Accounting Standard 22: Accounting for Taxes on Income

Effective date when mandatory (a) For listed companies and their subsidiaries 1-4-2001 (b)
For other companies - 1-4-2002 (c) All other enterprises - 1-4-2003.
The differences between taxable income and accounting income to 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 get reverse subsequently.
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.
Deferred tax should be recognised for all the timing differences, subject to the consideration of
prudence in respect of deferred tax assets (DTA).
When enterprise has carry forward tax losses, DTA to be recognised only if there is virtual
certainty supported by convincing evidence of future taxable income. Unrecognised DTA to be
reassessed at each balance sheet date. Virtual certainty refers to the fact that there is practically
no doubt regarding the determination of availability of the future taxable income. Also,
convincing evidence is required to support the judgment of virtual certainty (ASI-9).
In respect of loss under the head Capital Gains, DTA shall be recognised only to the extent that
there is a reasonable certainty of sufficient future taxable capital gain (ASI - 4). DTA to be
recognised on the amount, which is allowed as per the provisions of the Act; i.e., loss after
considering the cost indexation as per the Income Tax Act.
Treatment of deferred tax in case of Amalgamation
(ASI-11)
in case of amalgamation in nature of purchase, where identifiable assets / liabilities are accounted
at the fair value and the carrying amount for tax purposes continue to be the same as that for the
transferor enter price, the difference between the values shall be treated as a permanent
difference and hence it will not give rise to any deferred tax. The consequent difference in
depreciation charge of the subsequent years shall also be treated as a permanent difference.
The transferee company can recognise a DTA in respect of carry forward losses of the transferor
enterprise, if conditions relating to prudence as per AS 22 are satisfied, though transferor

enterprise would not have recognised such deferred tax assets on account of prudence.
Accounting treatment will depend upon nature of amalgamation, which shall be as follows :
o In case of amalgamation is in the nature of purchase and assets and liabilities are accounted at the
fair value, DTA should be recognised at the time of amalgamation (subject to prudence).
o In case of amalgamation is in the nature of purchase and assets and liabilities are accounted at their
existing carrying value, DTA shall not be recognised at the time of amalgamation. However, if
DTA gets recognised in the first year of amalgamation, the effect shall be through adjustment to
goodwill/ capital reserve.
o In case of amalgamation is in the nature of merger, the deferred tax assets shall not be recognised
at the time of amalgamation. However, if DTA gets recognised in the first year of amalgamation,
the effect shall be given through revenue reserves.
o In all the above if the DTA cannot be recognised by the first annual balance sheet following
amalgamation, the corresponding effect of this recognition to be given in the statement of profit
and loss.
Tax expenses for the period, comprises of current tax and deferred tax.
Current tax [includes payment u/s 115JB of the Act
(ASI-6)] should be measured at the amount expected to be paid to (recovered from) the taxation
authorities, using the applicable tax rates.
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 and should not be discounted to
their present value. Deferred Tax to be measured using the regular tax rates for companies that
pay tax u/s 115JB of the Act (ASI-6).
DTA should be disclosed separately after the head Investments and deferred tax liability (DTL)
should be disclosed separately after the head Unsecured Loans
(ASI-7) in the balance sheet of the enterprise. Assets and liabilities to be netted off only when the
enterprise has a legally enforceable right to set off.
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.
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.

 The deferred tax assets and liabilities in respect of timing differences which originate during the
tax holiday period and reverse during the tax holiday period, should not be recognised to the
extent deduction from the total income of an enterprise is allowed during the tax holiday period.
However, if timing differences reverse after the tax holiday period, DTA and DTL should be
recognised in the year in which the timing differences originate. Timing differences, which
originate first, should be considered for reversal first (ASI-3) and (ASI-5).
On the first occasion of applicability of this AS the enterprise should recognise, 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.

Why AS-22 Accounting for taxes on income is applied?

Posted In Finance | Articles | 3 Comments
Esha Agrawal

WHY AS 22 IS APPLIED
My aim of writing this article is to discuss with you all why AS 22 is applied, generally
this happens we study the whole AS, solve the questions, but we dont know the crux of it. So
friends AS 22 is Accounting for taxes on income and the reason for its application is
mentioned below.
There could be situations where depreciation is charged in the books over its useful life but for
which the entire deduction is claimed in the first year as per tax laws. In other words, the income
is charged to tax in year other than the year in which it is recorded in the books of accounts due
to varied tax provisions. Thus higher book profits and less tax in the current year cannot
completely justify about the profitability of the company, if the tax burden changes in the future.
Thus for the purpose of making a provision for tax an income in the same year of its accrual
irrespective of its actual due, is the main punch line of this Accounting Standard.
For the purpose of this standard following terms are used with the meaning below:1)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.

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) 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.
4) Current tax is the amount of income tax determined to be payable (recoverable) in respect of
the taxable income (tax loss) for a period.
5) Deferred tax is the tax effect of timing difference
6) Timing difference are the difference between taxable income and accounting income for a
period that originate in one period and are capable of reversal in one or more subsequent period
7)Permanent difference are the difference between taxable income and accounting income for
the period that originate in one period and do not reverses subsequently .Permanent difference do
not result in deferred tax assets or deferred tax liabilities.
ILLUSTRATION
A company, ABC Ltd., prepares its accounts annually on 31st March. On1st April, 2011, it
purchases a machine for research purpose at a cost of Rs. 1,50,000. The machine 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 2011 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 Account
(for the year ending 31st March 2011, 2012, 2013)
( Rupees in thousands)
2011
2012
2013
Profit before depreciation and
taxes
Less: Depreciation for
accounting purposes
Profit before taxes
Less: Tax expense

200

200

200

50

50

50

150

150

150

Current tax
Deffered tax
Profit after tax

20
40
90

80
(20)
90

80
(20)
90

Working note 1:- calculation of current tax

Profit before tax
Add:- Depreciation for
accounting purposes
Less:- Depreciation for tax
purpose
Taxable Income
Tax @ 40%

150

150

150

50

50

50

150

50
20

200
80

200
80

Working note 2:- calculation of deferred tax

Timing Difference
Opening balance
Add:- creation
Less:- reversal
Closing balance
Deffered tax liability
Reversal of deferred tax
liability
Less:- opening balance
Transfer to P/L account

0
150
50
100
40

100
0
50
50
0

50
0
50
0
0

20

0
40

40
( 20)

(20)
(20)

In 2011, 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 of Rs. 40,000. In 2012 and
2013,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
2011, 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. 1,00,000 while 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.

So from the above example we come to know we dont get any additional depreciation as
per income tax on asset in fact whatever additional depreciation we get that get reverse in
subsequent years, and we get depreciation as per the life of the machine.

ACCOUNTING STANDARDS
Accounting Standards are formulated with a view to harmonize different accounting policies and
practices in use in a country. The objective of Accounting Standards is, therefore, to reduce the
accounting alternatives in the preparation of financial statements within the bounds of rationality,
thereby ensuring comparability of financial statements of different enterprises with a view to
provide meaningful information to various users of financial statements to enable them to make
informed economic decisions.

Recognizing the need for international harmonization of accounting standards, in 1973, the
International Accounting Standards Committee (IASC) was established. It may be mentioned
here that the IASC has been reconstituted as the International Accounting Standards Board
(IASB). The objectives of IASC included promotion of the International Accounting Standards
for worldwide acceptance and observance so that the accounting standards in different countries
are harmonized. In recent years, need for international harmonization of Accounting Standards
followed in different countries has grown considerably as the cross-border transfers of capital are
becoming increasingly common.
The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC,
constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to
harmonize the diverse accounting policies and practices in use in India. After the avowed
adoption of liberalization and globalization as the corner stones of Indian economic policies in
early 90s, and the growing concern about the need of effective corporate governance of late, the
Accounting Standards have increasingly assumed importance. While formulating accounting
standards, the ASB takes into consideration the applicable laws, customs, usages and business
environment prevailing in the country. The ASB also gives due consideration to International
Financial Reporting Standards (IFRSs)/ International Accounting Standards (IASs) issued by
IASB and tries to integrate them, to the extent possible, in the light of conditions and practices
prevailing in India.
Composition of the Accounting Standards Board
The composition of the ASB is broad-based with a view to ensuring participation of all interest
groups in the standard-setting process. These interest-groups include industry, representatives of
various departments of government and regulatory authorities, financial institutions and
academic and professional bodies. Industry is represented on the ASB by their apex level
associations, viz., Associated Chambers of Commerce & Industry (ASSOCHAM), Confederation
of Indian Industries (CII) and Federation of Indian Chambers of Commerce and Industry
(FICCI). As regards government departments and regulatory authorities, Reserve Bank of India,
Ministry of Company Affairs, Comptroller & Auditor General of India, Controller General of
Accounts and Central Board of Excise and Customs are represented on the ASB. Besides these

interest-groups, representatives of academic and professional institutions such as Universities,

Indian Institutes of Management, Institute of Cost and Works Accountants of India and Institute
of Company Secretaries of India are also represented on the ASB. Apart from these interest
groups, certain elected members of the Central Council of ICAI are also on the ASB.
Compliance with Accounting Standards
Accounting Standards issued by the ICAI have legal recognition through the Companies Act,
1956, whereby every company is required to comply with the Accounting Standards and the
statutory auditors of every company are required to report whether the Accounting Standards
have been complied with or not. Also, the Insurance Regulatory and Development Authority
(IRDA) (Preparation of Financial Statements and Auditors Report of Insurance Companies)
Regulations, 2000 requires insurance companies to follow the Accounting Standards issued by
the ICAI. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India
also require compliance with the Accounting Standards issued by the ICAI from time to time.
The Accounting Standards-setting Process
The accounting standard setting, by its very nature, involves reaching an optimal balance of the
requirements of financial information for various interest-groups having a stake in financial
reporting. With a view to reach consensus, to the extent possible, as to the requirements of the
relevant interest-groups and thereby bringing about general acceptance of the Accounting
Standards among such groups, considerable research, consultations and discussions with the
representatives of the relevant interest-groups at different stages of standard formulation
becomes necessary. The standard-setting procedure of the ASB, as briefly outlined below, is
designed in such a way so as to ensure such consultation and discussions:

Identification of the broad areas by the ASB for formulating the Accounting Standards.

Constitution of the study groups by the ASB for preparing the preliminary drafts of the

proposed Accounting Standards.

Consideration of the preliminary draft prepared by the study group by the ASB and

revision,
if any, of the draft on the basis of deliberations at the ASB.

Circulation of the draft, so revised, among the Council members of the ICAI and 12

specified
outside bodies such as Standing Conference of Public Enterprises (SCOPE), Indian Banks
Association, Confederation of Indian Industry (CII), Securities and Exchange Board of India
(SEBI), Comptroller and Auditor General of India (C& AG), and Department of Company
Affairs, for comments.

Meeting with the representatives of specified outside bodies to ascertain their views on

the
draft of the proposed Accounting Standard.

Finalization of the Exposure Draft of the proposed Accounting Standard on the basis of

comments received and discussion with the representatives of specified outside bodies.

Issuance of the Exposure Draft inviting public comments.

Consideration of the comments received on the Exposure Draft and finalization of the

draft
Accounting Standard by the ASB for submission to the Council of the ICAI for its
consideration and approval for issuance.

Consideration of the draft Accounting Standard by the Council of the Institute, and if

found
necessary, modification of the draft in consultation with the ASB.

The Accounting Standard, so finalized, is issued under the authority of the Council.

The Accounting Standards as given by the ASB are listed below:

AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts

AS 8 Accounting for Research and Development (Withdrawn pursuant to AS 26 becoming

mandatory)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Employee Benefits
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in Associates in Consolidated Financial Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
AS 30 Financial Instruments: Recognition and Measurement
AS 31 Financial Instruments: Presentation
AS 32 Financial Instruments: Disclosures

AS 22 Accounting for Taxes on Income ( Effective from 1st April, 2001)

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 from the 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.
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.
For the purposes of this Statement, taxes on income include all domestic and foreign taxes which
are based on taxable income.
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