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Accounting is the field of worldwide application and process of issuing equity or debt securities
having a wide range of diversity in its application. In that will be listed on a recognized stock
practical situations, it is many times observed that there exchange in India as evidenced by the
is different treatment of accounting for the same event board of directors’ resolution in this
or transaction. Thus it was necessary to give uniform regard.
accounting treatment to such transactions so as to attain
ii. All the enterprises of a group, if the parent
the objective of at true and fairness of books of
presents consolidated financial statements
accounts . It was also intended to give the best possible
and the accounting standard is mandatory
treatment to such transactions. Accounting Standards
in nature in respect of any of the
came with this basic objective.
enterprises of that group in terms of (i)
In India, The Institute of Chartered Accountants of above.
India being the apex body in the field of Accountancy
b. All the accounting periods commencing on or
issues the Accounting Standards for various matters.
after 1st April 2002, in respect of companies
On the same ground Accounting Standard (AS) 22 was
not covered by (a) above.
issued by the Institute of Chartered Accountants of
India w.e.f. 1.04.2001 c. All the accounting periods commencing on or
after 1st April 2006, in respect of all other
Now with this background we can come across the AS
enterprises.
22 for more discussions.
Thus we can now take out the extract as, first clause
Basically one should ask himself, why is this standard?
has been not applicable being the next two are
and what this standard means?
overlapping the first one. Thus we can classify the
For such basic knowledge, we should get oneself applicability broadly into two categories as before 1st
conversant with the Scope and Applicability of this April 2006 applicable to some selective entities and
standard. The scope of the standard as is as follows: after 1st April 2006.
It is mandatory in nature for: If the accounting period is commenced before 1st April
2006, the standard is applicable to all the companies.
a. All the accounting periods commencing on or
Here "company" means a company defined under
after 1st April 2001, in respect of the following:
companies act, 1956.But for the accounting periods
i. Enterprise whose equity or debt securities commencing on or after 1st April 2006, standard is
are listed on a recognized stock exchange applicable to all the Enterprises where enterprise
in India and enterprises that are in the includes partnership firms and sole proprietorship
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concerns also. Thus now the standard is going to cover which includes foreign taxes also but excludes taxes
a large group of entities and job of accountants and on distribution of profits or funds like Dividend
auditors is going to be more challenging. Distribution Tax under section 115 O of the Income
Tax Act, 1961. We consider Dividend Distribution tax
Objective:
as an appropriation of profit & any appropriation of
Secondly it is necessary to get conversant with the basic profit is not eligible for deduction under Income Tax
objective of this standard. Its objective is to prescribe Act. This means it gets automatically escaped from
accounting treatment for taxes on income. As per the the net of this standard.
Matching concept of accounting, Taxes on income are
Before we go for working part of the standard, it will
accrued in the same period of the revenue and expenses
be desirable for us to know the definitions quoted for
to which they are related. i.e. there has to be a
the purpose of this standard.
correlation between the revenue for the period and the
expenditure incurred for earning the revenue. But it 1. Accounting Income (loss): It is the net profit or
generally observed that there are various counts where loss for a period, as reported in the statement
accounting income significantly defers from taxable of profit and loss, before deducting income tax
income. This divergence arises due to difference in expense or adding income tax saving.
the Accounting Principles & Tax Laws. The standard
i.e. it is a book profit arrived at applying the
helps to explain how to tackle those differences .For
Generally Accepted Accounting Practices.
Instance we can quote an example as under.
2. Taxable Income (Tax Loss): It is the amount of
There is a deduction available for certain assets such
the income (loss) for a period, determined in
as expenditure on scientific research (capital nature)
accordance with the tax laws, based upon which
under section 35 of the Income Tax Act, 1961. Though
income tax payable (recoverable) is determined.
the benefits of such assets are spread over the economic
life of the asset the entity is going to get weighted 3. Tax Expense (Tax Saving): It is aggregate of
deduction under the said section after compliance of current tax and deferred tax charged or credited
provisions. This situation is contrary to the Matching to the statement of profit and loss for the period.
Concept of accounting leading towards difference in 4. Current tax: It is the amount of income tax
taxable income & accounting income. determined to be payable (recoverable) in
We will get due knowledge about this in due course respect of the taxable income (tax loss) for the
but its important to know basically what is the scope period.
of this standard. As per bare text of the Accounting 5. Deferred tax: It is the tax effect of timing
Standard: differences.
1. This Statement should be applied in accounting 6. Timing Differences: These are the differences
for taxes on income. This includes the between taxable income and accounting income
determination of the amount of the expense or for a period that originate in one period and
saving related to taxes on income in respect of capable of reversal in one or more subsequent
an accounting period and the disclosure of such periods.
an amount in the financial statements.
Timing differences are temporary differences
2. For the purposes of this statement, taxes on between the accounting income & taxable
income include all domestic and foreign taxes, income, which are capable of reversal in
which are based on taxable income. subsequent periods. In short the impact on tax
3. This statement does not specify when, or how, due to the difference originated in one period gets
an enterprise should account for taxes on nullified over future period
distribution of dividends and other distributions For this purpose we will consider one example:-
made by the enterprise.
An asset is purchased on 1.04.2001 on which
Thus, this standard has specific scope of application, under Companies Act depreciation is to be
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charged at 18.91% where as Income Tax Act rate 6. Net out the aforesaid timing differences resulting
of depreciation is 25%. This leads to Timing towards either net deferred tax asset or net
Difference as in the initial years the depreciation deferred tax liability.
allowable as per income tax in higher than
7. Apply the tax rates & tax law that are enacted or
provided in the books. But in the subsequent years
substantively enacted by the balance sheet date
the situation gets reversed as the depreciation
on net timing difference. (When tax rates are
allowed as per income tax gets reduced as
applied as per slabs of income, then average rate
compared to provided in the books.
should be used for calculation of deferred tax
7. Permanent Differences: These are the asset and liability)
differences between taxable income and
Deferred tax = Net Timing Difference Tax Rate
accounting income for a period that originate
in one period and do not reverse subsequently. 8. Calculate the tax expense for the period: -
Permanent Difference creates a irreversible Tax expense is an aggregate of current tax &
impact on the taxable & accounting income. deferred tax. The tax expense is to be shown in
the financial statements as a separate disclosure.
e.g. amount deducted under section 80G of the
Income Tax Act, which is allowable to the extent Also, the companies act, 1956 allows slight
of 50% only though the entire amount is debited deviation from Schedule VI for presentation of
to profit & loss A/c. once the deduction is allowed Balance sheet.
to the extent of 50%, the remaining part is not Therefore,
going to be allowed as deduction forever.
Tax expense for the period = Current tax + Deferred
Now with this much introduction of the standard we Tax
will concentrate towards the main part i.e. Computation
of Deferred Tax Asset or Liability. Special points to be kept in mind while computing
deferred tax asset or liability:-
Steps involved in recognition of deferred tax asset or
liability:- 1. Concept of prudence:-
1. Compute the profit as per books of accounts:- The deferred tax asset so calculated should be
based on concept of prudence i.e. there should
Profit as per books of accounts is computed be a reasonable assurance that the future profits
following the Generally Accepted Accounting will be available against which the deferred tax
Practices. i.e. profit is calculated by applying all asset can be realized. For example if the company
accounting conventions & principals. E.g. has got a contract for supply of raw material to a
Concept of Prudence, Concept of mutuality, foreign buyer, this gives a reasonable assurance
Concept of accrual, etc. about the future available profit to realize the
2. Ascertain the taxable profits: - deferred tax asset.
Taxable profit is computed applying the tax laws 2. No discounting of deferred tax asset or liability:-
that are enacted for the relevant assessment year. Deferred tax asset or liability should not be
discounted to their present value due to the
3. Find out the difference in the profit as per books
practical difficulty of keeping the timely record
of accounts & taxable income as calculated in
of reversals of the timing differences.
above two steps.
3. Provisions of Fringe benefit tax under section
4. Analyse the causes for differences & classify
115WJ of the Income Tax Act,1961:-
them into "Timing Differences" or "Permanent
Differences" The Amount of Fringe Benefit Tax is not at all
deductible expenditure for computation of
5. Divide the "Timing Differences" into differences
Taxable Profits. Hence it leads to Permanent
leading towards Deferred Tax Asset and Deferred
Difference. Hence it should be excluded from the
Tax Liability separately.
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ambit of this standard. From the Assessment Year 2006-07, credit for
Minimum Alternate Tax can be carried forward
4. Provisions of Minimum Alternate Tax under
to next five assessment years. Thus now it leads
section 115JB of the Income Tax Act, 1961: -
to timing Difference. Hence credit available for
In the event of Taxable losses for a corporate Minimum Alternate Tax should be considered for
assessees Minimum Alternate Tax might be this standard.
payable as per the provisions of aforesaid section.
Now we will concentrate on issue of determination of timing difference leading to Deferred Tax Asset or Liability.
How to decide the deferred tax asset or deferred tax liability:-
1. When accounting income is Tax on taxable income is lesser Deferred tax liability
greater than taxable income than tax on accounting income
2. When accounting income is Tax on taxable income is greater Deferred tax Asset
lesser than taxable income than tax on accounting income
3. When accounting loss is The opportunity to carry forward Deferred tax Liability
greater than taxable loss & set off of losses against future
profit gets restricted to the taxable
loss and that results in future more
payment of taxes.
2004-05 300000 During the year 2001-02 Company has written off
Rs. 30000/- preliminary expenses to Profit & Loss
A/c. Under Income Tax Act the qualifying sum for
amortization for 5 years is Rs. 25000.
During 2003-2004 payment of Rs. 140000/- made by bearer cheque, which will be disallowed @ 20 % under
section 40A(3).
Prepare Profit and Loss Statement using AS 22.
SOLUTION:
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Note 1: Computation of current tax.
PARTICULARS YEAR
2001-02 2002-03 2003-04 2004-05
Add back/add:
Less:
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Calculation of depreciation as per Income Tax, 1961:-
Method:- Reducing Balance method
Rate of Depreciation:- 25% for general purpose machinery on W.D.V..
Segregation in
1. Permanent Difference.
Year Timing Rate of Tax Deferred Tax Whether Deferred Tax Asset or
Difference Liability should be created
*Rs.30000 Written off to Profit & Loss A/c -- Amortization Allowed Under Income Tax Rs.25000 = Non-
qualifying Amount Rs.5000
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Presentation and Disclosure Requirements:- it should give the separate identification.
1. Deferred Tax Asset or Liability should be 2. The major components in the Deferred Tax Assets
distinguished from assets & liabilities or Liabilities should be disclosed separately. This
representing current tax for the period. It should means that the items contributing toward
be separately in the balance so as a distinguishing recognition of Deferred Tax Asset or Liability
from current assets & liabilities. should be clearly spelt out in the notes to
accounts.
Though the standard requires separate disclosure
for the Deferred Tax Asset or Liability, it does 3. The nature of evidence supporting the recognition
not specify the place in the Balance Sheet. It is of Deferred Tax Asset or Liability should be spelt
at the discretion of the Management but provided out in the Notes to accounts.
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