As 22

SUB REGIONAL CONFERENCE & 19th ANNUAL CONFERENCE of HUBLI BRANCH
Deferred Taxation AS 22 and

Latest Developments
K.GURURAJ ACHARYA CHARTERED ACCOUNTANT TELEFAX: (080) 2336 1800 acharyaguru@yahoo.com
AS 22 Accounting for Taxes on Income
ICAI Statements
Standards
(Mandatory)
Guidance Notes
(Recommendatory)
Accounting Standards ( 29 + 1 )
A S I (29) {7 of AS 22}
Auditing & Assurance Standards (SAP) ( 32 + 2 )
General Clarification (18)

K.G.Acharya & Co., Chartered Accountants
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Accounting Standards u/s.211(3c)

(wef 31.10.1998)
Accounting Standard means the standard of accounting: Recommended by ICAI and Prescribed by Government in Consultation with the NACAS constituted u/s 210A(1) of the Companies Act, 1956.
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4.(d) In our opinion, the Balance Sheet, P&L Account and the
Deviation from AS
Cash Flow Statement dealt with by this report comply with the AS referred to in Sec. 211(3C) of the Companies Act, 1956 subject to the following observations: Certain Transactions are accounted on cash basis vide significant policy No. 2. Further contract works / certain consultancy works undertaken by the company are not accounted on accrual basis vide note 11 on the accounts. The extent of impact on accounts is not ascertained. Accounting Policy No. 13(b) is not in accordance with AS 10 on Fixed Assets. Certain transaction accounted under this policy has the effect of overstating value of Fixed Assets, Depreciation and profit by Rs. 2.05 Crores, Rs. 0.16 Crores and Rs. 1.89 Crores respectively
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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. Enterprises with > 40 Lacs but < 50 crores Turnover. > 1 crore but < 10 crores borrowings Holding & subsidiary cos of above. Other than Level - I & Level - II cases w.e.f 17-Sep-2003
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Level - II
Level - III
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. 01.04.2004
01.04.2006
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Deferred Tax
Deferred Taxes are Income Tax which arise in one period but because of Timing Difference will have to be actually paid in later years.
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Timing differences -TD- Differences between TI and AI for a period that originate in one period and are capable of reversal in one or more subsequent periods.
Permanent differences -PD- are the differences between TI and AI for a period that originate in one period and do not reverse subsequently.
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Deferred Tax
Taxable Income
Accounting Income
As per P&L A/c As per IT Return
Current Tax
(applicable rate/law)
Rs. 70 cr
Timing Difference Rs. 20 cr
Tax Expense
Deferred Tax
(substantively enacted rates /law) Average rate ?
Rs. 100 cr
Permanent Difference
Rs. 10 cr
No Tax effect
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Deferred Tax
Accounting Income
As per P&L A/c
Taxable Income
As per IT Return
Rs. 80 cr
Current Tax
Rs. 90 cr
(DTL)
or
Timing Difference
Reversal or DTA
DTA Prudence
Rs. 20 cr
Permanent Difference
Rs. 10 cr
No Tax effect
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Computation of DT
STI
AI +/- PD +/- TD TI
CT = IT on TI (Applicable tax rates/laws) DT = IT on (+\- TD)(Latest known tax rates/laws) TE = CT DT
(MAT - CT) is to be finally added to TE as a special case
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Case Study -1
As as 31st March PBT - AI Add: Depreciation - A/c's Less: Depreciation - IT Total Income - TI TD-being Depn differential CT -30% of IT DT-30% of TD Tax Exp.(CT-DT) TE= IT on (AI+/-PD)
1 100 20 30 90 -10
Computer Pur. value (Rs. In Crores) 50 2 3 4 100 100 100 12 7 4 12 5 2 100 102 102 0 2 2 31 1 30 30
Depreciation Rate Tax Rate Co's Act IT Act 40% 60% 30% 5 6 7 8 9 10 100 100 100 100 100 100 1000 3 2 1 1 0 0 50 1 0 0 0 0 0 50 102 101 101 101 100 100 1000 2 1 1 1 0 0 0 30 0 30 30 30 0 30 30 30 0 30 30 30 300 0 0 30 300 30 300
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27 30 -3 0 30 30 30 30
31 31 30 1 1 0 30 30 30 30 30 30

(Rs. In Crores) Co's Act IT Act 50 40% 60% 2 3 4 5 6 7 100 100 100 100 100 100 12 7 4 3 2 1 0 7 0 0 0 9 11 12 13 14 15 16 12 5 2 1 0 0 5 0 0 7 0 0 20 20 20 20 20 20 86 101 95 89 96 106 -5 9 2 -5 1 10 26 -2 27 27 91 30 3 28 28 92 29 1 28 28 93 27 -2 28 28 94 29 0 29 29 95 32 3 29 29 96
As as 31st March 1 PBT - AI 100 Add: Depreciation - A/c's 20 43B disallowance 5 40A(3) disallowance 10 Less: Depreciation - IT 30 43B disallowance 0 Sec.10 exemption 20 Total Income - TI 85 TD -5 CT -IT on TI DT-30% of TD Tax Exp.(CT-DT) TE= IT on (AI+/-PD) AI+/- PD 26 -2 27 27 90
8 100 1 0 17 0 0 20 98 1 29 0 29 29 97
30% 9 100 0 0 18 0 9 20 89 -9 27 -3 29 29 98
10 100 1000 0 50 0 21 19 0 50 0 21 20 99 1000 0 0 30 0 30 30 99 283 0 284 284 945
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Case Study - No. 3

ABCL reported Accounting income of Rs. 9 Crores for FY 2004-05.
The following data are provided:

(Rs. In Crores)
CT
DT
TD
Sales tax not paid until filing of Return of Income Income from exempted Govt. Bonds Depreciation as per Books of Accounts Depreciation as per Income Tax Act Disallowance U/s. 40A(3)
3.00 2.00 5.00 10.00 1.00
+ + +
PD
}Difference
}is TD
PD
Compute:
1. CT
IT on TI
TI = TD =
2. DT IT on +/- TD 3. TE CT - DT
(9+3-2+5-10+1) = 6 CT = 35% of 6 = 2.10 [(3+(5-10)] = -2 DTL = 30% of -2 = - 0.60 2.10 - (-0.60) or 2.10 + 0.60 = 2.70
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AS - 22 - Taxes on Income
CASE STUDY -4 Computation of Deferred Tax
31.3.2005 31.3.2004 (Amt in Rs.) 2393768 372917 2766685 1590784 802984 2393768
Deferred Tax Liability for earlier years Deferred Tax Liability for the current year
TD Liability: DT @ DT @ Relating to fixed asset: 31.3.2005 33.66% 31.3.2004 35.875% WDV as per Companies Act 29849597 20063103 WDV as per Income Tax. Act 21630092 13390579 8219505 6672524
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DTA v/s DTL

Accounting Income > Taxable Income
Create DTL
Accounting Income < Taxable Income

Reversal of DTL or Creation of DTA s.t PRUDENCE
Accounting Income = Taxable Income

Neither DTA nor DTL
Accounting Loss = Taxable Loss

Create DTA subject to PRUDENCE
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Scope of AS 22
Taxes on income include all domestic and foreign taxes, which are based on taxable income
Does not cover Dividend Distribution Tax.
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Recognition of Deferred Tax Asset

Consideration of PRUDENCE is a must while recognizing DTA
DTA Arising due to Basis of Recognition Unabsorbed Business Virtual Certainty (Judgment) & & Depreciation Loss Convincing Evidence (Fact)
ASI 9
Other than above
Reasonable Certainty
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Re-Assessment v/s Review
Re-Assessment (Right)
Relates to DTA Previously unrecognized
Review (Duty)
Relates to DTA Previously recognized
Not a prior period item as per AS-5 unless it was a mistake
AS 22 does not mention review or re-assessment of DTL

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Transitional Provisions
On the first occasion, the enterprise should recognize, the deferred tax balance that has accumulated prior to adoption of this statement as DTA/DTL with the corresponding credit/charge to the revenue reserves. Non Corporate Entities : Capital Account
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Presentation of DT Balance Sheet (ASI-7)

Share capital Reserves Secured loans Unsecured loans Deferred tax liability Total Fixed assets Investments Deferred tax asset Net Current Assets Total
PROFIT AND LOSS ACCOUNT
I. INCOME Gross Sales Less: Excise Duty Net Sales Other Income TOTAL - I II. EXPENDITURE Material Cost Employees' Remuneration & Benefits Manufacturing Expenses Repairs & Maintenance Selling, General & Administration Expenses Interest Depreciation TOTAL - II III. PROFIT BEFORE TAX (I-II) IV. Provision for Current Taxation Provision for Deferred Tax Provision for Fringe Benefit Tax V. Profit after Tax (III - IV)
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Disclosure
Break-up of major components of DTA / DTL to be disclosed. DTA and DTL to be set off if permissible under tax laws but to be shown separately otherwise. Evidence supporting the recognition of DTA to be disclosed, if an enterprise has Unabsorbed Depreciation / Tax Losses to be carried forward.
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Presentation of CT - Para 27
An Enterprise should offset assets and liabilities representing current tax if the enterprise: a) has a legally enforceable right to set off the recognized amounts; and b) intends to settle the asset and the liability on a net basis
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Accounting Standard 22
Accounting for Taxes on Income
ISSUES & LATEST DEVLOPMENTS
Timing Difference Ex..

Difference in net block of fixed assets between tax and accounts Difference in Depreciation due to Different rates / methods Pro rata treatment Vs. 180 days (in I year) Exchange fluctuation of FC liability incurred for FA purchase. - As-11(R) Vs. Sch.VI Vs. S. 43A Up to Rs. 5000 assets write off under Companies Act Impairment Loss as per AS-28 Sale Proceeds Cr. to Block of Asset as per IT Act Vs. Profit / Loss on sale of FAs recognised in P&L A/c Purchase of Scientific Research Assets [35(2)]
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Timing Difference Ex.

Expenses Dr. to P & L A/c on accrual basis but allowed on actual payment.
Payments made without TDS, but disallowed for tax purposes u/s 40(a)(i) / (ia) and allowed when relevant tax is deducted & paid subsequently Expenditure U/s 43B of Income Tax Act Provision for Gratuity u/s 40A(7) Provisions made in the P&L A/c in anticipation of liabilities allowed when liabilities crystallize
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Timing Difference Ex..

Provision for doubtful debts / advance Provision for warranties Preliminary expenses written off fully when incurred (U/s 35D) Expenses amortized in books of Accounts over a period of years but a shorter or longer period is allowable for tax purposes
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Permanent Difference Ex...

Amortization of goodwill considered as disallowable expense Personal expenditure disallowed by tax authorities Penalty (Not being compensatory) Payments disallowed U/s 40(A)(3) Donations disallowed U/s 80G Remuneration to partners disallowed U/s 40(b) Scientific research expenditure.(only weighted element) Exemptions u/s 10/10A/10B Deductions U/s 80IA / IB / IC Financial Lease - Circular No. 2 (dtd. 9th Feb 2001 post AS 19 tax position) Additional Depreciation on Revaluation
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Financial Implication of Deferred Tax:

(1) Effect of Deferred tax on Income Tax
(2) Effect on Current Ratio

(3) Affects Net Worth Thereby affecting - Limits under Companies Acceptance of Deposits Rules
- Eligibility to make investments

- Determination of Sickness for BIFR purposes
(4) Affects Debt -Equity Ratio and TOL / TNW (Double edged sword)
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(6)
Affects Net Profit Ratio (PAT/Net Sales)
(7) Affects EPS
(8)
Affects Dividend declaration - No specific reference in the Company Law on DT.

(PBT loss V PAT Profit position Impact on dividend and Audit report)
(9)
Affects Capital Adequacy Norms in case of banks (Tier-I & Tier-II Capital) - Capital to Risk Weighted Assets Ratio (CRAR)
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Issues relating to DTA / DTL:

(1) Accounting for Taxes on Income in case of an Amalgamation as per AS-14 (ASI 11)
(2) Is it OK not to recognize DTL on the ground that the enterprise intends to carry out a major capital expansion programme in near future?
(3) Is it OK not to recognize DTL on the ground that the company expects that there will be losses both for accounting and tax purposes in near future?
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(4) Accounting for Taxes on Income in Interim Financial Reports as per AS-25
(5) Accounting for Taxes on Income in Consolidated Financial Statements as per AS21 ASI 26 : Total TE = TE in Parent Co + TE in Subsidiary Co. GC 18/2002 : DT in CFS = simple aggregation of DT balances across the group
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(6) ASI 3: Accounting for Taxes on Income in the situations of Tax Holiday U/S 80-IA and 80-IB of the Income-tax Act, 1961 ASI 5: Accounting for Taxes on Income in the situation of Tax Holiday U/S 10A and 10B of the Income-tax Act,1961 ASI 4: Losses under the head Capital Gains ASI 6: Accounting for Taxes on Income in the context of S. 115JB of the Income-tax Act, 1961 MAT credit whether Current Tax ?
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(7)
(8) (9)

Case Study - No. 5 Computation of Curre nt Tax and De fe rre d Tax unde r S.80IA/80IB/80IC Ye ar De pre ciation TD CT De fe rre d Accumulated Tax Books IT @ 30% Tax DTL/DTA Expe nse (a) (b) (c) (d)=(c-b) (e ) (f)=(d*30%) (g) (h)=(e +f) 1 100 375 275 (O) 0 14 14 14 2 100 281 181 (O) 0 54 68 54 3 100 211 111 (O) 0 33 102 33 4 100 158 58 (O) 0 17 119 17 5 100 119 19 (O) 0 6 125 6 6 100 89 (11) (R) 0 0 125 0 7 100 67 (33) (R) 0 0 125 0 8 100 50 (50) (R) 0 0 125 0 9 100 38 (62) (R) 0 0 125 0 10 100 28 (72) (R) 0 0 125 0 11 100 21 (79) (R) 294 (24) 101 270 12 100 16 (84) (R) 295 (25) 76 270 13 100 12 (88) (R) 296 (26) 49 270 14 100 9 (91) (R) 297 (27) 22 270 15 100 7 (93) (R) 298 (28) (6) 270
Note: Deferred Tax, for the first year, is calculated after considering the reversal within 10 years.
-3 -10 -15 -19 -22
-69
I.e
275
(229) 46 @ 30% = -69
14
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AS 22 Conclusion
- Increases transparency Matching / accrual concept upheld - Tax effect Accounting - ensures that Tax Charge in
future accounting periods is not vitiated by Timing Differences
- Aligns our AS with global AS
- Catch 22 standard
- A Tough job for CAs certifying on DT.
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THE BEGINNING
K. GURURAJ ACHARYA TELFAX: 080-2336 1800 acharyaguru@yahoo.com

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As 22

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SUB REGIONAL CONFERENCE & 19th ANNUAL CONFERENCE of HUBLI BRANCH

Deferred Taxation AS 22 and

K.GURURAJ ACHARYA CHARTERED ACCOUNTANT TELEFAX: (080) 2336 1800 acharyaguru@yahoo.com

AS 22 Accounting for Taxes on Income

Auditing & Assurance Standards (SAP) ( 32 + 2 )

General Clarification (18)

AS 22 Accounting for Taxes on Income

Accounting Standards u/s.211(3c)

AS 22 Accounting for Taxes on Income

AS 22 Accounting for Taxes on Income

AS 22 Accounting for Taxes on Income

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

AS 22 Accounting for Taxes on Income

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

AS 22 Accounting for Taxes on Income

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

10 100 1000 0 50 0 21 19 0 50 0 21 20 99 1000 0 0 30 0 30 30 99 283 0 284 284 945

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

Case Study - No. 3

The following data are provided:

3.00 2.00 5.00 10.00 1.00

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

CASE STUDY -4 Computation of Deferred Tax

AS 22 Accounting for Taxes on Income

DTA v/s DTL

Accounting Income < Taxable Income

Accounting Income = Taxable Income

Accounting Loss = Taxable Loss

AS 22 Accounting for Taxes on Income

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

Recognition of Deferred Tax Asset

Other than above

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

Re-Assessment v/s Review

Not a prior period item as per AS-5 unless it was a mistake

AS 22 does not mention review or re-assessment of DTL

AS 22 Accounting for Taxes on Income

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

Presentation of DT Balance Sheet (ASI-7)

PROFIT AND LOSS ACCOUNT

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

ISSUES & LATEST DEVLOPMENTS

AS 22 Accounting for Taxes on Income

Timing Difference Ex..

K.G.Acharya & Co., Chartered Accountants

AS 22 Accounting for Taxes on Income

Timing Difference Ex.