (in ₹ Lakhs)
Particulars 2019- 2020 - 2021- 2022-
20 21 22 23
Profit before tax 28.00 31.5 35.00 24.50
Timing Differences 3.15 2.10 (0.70) Nil
Permanent Differences 3.50 2.80 3.15 4.20
Taxable Income 34.65 36.40 37.45 28.70
Corporate tax rate 40% 38% 35% 30%
Current Tax (Taxable Income 13.86 13.832 13.1075 8.61
Tax rate)
QUESTION 3:
The following information is available from the records of Vishnu Ltd.:
Depreciation charged to income statement ₹ 8,00,000; Depreciation u/s 32 of Income
Tax Act ₹ 20,00,000; Unamortised preliminary expenditure as per income tax records ₹
1,50,000.
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ACCOUNTING STANDARDS
It is communicated that there is adequate evidence of future profit sufficiency. Given
that the corporate tax rate is 40%, you are required to ascertain the amount of
deferred tax asset/ deferred tax liability to be created in this situation.
Solution: Timing Difference = Additional depreciation as per Income Tax Act (-) Preliminary
expenditure to be allowed = ₹ (20,00,000 – 8,00,000) - 1,50,000 = ₹ 10,50,000.
Deferred Tax Liability = ₹ 10,50,000 40% = ₹ 4,20,000.
QUESTION 4:
AB Ltd. has provided depreciation as per accounting records ₹8,00,000 and as per tax
records ₹14,00,000. Unamortized preliminary expenses, as per tax record is ₹11,200.
There is adequate evidence of future profit sufficiency. How much deferred tax asset /
liability should be recognized as transition adjustment. Tax rate is 40%.
Solution:
As per AS-22 deferred tax should be recognized for all the timing differences. In the instant
case the timing difference i.e., difference between taxable income and accounting income is –
Excess depreciation as per tax ₹14,00,000 – ₹8,00,000 = ₹6,00,000
Less: Expenses provided in taxable income ₹ 11,200
₹ 5,88,800
As tax expense is more than the current tax due to timing difference of ₹5,88,800,
therefore deferred tax liability = 40% of ₹5,88,800 = ₹2,35,520 shall be credited in
accounts.
QUESTION 5:
Omega Limited is working on different projects which are likely to be completed within 3
years period. It recognises revenue from these contracts on percentage of completion
method for financial statements during 20X0-20X1, 20X1-20X2 and 20X2-20X3 for ₹
11,00,000, ₹ 16,00,000 and ₹ 21,00,000 respectively. However, for Income-tax
purpose, it has adopted the completed contract method under which it has recognised
revenue of ₹ 7,00,000, ₹ 18,00,000 and ₹ 23,00,000 for the years 20X0-20X1, 20X1-
20X2 and 20X2-20X3 respectively. Income-tax rate is 35%. Compute the amount of
deferred tax asset/liability for the years 20X0-20X1, 20X1- 20X2 and 20X2-20X3.
Solution:
AKASH AGARWAL CLASSES Page | 65
CONT: 8007777042/43
CA AKASH AGARWAL
ACCOUNTING STANDARDS
Calculation of Deferred Tax Asset/Liability in Omega Limited
Particulars 2014-15 2015-16 2016-17
Income as per Books 11,00,000 16,00,000 21,00,000
Taxable income as per Income tax 7,00,000 18,00,000 23,00,000
Timing Difference (Balance) 4,00,000 2,00,000 Nil
Current tax @ 35% 3,85,000 5,60,000 7,35,000
Deferred Tax Liability 1,40,000 70,000 Nil
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