ICAI Notes- Unit 4: Accounting Standards Based on Items Impacting Financial Statements | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
ADVANCED ACCOUNTING 
7.54 
 
 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD 22 
ACCOUNTING FOR TAXES ON INCOME  
After studying this chapter, you will be able to comprehend the:  
? What is the Objective of AS 22 
? What is the Recognition criteria for Deferred Tax 
? Re-assessment of Unrecognised Deferred Tax Assets  
? Measurement of Deferred Tax 
? Review of Deferred Tax Assets  
? Presentation and Disclosure 
? Solve the practical problems based on application of Accounting 
Standards. 
4.1 INTRODUCTION 
This standard prescribes the accounting treatment of taxes on income and follows 
the concept of matching expenses against revenue for the period. The concept of 
matching is more peculiar in cases of income taxes since in a number of cases, the 
taxable income may be significantly different from the income reported in the 
financial statements due to the difference in treatment of certain items under 
taxation laws and the way it is reflected in accounts. 
4.2 OBJECTIVE 
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.  
© The Institute of Chartered Accountants of India
Page 2


 
 
ADVANCED ACCOUNTING 
7.54 
 
 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD 22 
ACCOUNTING FOR TAXES ON INCOME  
After studying this chapter, you will be able to comprehend the:  
? What is the Objective of AS 22 
? What is the Recognition criteria for Deferred Tax 
? Re-assessment of Unrecognised Deferred Tax Assets  
? Measurement of Deferred Tax 
? Review of Deferred Tax Assets  
? Presentation and Disclosure 
? Solve the practical problems based on application of Accounting 
Standards. 
4.1 INTRODUCTION 
This standard prescribes the accounting treatment of taxes on income and follows 
the concept of matching expenses against revenue for the period. The concept of 
matching is more peculiar in cases of income taxes since in a number of cases, the 
taxable income may be significantly different from the income reported in the 
financial statements due to the difference in treatment of certain items under 
taxation laws and the way it is reflected in accounts. 
4.2 OBJECTIVE 
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.  
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.55 
 
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. 
4.3 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 (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 + Deferred Tax = Tax expense (Tax saving) 
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. 
The differences between taxable income and accounting income can be classified 
into permanent differences and 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. 
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 Institute of Chartered Accountants of India
Page 3


 
 
ADVANCED ACCOUNTING 
7.54 
 
 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD 22 
ACCOUNTING FOR TAXES ON INCOME  
After studying this chapter, you will be able to comprehend the:  
? What is the Objective of AS 22 
? What is the Recognition criteria for Deferred Tax 
? Re-assessment of Unrecognised Deferred Tax Assets  
? Measurement of Deferred Tax 
? Review of Deferred Tax Assets  
? Presentation and Disclosure 
? Solve the practical problems based on application of Accounting 
Standards. 
4.1 INTRODUCTION 
This standard prescribes the accounting treatment of taxes on income and follows 
the concept of matching expenses against revenue for the period. The concept of 
matching is more peculiar in cases of income taxes since in a number of cases, the 
taxable income may be significantly different from the income reported in the 
financial statements due to the difference in treatment of certain items under 
taxation laws and the way it is reflected in accounts. 
4.2 OBJECTIVE 
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.  
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.55 
 
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. 
4.3 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 (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 + Deferred Tax = Tax expense (Tax saving) 
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. 
The differences between taxable income and accounting income can be classified 
into permanent differences and 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. 
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 Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
7.56 
 
the same, but periods over which the depreciation is charged and the deduction 
is allowed will differ. This may lead to recognition of deferred tax in the books.  
Permanent differences are the differences between taxable income and 
accounting income for a period that originate in one period and do not reverse 
subsequently. Generally permanent differences leads to increase in current tax & 
have no impact on Deferred Tax. 
For Example, XYZ has been charged with the fine on the late payment of the tax 
amount due to authorities. This would be considered as an expense in the profit 
and loss account, however this is specifically a disallowed expense for 
computation of taxable income. This will be treated as permanent difference as 
this difference will never reverse. 
4.4 RECOGNITION 
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.  
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 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 or as deferred tax liabilities, in the 
balance sheet. 
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 level of certainty would normally be achieved by examining the 
past record of the enterprise and by making realistic estimates of profits for the 
future. 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 evidence that sufficient 
future taxable income will be available against which such deferred tax assets can 
be realised. 
Permanent differences do not result in deferred tax assets or deferred tax 
liabilities. 
© The Institute of Chartered Accountants of India
Page 4


 
 
ADVANCED ACCOUNTING 
7.54 
 
 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD 22 
ACCOUNTING FOR TAXES ON INCOME  
After studying this chapter, you will be able to comprehend the:  
? What is the Objective of AS 22 
? What is the Recognition criteria for Deferred Tax 
? Re-assessment of Unrecognised Deferred Tax Assets  
? Measurement of Deferred Tax 
? Review of Deferred Tax Assets  
? Presentation and Disclosure 
? Solve the practical problems based on application of Accounting 
Standards. 
4.1 INTRODUCTION 
This standard prescribes the accounting treatment of taxes on income and follows 
the concept of matching expenses against revenue for the period. The concept of 
matching is more peculiar in cases of income taxes since in a number of cases, the 
taxable income may be significantly different from the income reported in the 
financial statements due to the difference in treatment of certain items under 
taxation laws and the way it is reflected in accounts. 
4.2 OBJECTIVE 
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.  
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.55 
 
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. 
4.3 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 (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 + Deferred Tax = Tax expense (Tax saving) 
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. 
The differences between taxable income and accounting income can be classified 
into permanent differences and 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. 
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 Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
7.56 
 
the same, but periods over which the depreciation is charged and the deduction 
is allowed will differ. This may lead to recognition of deferred tax in the books.  
Permanent differences are the differences between taxable income and 
accounting income for a period that originate in one period and do not reverse 
subsequently. Generally permanent differences leads to increase in current tax & 
have no impact on Deferred Tax. 
For Example, XYZ has been charged with the fine on the late payment of the tax 
amount due to authorities. This would be considered as an expense in the profit 
and loss account, however this is specifically a disallowed expense for 
computation of taxable income. This will be treated as permanent difference as 
this difference will never reverse. 
4.4 RECOGNITION 
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.  
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 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 or as deferred tax liabilities, in the 
balance sheet. 
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 level of certainty would normally be achieved by examining the 
past record of the enterprise and by making realistic estimates of profits for the 
future. 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 evidence that sufficient 
future taxable income will be available against which such deferred tax assets can 
be realised. 
Permanent differences do not result in deferred tax assets or deferred tax 
liabilities. 
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.57 
 
4.5 MEASUREMENT 
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.  
Deferred tax assets and liabilities are usually measured using the tax rates and tax 
laws that have been enacted by the balance sheet date.  
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.  
Deferred tax assets and liabilities should not be discounted to their present 
value. 
4.6 RE-ASSESSMENT OF UNRECOGNISED 
DEFERRED TAX ASSETS 
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 case 
may be, that sufficient future taxable income will be available against which such 
deferred tax assets can be realised. 
4.7 REVIEW OF PREVIOUSLY RECOGNISED 
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 to the extent that it is no longer reasonably certain or virtually certain, as 
the case may be, that sufficient future taxable income will not 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, that sufficient future taxable income will be available. 
© The Institute of Chartered Accountants of India
Page 5


 
 
ADVANCED ACCOUNTING 
7.54 
 
 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD 22 
ACCOUNTING FOR TAXES ON INCOME  
After studying this chapter, you will be able to comprehend the:  
? What is the Objective of AS 22 
? What is the Recognition criteria for Deferred Tax 
? Re-assessment of Unrecognised Deferred Tax Assets  
? Measurement of Deferred Tax 
? Review of Deferred Tax Assets  
? Presentation and Disclosure 
? Solve the practical problems based on application of Accounting 
Standards. 
4.1 INTRODUCTION 
This standard prescribes the accounting treatment of taxes on income and follows 
the concept of matching expenses against revenue for the period. The concept of 
matching is more peculiar in cases of income taxes since in a number of cases, the 
taxable income may be significantly different from the income reported in the 
financial statements due to the difference in treatment of certain items under 
taxation laws and the way it is reflected in accounts. 
4.2 OBJECTIVE 
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.  
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.55 
 
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. 
4.3 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 (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 + Deferred Tax = Tax expense (Tax saving) 
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. 
The differences between taxable income and accounting income can be classified 
into permanent differences and 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. 
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 Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
7.56 
 
the same, but periods over which the depreciation is charged and the deduction 
is allowed will differ. This may lead to recognition of deferred tax in the books.  
Permanent differences are the differences between taxable income and 
accounting income for a period that originate in one period and do not reverse 
subsequently. Generally permanent differences leads to increase in current tax & 
have no impact on Deferred Tax. 
For Example, XYZ has been charged with the fine on the late payment of the tax 
amount due to authorities. This would be considered as an expense in the profit 
and loss account, however this is specifically a disallowed expense for 
computation of taxable income. This will be treated as permanent difference as 
this difference will never reverse. 
4.4 RECOGNITION 
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.  
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 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 or as deferred tax liabilities, in the 
balance sheet. 
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 level of certainty would normally be achieved by examining the 
past record of the enterprise and by making realistic estimates of profits for the 
future. 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 evidence that sufficient 
future taxable income will be available against which such deferred tax assets can 
be realised. 
Permanent differences do not result in deferred tax assets or deferred tax 
liabilities. 
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.57 
 
4.5 MEASUREMENT 
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.  
Deferred tax assets and liabilities are usually measured using the tax rates and tax 
laws that have been enacted by the balance sheet date.  
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.  
Deferred tax assets and liabilities should not be discounted to their present 
value. 
4.6 RE-ASSESSMENT OF UNRECOGNISED 
DEFERRED TAX ASSETS 
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 case 
may be, that sufficient future taxable income will be available against which such 
deferred tax assets can be realised. 
4.7 REVIEW OF PREVIOUSLY RECOGNISED 
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 to the extent that it is no longer reasonably certain or virtually certain, as 
the case may be, that sufficient future taxable income will not 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, that sufficient future taxable income will be available. 
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
7.58 
 
4.8 Virtual certainty supported by   
 CONVINCING EVIDENCE 
Determination of virtual certainty that sufficient future taxable income will be 
available is a matter of judgement and will have to be evaluated on a case-to-
case basis. Virtual certainty refers to the extent of certainty, which, for all practical 
purposes, can be considered certain. Virtual certainty cannot be based merely on 
forecasts of performance such as business plans. Virtual certainty is not a matter 
of perception and it should be supported by convincing evidence. Evidence is a 
matter of fact. To be convincing, the evidence should be available at the reporting 
date in a concrete form, for example, a profitable binding export order, 
cancellation of which will result in payment of heavy damages by the defaulting 
party. On the other hand, a projection of the future profits made by an enterprise 
based on the future capital expenditures or future restructuring etc., submitted 
even to an outside agency, e.g., to a credit agency for obtaining loans and 
accepted by that agency cannot, in isolation, be considered as convincing 
evidence. 
4.9 DISCLOSURE 
Statement of profit and loss
Under AS 22, there is no specific requirement to disclose current tax and deferred 
tax in the statement of profit and loss. However, considering the requirements 
under the Companies Act, 2013, the amount of income tax and other taxes on 
profits should be disclosed.  
AS 22 does not require any reconciliation between accounting profit and the tax 
expense. 
Balance sheet 
The break-up of deferred tax assets and deferred tax liabilities into major 
components of the respective balance should be disclosed in the notes to 
accounts. 
© The Institute of Chartered Accountants of India