AS 22

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SUB REGIONAL CONFERENCE 19th ANNUAL CONFERENCE
of HUBLI BRANCH
Deferred Taxation AS 22 and Latest
Developments K.GURURAJ ACHARYACHARTERED
ACCOUNTANTTELEFAX [phone]
acharyaguru_at_yahoo.com
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ICAI Statements
Standards (Mandatory)
Guidance Notes (Recommendatory)
Auditing Assurance Standards (SAP) ( 32 2 )
Accounting Standards ( 29 1 )
A S I (29) 7 of AS 22
General Clarification (18)
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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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Deviation from AS

• 4.(d) In our opinion, the Balance Sheet, PL
  Account and the 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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• Listed/Proposed to be listed Cos
• Banks, FIs, Insurance Cos
• Enterprises with gt 50 crores Turnover in
  preceding year
• gt 10 crores borrowings at any time during the
  year
• Holding subsidiary Cos of above.

Level - I

• Enterprises with gt 40 Lacs but lt 50 crores
  Turnover.
• gt 1 crore but lt 10 crores borrowings
• Holding subsidiary cos of above.

Level - II
Level - III

• Other than Level - I Level - II cases

w.e.f 17-Sep-2003
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Applicability of AS 22 (For All Levels - I /
II/ III)
Companies listed and in the process of listing in India - including Group companies. 01.04.2001
In respect of other companies not covered above. 01.04.2002
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 As per IT Return Rs. 70 cr
Current Tax (applicable rate/law)
Tax Expense
Accounting Income As per PL A/c Rs. 100 cr
Deferred Tax (substantively enacted rates /law)
Average rate ?
Timing Difference Rs. 20 cr
Permanent Difference Rs. 10 cr
No Tax effect
10
Deferred Tax
Accounting Income As per PL A/c Rs. 80 cr
Taxable Income As per IT Return Rs. 90 cr
Current Tax
Timing Difference Reversal or DTA Rs. 20 cr
(DTL) or DTA Prudence
Permanent Difference Rs. 10 cr
No Tax effect
11
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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AS - 22 - Taxes on Income
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DTA v/s DTL

• Accounting Income gt Taxable Income
• Create DTL
• Accounting Income lt 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 Depreciation Loss Virtual Certainty (Judgment) Convincing Evidence (Fact) ASI 9
Other than above Reasonable Certainty
19

• 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

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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
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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
  PL 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 PL 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
• Effect on Current Ratio
• 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
• 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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Issues relating to DTA / DTL

• (4) Accounting for Taxes on Income in Interim
  Financial Reports as per AS-25
• Accounting for Taxes on Income in Consolidated
  Financial Statements as per AS-21
• 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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Issues relating to DTA / DTL

• 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
• (8) 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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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 ACHARYATELFAX 080-2336
1800acharyaguru_at_yahoo.com