IAS 22

Accounting Standard (AS) 22

(issued 2001)

Accounting for Taxes on Income

Contents

OBJECTIVE

SCOPE Paragraphs 1-3

DEFINITIONS 4-8

RECOGNITION 9-19

Re-assessment of Unrecognised Deferred Tax Assets 19

MEASUREMENT 20-26

Review of Deferred Tax Assets 26

PRESENTATION AND DISCLOSURE 27-32

TRANSITIONAL PROVISIONS 33-34

APPENDICES

The following Accounting Standards Interpretations (ASIs) relate to AS 22:

 Revised

ASI 3 - Accounting for Taxes on Income in the situations of Tax

Holiday under Sections 80-IA and 80-IB of the Incometax

Act, 1961

 Revised

ASI 4 - Losses under the head Capital Gains

 ASI 5 - Accounting for Taxes on Income in the situations of

Tax Holiday under Sections 10Aand 10B of the Income-tax

Act, 1961

 ASI 6 - Accounting for Taxes on Income in the context of Section

115JB of the Income-tax Act, 1961

Continued../..

421

 ASI 7 - Disclosure of deferred tax assets and deferred tax liabilities

in the balance sheet of a company

 ASI 9 - Virtual Certainty Supported by Convincing Evidence

 ASI 11 - Accounting for Taxes on Income in case of an

Amalgamation

The above Interpretations are published elsewhere in this Compendium.

Accounting Standard (AS) 22

(issued 2001)

Accounting forTaxes on Income

(This Accounting Standard includes paragraphs set in bold italic type

and plain type, which have equal authority. Paragraphs in bold italic

type indicate the main principles. This Accounting Standard should be

read in the context of its objective and the Preface to the Statements of

Accounting Standards1.)

Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’, issued by

the Council of the Institute of Chartered Accountants of India, comes into

effect in respect of accounting periods commencing on or after 1-4-2001. It

is mandatory in nature2 for:

(a) All the accounting periods commencing on or after 01.04.2001, in

respect of the following:

i) Enterprises whose equity or debt securities are listed on a

recognised stock exchange in India and enterprises that are

in the process of issuing equity or debt securities thatwill be

listed on a recognised stock exchange in India as evidenced

by the board of directors’ resolution in this regard.

ii) All the enterprises of a group, if the parent presents

consolidated financial statements and the Accounting

Standard is mandatory in nature in respect of any of the

enterprises of that group in terms of (i) above.

(b) All the accounting periods commencing on or after 01.04.2002, in

respect of companies not covered by (a) above.

1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

2 Reference may be made to the section titled ‘Announcements of the Council

regarding status of various documents issued by the Institute of Chartered

Accountants of India’ appearing at the beginning of this Compendium for a detailed

discussion on the implications of the mandatory status of an accounting standard.

Accounting for Taxes on Income 423

(c) All the accounting periods commencing on or after 01.04.2006, in

respect of all other enterprises.3

The Guidance Note on Accounting for Taxes on Income, issued by the

Institute of Chartered Accountants of India in 1991, stands withdrawn from

1.4.2001. The following is the text of the Accounting Standard.

Objective

The objective of this Statement is to prescribe accounting treatment for taxes

on income. Taxes on income is one of the significant items in the statement

of profit and loss of an enterprise. In accordance with the matching concept,

taxes on income are accrued in the same period as the revenue and expenses

to which they relate. Matching of such taxes against revenue for a period

poses special problems arising fromthe fact that in a number of cases, taxable

income may be significantly different from the accounting income. This

divergence between taxable income and accounting income arises due to

two main reasons. Firstly, there are differences between items of revenue

and expenses as appearing in the statement of profit and loss and the items

which are considered as revenue, expenses or deductions for tax purposes.

Secondly, there are differences between the amount in respect of a particular

item of revenue or expense as recognised in the statement of profit and loss

and the corresponding amount which is recognised for the computation of

taxable income.

Scope

1. This Statement should be applied in accounting for taxes on income.

This includes the determination of the amount of the expense or saving

related to taxes on income in respect of an accounting period and the

disclosure of such an amount in the financial statements.

3 It may be noted that for enterprises covered by this clause, AS 22 was originally

made mandatory in respect of accounting periods commencing on or after 1-4-2003.

The Council at its meeting held on June 24-26, 2004, decided to defer the applicability

of the Standard so as to make it mandatory to such enterprises in respect of

accounting periods commencing on or after 1-4-2006. [For full text of the

Announcement, reference may be made to the section titled ‘Announcements of

the Council regarding status of various documents issued by the Institute of

Chartered Accountants of India’ appearing at the beginning of this Compendium.]

424 AS 22 (issued 2001)

2. For the purposes of this Statement, taxes on income include all domestic

and foreign taxes which are based on taxable income.

3. This Statement does not specify when, or how, an enterprise should

account for taxes that are payable on distribution of dividends and other

distributions made by the enterprise.

Definitions

4. For the purpose of this Statement, the following terms are used

with the meanings specified:

Accounting income (loss) 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.

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.

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.

Current tax is the amount of income tax determined to be payable

(recoverable) in respect of the taxable income (tax loss) for a period.

Deferred tax is the tax effect of timing differences.

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.

5. Taxable income is calculated in accordance with tax laws. In some

circumstances, the requirements of these laws to compute taxable income

differ fromthe accounting policies applied to determine accounting income.

The effect of this difference is that the taxable income and accountingincome

may not be the same.

Accounting for Taxes on Income 425

6. The differences between taxable income and accounting income can be

classified into permanent differences and timing differences. Permanent

differences are those differences between taxable income and accounting

income which originate in one period and do not reverse subsequently. For

instance, if for the purpose of computing taxable income, the tax laws allow

only a part of an item of expenditure, the disallowed amount would result in

a permanent difference.

7. Timing differences are those 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. Timing differences arise

because the period in which some items of revenue and expenses are

included in taxable income do not coincide with the period in which such

items of revenue and expenses are included or considered in arriving at

accounting income. For example, machinery purchased for scientific

research related to business is fully allowed as deduction in the first

year for tax purposes whereas the same would be charged to the

statement of profit and loss as depreciation over its useful life. The total

depreciation charged on the machinery for accounting purposes and the

amount allowed

as deduction for tax purposes will ultimately be the same, but periods over

which the depreciation is charged and the deduction is allowed will differ.

Another example of timing difference is a situation where, for the

purpose

of computing taxable income, tax laws allow depreciation on the basis

of the written down value method, whereas for accounting purposes,

straight line method is used. Some other examples of timing

differences arising under the Indian tax laws are given in Appendix 1.

8. Unabsorbed depreciation and carry forward of losses which can be setoff

against future taxable income are also considered as timing differences

and result in deferred tax assets, subject to consideration of prudence (see

paragraphs 15-18).

Recognition

9. Tax expense for the period, comprising current tax and deferred

tax, should be included in the determination of the net profit or loss for

the period.

10. Taxes on income are considered to be an expense incurred by the

enterprise in earning income and are accrued in the same period as the

426 AS 22 (issued 2001)

revenue and expenses to which they relate. Such matching may result into

timing differences. The tax effects of timing differences are included in the

tax expense in the statement of profit and loss and as deferred tax assets

(subject to the consideration of prudence as set out in paragraphs 15-18) or

as deferred tax liabilities, in the balance sheet.

11. An example of tax effect of a timing difference that results in a deferred

tax asset is an expense provided in the statement of profit and loss but not

allowed as a deduction under Section 43B of the Income-tax Act, 1961.

This timing difference will reverse when the deduction of that expense is

allowed under Section 43B in subsequent year(s). An example of tax effect

of a timing difference resulting in a deferred tax liability is the higher charge

of depreciation allowable under the Income-tax Act, 1961, compared to the

depreciation provided in the statement of profit and loss. In subsequent

years, the differential will reverse when comparatively lower depreciation

will be allowed for tax purposes.

12. Permanent differences do not result in deferred tax assets or deferred

tax liabilities.

13. Deferred tax should be recognised for all the timing differences,

subject to the consideration of prudence in respect of deferred tax assets

as set out in paragraphs 15-18.

14. This Statement requires recognition of deferred tax for all the timing

differences. This is based on the principle that the financial statements for a

period should recognise the tax effect, whether current or deferred, of all

the transactions occurring in that period.

15. Except in the situations stated in paragraph 17, deferred tax assets

should be recognised and 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 realised.

16. While recognising the tax effect of timing differences, consideration of

prudence cannot be ignored. Therefore, deferred tax assets are recognised

and carried forward only to the extent that there is a reasonable certainty of

their realisation.This reasonable levelof certaintywould normallybe achieved

by examining the past record of the enterprise and by making realistic

estimates of profits for the future.

Accounting for Taxes on Income 427

17. Where an enterprise has unabsorbed depreciation or carry forward

of losses under tax laws, deferred tax assets should be recognised only

to the extent that there is virtual certainty supported by convincing

evidence4 that sufficient future taxable income will be available against

which such deferred tax assets can be realised.

18. The existence of unabsorbed depreciation or carry forward of losses

under tax laws is strong evidence that future taxable income may not be

available. Therefore, when an enterprise has a history of recent losses, the

enterprise recognises deferred tax assets only to the extent that it has timing

differences the reversal of which will result in sufficient income or there is

other convincing evidence that sufficient taxable income will be available

against which such deferred tax assets can be realised. In such

circumstances, the nature of the evidence supporting its recognition is

disclosed.

Re-assessment of Unrecognised Deferred Tax Assets

19. At each balance sheet date, an enterprise re-assesses unrecognised

deferred tax assets. The enterprise recognises previously unrecognised

deferred tax assets to the extent that it has become reasonably certain or

virtually certain, as the casemay be (see paragraphs 15 to 18), that sufficient

future taxable incomewill be available againstwhich such deferred tax assets

can be realised. For example, an improvement in trading conditions may

make it reasonably certain that the enterprisewill be able to generate sufficient

taxable income in the future.

Measurement

20. Current tax should be measured at the amount expected to be

paid to (recovered from) the taxation authorities, using the applicable

tax rates and tax laws.

21. 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.

22. Deferred tax assets and liabilities are usually measured using the tax

4 See also Accounting Standards Interpretation (ASI) 9, published elsewhere in this

Compendium.

428 AS 22 (issued 2001)

rates and tax laws that have been enacted. However, certain announcements

of tax rates and tax laws by the government may have the substantive effect

of actual enactment. In these circumstances, deferred tax assets and liabilities

are measured using such announced tax rate and tax laws.

23. When different tax rates apply to different levels of taxable income,

deferred tax assets and liabilities are measured using average rates.

24. Deferred tax assets and liabilities should not be discounted to their

present value.

25. The reliable determination of deferred tax assets and liabilities on a

discounted basis requires detailed scheduling of the timing of the reversal of

each timing difference. In a number of cases such scheduling is impracticable

or highly complex. Therefore, it is inappropriate to require discounting of

deferred tax assets and liabilities. To permit, but not to require, discounting

would result in deferred tax assets and liabilities which would not be

comparable between enterprises. Therefore, this Statement does not require

or permit the discounting of deferred tax assets and liabilities.

Review of Deferred Tax Assets

26. The carrying amount of deferred tax assets should be reviewed at

each balance sheet date. An enterprise should write-down the carrying

amount of a deferred tax asset to the extent that it is no longer reasonably

certain or virtually certain, as the case may be (see paragraphs 15 to

18), that sufficient future taxable income will be available against which

deferred tax asset can be realised. Any such write-down may be reversed

to the extent that it becomes reasonably certain or virtually certain, as

the case may be (see paragraphs 15 to 18), that sufficient future taxable

income will be available.

Presentation andDisclosure

27. An enterprise should offset assets and liabilities representing

current tax if the enterprise:

(a) has a legally enforceable right to set off the recognised

amounts; and

(b) intends to settle the asset and the liability on a net basis.

Accounting for Taxes on Income 429

28. An enterprise will normally have a legally enforceable right to set off

an asset and liability representing current tax when they relate to income

taxes levied under the same governing taxation laws and the taxation laws

permit the enterprise to make or receive a single net payment.

29. An enterprise should offset deferred tax assets and deferred tax

liabilities if:

(a) the enterprise has a legally enforceable right to set off assets

against liabilities representing current tax; and

(b) the deferred tax assets and the deferred tax liabilities relate

to taxes on income levied by the same governing taxation

laws.

30. Deferred tax assets and liabilities should be distinguished from

assets and liabilities representing current tax for the period. Deferred

tax assets and liabilities should be disclosed under a separate heading

in the balance sheet of the enterprise, separately from current assets

and current liabilities.5

31. The break-up of deferred tax assets and deferred tax liabilities

into major components of the respective balances should be disclosed in

the notes to accounts.

32. The nature of the evidence supporting the recognition of deferred

tax assets should be disclosed, if an enterprise has unabsorbed

depreciation or carry forward of losses under tax laws.

TransitionalProvisions

33. On the first occasion that the taxes on income are accounted for in

accordance with this Statement, the enterprise should recognise, in the

financial statements, the deferred tax balance that has accumulated

prior to the adoption of this Statement as deferred tax asset/liability

with a corresponding credit/charge to the revenue reserves, subject to

the consideration of prudence in case of deferred tax assets (see

paragraphs 15-18). The amount so credited/charged to the revenue

5 See also Accounting Standards Interpretation (ASI) 7, published elsewhere in this

Compendium.

430 AS 22 (issued 2001)

reserves should be the same as that which would have resulted if this

Statement had been in effect from the beginning.6

34. For the purpose of determining accumulated deferred tax in the period

in which this Statement is applied for the first time, the opening balances of

assets and liabilities for accounting purposes and for tax purposes are

compared and the differences, if any, are determined. The tax effects of

these differences, if any, should be recognised as deferred tax assets or

liabilities, if these differences are timing differences. For example, in the

year in which an enterprise adopts this Statement, the opening balance of a

fixed asset is Rs. 100 for accounting purposes and Rs. 60 for tax purposes.

The difference is because the enterprise applies written down value method

of depreciation for calculating taxable income whereas for accounting

purposes straight line method is used. This difference will reverse in future

when depreciation for tax purposes will be lower as compared to the

depreciation for accounting purposes. In the above case, assuming that

enacted tax rate for the year is 40% and that there are no other timing

differences, deferred tax liability of Rs. 16 [(Rs. 100 - Rs. 60) x 40%] would

be recognised. Another example is an expenditure that has already been

written off for accounting purposes in the year of its incurrence but is

allowable for tax purposes over a period of time. In this case, the asset

representing that expenditure would have a balance only for tax purposes

but not for accounting purposes. The difference between balance of the

asset for tax purposes and the balance (which is nil) for accounting purposes

would be a timing difference which will reverse in future when this

expenditure would be allowed for tax purposes. Therefore, a deferred tax

asset would be recognised in respect of this difference subject to the

consideration of prudence (see paragraphs 15 - 18).

6 It is clarified that an enterprise, which applies AS 22 for the first time in respect of

accounting period commencing on 1st April, 2001, should determine the amount of

the opening balance of the accumulated deferred tax by using the rate of income tax

applicable as on 1st April, 2001. (See ‘The Chartered Accountant’, October 2001,

pp.471-472).

Appendix 1

Accounting for Taxes on Income 431

Examples of Timing Differences

Note: This appendix is illustrative only and does not form part of the

Accounting Standard. The purpose of this appendix is to assist in

clarifying the meaning of the Accounting Standard. The sections

mentioned hereunder are references to sections in the Income-tax Act,

1961, as amended by the Finance Act, 2001.

1. Expenses debited in the statement of profit and loss for accounting

purposes but allowed for tax purposes in subsequent years, e.g.

a) Expenditure of the nature mentioned in section 43B (e.g. taxes,

duty, cess, fees, etc.) accrued in the statement of profit and loss

on mercantile basis but allowed for tax purposes in subsequent

years on payment basis.

b) Payments to non-residents accrued in the statement of profit and

loss on mercantile basis, but disallowed for tax purposes under

section 40(a)(i) and allowed for tax purposes in subsequent years

when relevant tax is deducted or paid.

c) Provisionsmade in the statement of profit and loss in anticipation

of liabilitieswhere the relevant liabilities are allowed in subsequent

years when they crystallize.

2. Expenses amortized in the books over a period of years but are allowed

for tax purposes wholly in the first year (e.g. substantial advertisement

expenses to introduce a product, etc. treated as deferred revenue expenditure

in the books) or if amortization for tax purposes is over a longer or shorter

period (e.g. preliminary expenses under section 35D, expenses incurred for

amalgamation under section 35DD, prospecting expenses under section 35E).

3. Where book and tax depreciation differ. This could arise due to:

a) Differences in depreciation rates.

b) Differences in method of depreciation e.g. SLM or WDV.

c) Differences in method of calculation e.g. calculation of

432 AS 22 (issued 2001)

depreciation with reference to individual assets in the books but

on block basis for tax purposes and calculation with reference to

time in the books but on the basis of full or half depreciation under

the block basis for tax purposes.

d) Differences in composition of actual cost of assets.

4. Where a deduction is allowed in one year for tax purposes on the basis

of a deposit made under a permitted deposit scheme (e.g. tea development

account scheme under section 33AB or site restoration fund scheme under

section 33ABA) and expenditure out of withdrawal from such deposit is

debited in the statement of profit and loss in subsequent years.

5. Income credited to the statement of profit and loss but taxed only in

subsequent years e.g. conversion of capital assets into stock in trade.

6. If for any reason the recognition of income is spread over a number of

years in the accounts but the income is fully taxed in the year of receipt.

Appendix 2

Accounting for Taxes on Income 433

Note: This appendix is illustrative only and does not form part of the

Accounting Standard. The purpose of this appendix is to illustrate the

application of the Accounting Standard. Extracts from statement of

profit and loss are provided to show the effects of the transactions

described below.

Illustration 1

A company, ABC Ltd., prepares its accounts annually on 31st March. On

1stApril, 20x1, it purchases amachine at a cost of Rs. 1,50,000. Themachine

has a useful life of three years and an expected scrap value of zero. Although

it is eligible for a 100% first year depreciation allowance for tax purposes,

the straight-line method is considered appropriate for accounting purposes.

ABC Ltd. has profits before depreciation and taxes of Rs. 2,00,000 each

year and the corporate tax rate is 40 per cent each year.

The purchase of machine at a cost of Rs. 1,50,000 in 20x1 gives rise to a tax

saving of Rs. 60,000. If the cost of the machine is spread over three years of

its life for accounting purposes, the amount of the tax saving should also be

spread over the same period as shown below:

Statement of Profit and Loss

(for the three years ending 31st March, 20x1, 20x2, 20x3)

(Rupees in thousands)

20x1 20x2 20x3

Profit before depreciation and taxes 200 200 200

Less: Depreciation for accounting purposes 50 50 50

Profit before taxes 150 150 150

Less: Tax expense

Current tax

0.40 (200 – 150) 20

0.40 (200) 80 80

434 AS 22 (issued 2001)

Deferred tax

Tax effect of timing differences

originating during the year

0.40 (150 – 50) 40

Tax effect of timing differences

reversing during the year

0.40 (0 – 50) (20) (20)

Tax expense 60 60 60

Profit after tax 90 90 90

Net timing differences 100 50 0

Deferred tax liability 40 20 0

In 20x1, the amount of depreciation allowed for tax purposes exceeds the

amount of depreciation charged for accounting purposes by Rs. 1,00,000

and, therefore, taxable income is lower than the accounting income. This

gives rise to a deferred tax liability ofRs. 40,000. In 20x2 and 20x3, accounting

income is lower than taxable income because the amount of depreciation

charged for accounting purposes exceeds the amount of depreciation allowed

for tax purposes by Rs. 50,000 each year.Accordingly, deferred tax liability

is reduced by Rs. 20,000 each in both the years. As may be seen, tax expense

is based on the accounting income of each period.

In 20x1, the profit and loss account is debited and deferred tax liability account

is credited with the amount of tax on the originating timing difference of Rs.

1,00,000while in each of the following two years, deferred tax liability account

is debited and profit and loss account is credited with the amount of tax on

the reversing timing difference of Rs. 50,000.

Accounting for Taxes on Income 435

The following Journal entries will be passed:

Year 20x1

Profit and Loss A/c Dr. 20,000

To Current tax A/c 20,000

(Being the amount of taxes payable for the year 20x1 provided for)

Profit and Loss A/c Dr. 40,000

To Deferred tax A/c 40,000

(Being the deferred tax liability created for originating timing

difference of Rs. 1,00,000)

Year 20x2

Profit and Loss A/c Dr. 80,000

To Current tax A/c 80,000

(Being the amount of taxes payable for the year 20x2 provided for)

Deferred tax A/c Dr. 20,000

To Profit and Loss A/c 20,000

(Being the deferred tax liability adjusted for reversing timing difference

of Rs. 50,000)

Year 20x3

Profit and Loss A/c Dr. 80,000

To Current tax A/c 80,000

(Being the amount of taxes payable for the year 20x3 provided for)

Deferred tax A/c Dr. 20,000

To Profit and Loss A/c 20,000

(Being the deferred tax liability adjusted for reversing timing difference

of Rs. 50,000)

In year 20x1, the balance of deferred tax account i.e., Rs. 40,000 would be

shown separately from the current tax payable for the year in terms of

paragraph 30 of the Statement. In Year 20x2, the balance of deferred tax

account would be Rs. 20,000 and be shown separately from the current tax

436 AS 22 (issued 2001)

payable for the year as in year 20x1. In Year 20x3, the balance of deferred

tax liability account would be nil.

Illustration 2

In the above illustration, the corporate tax rate has been assumed to be same

in each of the three years. If the rate of tax changes, it would be necessary

for the enterprise to adjust the amount of deferred tax liabilitycarried forward

by applying the tax rate that has been enacted or substantively enacted by

the balance sheet date on accumulated timing differences at the end of the

accounting year (see paragraphs 21 and 22). For example, if in Illustration

1, the substantively enacted tax rates for 20x1, 20x2 and 20x3 are 40%, 35%

and 38%respectively, the amount of deferred tax liabilitywould be computed

as follows:

The deferred tax liability carried forward each year would appear in the

balance sheet as under:

31st March, 20x1 = 0.40 (1,00,000) = Rs. 40,000

31st March, 20x2 = 0.35 (50,000) = Rs. 17,500

31st March, 20x3 = 0.38 (Zero) = Rs. Zero

Accordingly, the amount debited/(credited) to the profit and loss account

(with corresponding credit or debit to deferred tax liability) for each year

would be as under:

31st March, 20x1 Debit = Rs. 40,000

31st March, 20x2 (Credit) = Rs. (22,500)

31st March, 20x3 (Credit) = Rs. (17,500)

Illustration 3

A company, ABC Ltd., prepares its accounts annually on 31st March. The

company has incurred a loss of Rs. 1,00,000 in the year 20x1 and made

profits of Rs. 50,000 and 60,000 in year 20x2 and year 20x3 respectively. It

is assumed that under the tax laws, loss can be carried forward for 8 years

and tax rate is 40% and at the end of year 20x1, it was virtually certain,

supported by convincing evidence, that the company would have sufficient

taxable income in the future years against which unabsorbed depreciation

and carry forward of losses can be set-off. It is also assumed that there is

Accounting for Taxes on Income 437

no difference between taxable income and accounting income except that

set-off of loss is allowed in years 20x2 and 20x3 for tax purposes.

Statement of Profit and Loss

(for the three years ending 31st March, 20x1, 20x2, 20x3)

(Rupees in thousands)

20x1 20x2 20x3

Profit (loss) (100) 50 60

Less: Current tax — — (4)

Deferred tax:

Tax effect of timing differences

originating during the year 40

Tax effect of timing differences

reversing during the year (20) (20)

Profit (loss) after tax effect (60) 30 36