Accounting for Taxes on Income Contents - webtel.in

1 420 AccountingStandard(AS)22(issued2001)Acco untingforTaxesonIncomeContentsOBJECTIVES COPEP aragraphs1-3 DEFINITIONS4-8 RECOGNITION9-19Re-assessmentofUnrecognis edDeferredTaxAssets19 MEASUREMENT20-26 ReviewofDeferredTaxAssets26 PRESENTATIONANDDISCLOSURE27-32 TRANSITIONALPROVISIONS33-34 APPENDICEST hefollowingAccountingStandardsInterpreta tions(ASIs)relatetoAS22: RevisedASI3-AccountingforTaxesonIncomein thesituationsofTaxHolidayunderSections80 -IAand80-IBoftheIncome-taxAct,1961 RevisedASI4-LossesundertheheadCapitalGai ns ASI5-AccountingforTaxesonIncomeinthesitu ationsofTaxHolidayunderSections10 Aand10 BoftheIncome-taxAct,1961 ASI6-AccountingforTaxesonIncomeinthecont extofSection115 JBoftheIncome-taxAct, ASI7-Disclosureofdeferredtaxassetsanddef erredtaxliabilitiesinthebalancesheetofac ompany ASI9-VirtualCertaintySupportedbyConvinci ngEvidence (AS)22(issued2001)AccountingforTaxesonIn come(ThisAccountingStandardincludesparag raphssetinbolditalictypeandplaintype, )AccountingStandard(AS)

2 22, AccountingforTaxesonIncome ,issuedbytheCounciloftheInstituteofChart eredAccountantsofIndia, :(a) ,inrespectofthefollowing:i)Enterpriseswh oseequityordebtsecuritiesarelistedonarec ognisedstockexchangeinIndiaandenterprise sthatareintheprocessofissuingequityordeb tsecuritiesthatwillbelistedonarecognised stockexchangeinIndiaasevidencedbytheboar dofdirectors )Alltheenterprisesofagroup,iftheparentpr esentsconsolidatedfinancialstatementsand theAccountingStandardismandatoryinnature inrespectofanyoftheenterprisesofthatgrou pintermsof(i)above.(b) ,inrespectofcompaniesnotcoveredby(a) , AnnouncementsoftheCouncilregardingstatus ofvariousdocumentsissuedbytheInstituteof CharteredAccountantsofIndia (c) , ,issuedbytheInstitute of Chartered Accountants of India in 1991, stands withdrawn , , ,therearedifferencesbetweenitemsofrevenu eandexpensesasappearinginthestatementofp rofitandlossandtheitemswhichareconsidere dasrevenue, , , Council at its meeting held on June 24-26, 2004, decided to defer the applicabilityoftheStandardsoastomakeitma ndatorytosuchenterprisesinrespectofaccou ntingperiodscommencingonorafter1-4-2006.

3 [ForfulltextoftheAnnouncement,referencem aybemadetothesectiontitled AnnouncementsoftheCouncilregardingstatus ofvariousdocumentsissuedbytheInstituteof CharteredAccountantsofIndia appearingatthebeginningofthisCompendium. ]424AS22(issued2001) , ,orhow, ,thefollowingtermsareusedwiththemeanings specified:Accountingincome(loss)isthenet profitorlossfor aperiod,asreportedinthestatementofprofit andloss, (taxloss)istheamountoftheincome(loss)for aperiod,determinedinaccordancewiththetax laws,baseduponwhichincometaxpayable(reco verable) (taxsaving) (recoverable)inrespectofthetaxableincome (taxloss) , ,ifforthepurposeofcomputingtaxableincome ,thetaxlawsallowonlyapartofanitemofexpen diture, , chargedonthemachineryforaccountingpurpos esandtheamountallowedasdeductionfortaxpu rposeswillultimatelybethesame, ,forthepurposeofcomputingtaxableincome,t axlawsallowdepreciationonthebasisof thewrittendownvaluemethod,whereasforacco untingpurposes, ,subjecttoconsiderationofprudence(seepar agraphs15-18).

4 ,comprisingcurrenttaxanddeferredtax, (issued2001) (subjecttotheconsiderationofprudenceasse toutinparagraphs15-18)orasdeferredtaxlia bilities, , (s).Anexampleoftaxeffectofatimingdiffere nceresultinginadeferredtaxliabilityisthe higherchargeofdepreciationallowableunder theIncome-taxAct,1961, ,thedifferentialwillreversewhencomparati velylowerdepreciationwill be allowed for tax , ,whethercurrentordeferred, , , , , ,whenanenterprisehasahistoryofrecentloss es, , , ,asthecasemaybe(seeparagraphs15to18), , (recoveredfrom)thetaxationauthorities, (ASI)9, (issued2001) , , , , ,butnottorequire, , ,asthecasemaybe(seeparagraphs15to18), ,asthecasemaybe(seeparagraphs15to18), :(a)hasalegallyenforceablerighttosetofft herecognisedamounts.

5 And(b) :(a)theenterprisehasalegallyenforceabler ighttosetoffassetsagainstliabilitiesrepr esentingcurrenttax;and(b) , , ,theenterpriseshouldrecognise,inthefinan cialstatements,thedeferredtaxbalancethat hasaccumulatedpriortotheadoptionofthisSt atementasdeferredtaxasset/liabilitywitha correspondingcredit/chargetotherevenuere serves,subjecttotheconsiderationofpruden ceincaseofdeferredtaxassets(seeparagraph s15-18).Theamountsocredited/chargedtothe revenue5 See alsoAccountingStandardsInterpretation(AS I)7, (issued2001) ,theopeningbalancesofassetsandliabilitie sforaccountingpurposesandfortaxpurposesa recomparedandthedifferences,ifany, ,ifany,shouldberecognisedasdeferredtaxas setsorliabilities, ,intheyearinwhichanenterpriseadoptsthisS tatement, ,assumingthatenactedtaxratefortheyearis4 0%andthattherearenoothertimingdifference s, [( )x40%] , (whichisnil) ,adeferredtaxassetwouldberecognisedinres pectofthisdifferencesubjecttotheconsider ationofprudence(seeparagraphs15-18).

6 6 Itisclarifiedthatanenterprise,whichappli esAS22forthefirsttimeinrespectofaccounti ngperiodcommencingon1stApril,2001,should determinetheamountoftheopeningbalanceoft heaccumulateddeferredtaxbyusingtherateof incometaxapplicableason1stApril,2001.(Se e TheCharteredAccountant ,October2001, ).Appendix1 AccountingforTaxesonIncome431 Examples of Timing ,1961,asamendedbytheFinanceAct, , )Expenditureofthenaturementionedinsectio n43B( ,duty,cess,fees,etc.) )Paymentstonon-residentsaccruedinthestat ementofprofitandlossonmercantilebasis,bu tdisallowedfortaxpurposesundersection40( a)(i) ) ( , )orifamortizationfortaxpurposesisoveralo ngerorshorterperiod( ,expensesincurredforamalgamationundersec tion35DD,prospectingexpensesundersection 35E).

7 :a) ) ) (issued2001) ) ( ) ,ABCLtd., ,20x1, ,50, , ,00, ,50, , life for Accounting purposes, the amount of the tax saving should also bespreadoverthesameperiodasshownbelow:St atementofProfitandLoss(forthethreeyearse nding31stMarch,20x1,20x2,20x3)(Rupeesint housands)20x120x220x3 Profitbeforedepreciationandtaxes20020020 0 Less:Depreciationforaccountingpurposes50 5050 Profitbeforetaxes150150150 (200 150) (200)8080434AS22(issued2001) (150 50) (0 50)(20)(20)Taxexpense606060 Profitaftertax909090 Nettimingdifferences100500 Deferredtaxliability40200In20x1, ,00,000and,therefore, , , , , , , , ,00,000whileineachofthefollowingtwoyears .

8 Year20x1 ,000 ToCurrenttaxA/c20,000(Being the amount of Taxes payable for the year 20x1 provided for) ,000 ToDeferredtaxA/c40,000( ,00,000)Year20x2 ,000 ToCurrenttaxA/c80,000(Being the amount of Taxes payable for the year 20x2 provided for) ,000 ToProfitandLossA/c20,000( ,000)Year20x3 ,000 ToCurrenttaxA/c80,000(Being the amount of Taxes payable for the year 20x3 provided for) ,000 ToProfitandLossA/c20,000( ,000)Inyear20x1, , , , ,000andbeshownseparatelyfromthecurrentta x436AS22(issued2001) , , ,itwouldbenecessaryfortheenterprisetoadj usttheamountofdeferredtaxliabilitycarrie dforwardbyapplyingthetaxratethathasbeene nactedorsubstantivelyenactedbythebalance sheetdateonaccumulatedtimingdifferencesa ttheendoftheaccountingyear(seeparagraphs 21and22).

9 Forexample,ifinIllustration1,thesubstant ivelyenactedtaxratesfor20x1,20x2and20x3a re40%,35%and38%respectively,theamountofd eferredtaxliabilitywouldbecomputedasfoll ows:Thedeferredtaxliabilitycarriedforwar deachyearwouldappearinthebalancesheetasu nder:31stMarch,20x1= (1,00,000)= ,00031stMarch,20x2= (50,000)= ,50031stMarch,20x3= (Zero)=Rs. ZeroAccordingly,theamountdebited/(credit ed)totheprofitandlossaccount(withcorresp ondingcreditordebittodeferredtaxliabilit y)foreachyearwouldbeasunder:31stMarch,20 x1 Debit= ,00031stMarch,20x2(Credit)=Rs. (22,500)31stMarch,20x3(Credit)=Rs. (17,500)Illustration3 Acompany,ABCLtd., ,00, ,000and60, ,losscanbecarriedforwardfor8yearsandtaxr ateis40%andattheendofyear20x1,itwasvirtu allycertain,supportedbyconvincingevidenc e, (forthethreeyearsending31stMarch,20x1,20 x2,20x3)(Rupeesinthousands)20x120x220x3 Profit(loss)(100)5060 Less:Currenttax (4)Deferredtax:Taxeffectoftimingdifferen cesoriginatingduringtheyear40 Taxeffectoftimingdifferencesreversingdur ingtheyear(20)(20)Profit(loss)aftertaxef fect(60)3036