AS 22 – Accounting for Taxes on Income

Objective: is to prescribe accounting treatment for taxes on income

Applicability: This statement comes into effect in respect of accounting periods commencing on or after 1st April, 2001

Scope

This statement should be applied in accounting for taxes on income. For computing the taxes on income, it becomes necessary to calculate the amount of expense or savings related to taxes on income in respect of an accounting period. Taxes on income should include all the domestic and foreign taxes, which are based on taxable income. However, there is no specification in this statement as regards the time and mode for accounting for taxes in the event of payment and distribution of dividends made by the enterprise. This statement is mandatory for:

1. Those enterprises whose equity or debt securities are listed on a recognised stock exchange in India and those enterprises that are in the process of issuing equity or debt securities that will be listed on a recognised stock exchange in India as evidenced by the board of directors’ resolution in this regard; and all the enterprises of a group, if the parent presents consolidated financial statements
2. All the accounting periods commencing on or after 1st April, 2002 in respect of companies not covered as above.
3. All the accounting periods commencing on or after 1st April, 2003 in respect of all other enterprises.

Definitions

• 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 / (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 / (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.

Recognition: For determining the net profit or loss for the period, current tax and deferred tax have to be included. The tax on income received should be treated as an expense. Deferred tax assets and liabilities are usually measured using the tax rates and tax laws for the time being in force. Deferred tax assets should be recognised and carried forward only to the extent of the deferred taxes those are realisable in future.

Re-assessment of Unrecognised Deferred Tax Assets: On every balance sheet date, the enterprise should recognise the unrecognised deferred assets only to the extent of future taxable income that will be available against the deferred tax assets that is anticipated to be realised.

Measurement

Current Tax: at the amount that is expected to be paid to the taxation authorities.

Deferred Tax Assets & Liabilities: at the tax rates and tax laws that have been enacted at the balance sheet date.

However, when different tax rates are applied to different levels of taxable income, deferred tax assets and liabilities are measured using average rates.

Review of Deferred Tax Assets: 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 only to the extent of future taxable income that will be available against which deferred tax asset can be realised.

Presentation and Disclosure

1. An enterprise should offset assets and liabilities representing current tax if the enterprise:
1. has a legally enforceable right to set off the recognised amounts, and
2. intends to settle the asset and the liability on a net basis.
2. An enterprise should offset deferred tax assets and deferred tax liabilities if:
1. the enterprise has a legally enforceable right to set off assets against liabilities representing current tax, and
2. the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.
3. Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period.
4. 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.
5. 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.

Transistional Provisions: While accounting for taxes on income for the first time in accordance with this statement, the enterprise should consider in its financial statements, the deferred tax balance that was accumulated prior to the adoption of this statement as either deferred tax liability or income. The amount so credited or charged to the revenue reserves should be the same as that, which would have resulted if this Statement was adopted from the beginning.