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Accounting Standards For Deferred Tax

Taxes on income include all domestic and foreign

Scope of AS 22

taxes, which are based on taxable income Does not cover Dividend Distribution Tax. Accounting Standard means the standard of accounting: Recommended by ICAI and Prescribed by Government

Applicability of AS 22 For All Levels - I / II/ III


Companies listed and in the 01.04.2001 process of listing in India including Group companies.

In respect of other companies not 01.04.2002 covered above. In respect of all other enterprises. 01.04.2006

Levels of operation
Level - I
Listed/Proposed to be listed Cos Banks, FIs, Insurance Cos Enterprises with > 50 crores Turnover in preceding year > 10 crores borrowings at any time during the year Holding & subsidiary Cos of above.

Level - II

Enterprises with > 40 Lacs but < 50 crores Turnover. > 1 crore but < 10 crores borrowings Holding & subsidiary cos of above.

Level - III

Other than Level - I & Level - II cases

DEFERRED TAX
MEANING : Tax Effect Of Timing Differences.
TYPES OF DIFFERENCES :
TIMING DIFFERENCE : 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 DIFFERENCE : Differences between taxable income


and accounting income for a period that originate in one period and do not reverse subsequently.

Why deferred Income Tax is important


Provides a more accurate calculation of accrual

earnings, also help I true future performance predictions Provides a more accurate measure of equity earning positions Moderate earning by increasing the tax liabilities in good year & decreasing the tax liabilities in bad year When deferred tax decreases from one balance sheet to next, a tax reversal is created thereby providing cushion to business operation

TAX EXPENSE : = Current tax + Deferred Tax TAX EFFECTS :

TIMING DIFFERENCE : Tax Effects are included in tax expense

as deferred tax assets and deferred tax liabilities.


PERMANENT DIFFERENCE : Tax Effects are not included in tax expense

as deferred tax assets and deferred tax liabalities.

Understanding the impact of deferred tax on business


It is vital for management decision making &

monitoring. In market value balance sheet what equity reflects & equity in operation may differ if the differ tax is not included.

Deferred tax under various circumstances:


An asset whose carrying value exceeds its tax basis

will result in a deferred tax liability. An asset whose carrying value is less than its tax basis will result in a deferred tax asset. A liability whose carrying value exceeds its tax basis will result in a deferred tax asset. A liability whose carrying value is less than its tax basis will result in a deferred tax liability.

DEFERRED TAX ASSESTS AND LIABILITIES :


Deferred tax assets and liabilities should be measured

using the tax rates and tax laws that have been enacted by the balance sheet date.
For different tax rates for levels of income average

rates should be used for deferred tax assets and liabilities


Deferred tax assets and liabilities should not be

discounted to their present value

ROLE OF ENTERPRISE AND IMPLEMENTATION : An enterprise should offset deferred tax assets and deferred tax

liabilities if:
i.

If the enterprise has a legal right to set off assets against liabilities representing current tax The deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.

ii.

iii. Intends to settle the asset and the liability on a net basis.

Implementation of Deferred Tax Assets and Liabilities can be

done when :
a. Deferred tax assets and liabilities should be distinguished from

assets and liabilities representing current tax for the period.


b. 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.
c. 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.

d.

The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation. ILLUSTRATION : A company, ABC Ltd., prepares its accounts annually on 31st March. On 1st April, 20x1, it purchases a machine 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.

a)

b. 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:

CURRENT TAX

20x1 (Rupees in thousands) Profit before depreciation and taxes 200

20x2

20x3

200

200

Depreciation as per Taxation

150

Profit before Tax (Taxation P & L)

50

200

200

Tax (@ 40%)

(a)

20

80

80

DEFERRED TAX
(Rupees in thousands)

20x1

20x2

20x3

Tax Effect of timing differences originating during depreciation

150

Less: Depreciation as per Accounts


Profit reduced by (b)

50

50

50

100 40

(50)

(50)

Deferred Tax Liability (b) * 40% (Since Rs 40/- is required to be paid in future)
Tax effect of timing differences reversing during the year (b) * 40%

(20)
40 (20)

(20)
(20)

Statement Of Profit And Loss For 3 Years


(Rupees

in thousands)

20x1 200 50

20x2 200 50

20x3 200 50

Profit before depreciation and tax Less: depreciation for accounting purpose Profit Before Taxes Tax expensesCurrent Tax (a) Deferred Tax- (b)

150

150

150

20 40 60

80 (20) 60

80 (20) 60

Profit After Tax

90

90

90

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