as 22 deferred taxes

Accounting for Taxes on Income-

AS 22

CA Siddharth Ranjan

14 April 2012

Agenda

1. Back ground 2.  A case study 3. Scope 4. Definitions 5. Recognition 6. Re-assessment of Unrecognized

Deferred Tax Assets 7. Measurement 8. Review of Deferred Tax Assets 9.  Presentation & Disclosure 10.  Transitional provisions

2 CA Siddharth Ranjan

Back ground

Taxable profit and accounting profit for a period may be different for the following two reasons: (a) differences between items of revenue and expenses as appearing in the statement of profit and loss and the items which are considered as revenue, expenses or deductions for tax

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Back ground (contd.)

(b) differences in amount with respect to a particular item of revenue or expense as recognized in the statement of profit and loss for accounting and as recognized for Tax purposes


Back ground (contd.)

Matching principle:

In accordance with the matching concept; taxes on income should be accrued (matched) in the same period as the revenue and expenses.


2. A Case Study


Case Study -1 Computer Pur. value Tax Rate(Rs. In Crores) Co's Act IT Act

50 40% 60% 30%As as 31st March 1 2 3 4 5 6 7 8 9 10PBT - AI 100 100 100 100 100 100 100 100 100 100 1000Add: Depreciation - A/c's 20 12 7 4 3 2 1 1 0 0 50Less: Depreciation - IT 30 12 5 2 1 0 0 0 0 0 50Total Income - TI 90 100 102 102 102 101 101 101 100 100 1000TD-being Depn differential -10 0 2 2 2 1 1 1 0 0 0

CT -30% of IT 27 30 31 31 31 30 30 30 30 30 300DT-30% of TD -3 0 1 1 1 0 0 0 0 0 0Tax Exp.(CT-DT) 30 30 30 30 30 30 30 30 30 30 300TE= IT on (AI+/-PD) 30 30 30 30 30 30 30 30 30 30 300

Depreciation Rate

2. Case Study- Exact workings:


yr 1 2 3 4 5 6 7 8 WDV-‐Asset (Acc) 50 30 18 10.8 6.48 3.89 2.33 1.40 WDV-‐Asset (Tax) 20 8 3.2 1.28 0.51 0.20 0.08 Acc Depn:Rate 0.4 Tax Depn:Rate 0.6 Depn Acc 20 12 7.2 4.32 2.592 1.56 0.93 0.56 Depn Tax 30 12 4.8 1.92 0.768 0.31 0.12 0.05 Diff -‐10 0 2.4 2.4 1.824 1.25 0.81 0.51 Tax Savings ,@ 30% -‐3 0 0.72 0.72 0.5472 0.37 0.24 0.15

3. Scope

Taxes on income include all domestic and foreign taxes which are based on taxable income. Exclusion: This Standard does not specify when, or how, an enterprise should account for taxes that are payable on distribution of dividends and other distributions made by the enterprise.


4.Definitions

Tax expense (tax saving) is the aggregate of current tax and deferred tax charged or credited to the statement of profit and loss for the period.


Definitions (contd.)

Deferred tax is the tax effect of timing differences. OR, said otherwise: Deferred Taxes are ‘Income Tax’ which arise in one period but because of Timing Difference will have to be actually paid/ adjusted in later years.



Timing differences are the 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.


Examples of Timing differences

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


Examples of Timing differences (contd.)

– Impairment Loss as per AS-28

– Sale Proceeds Cr. to Block of Asset as per IT Act Vs. Profit / Loss on sale of FA’s recognised in P&L A/c

– P u r c h a s e o f S c i e n t i f i c Research Assets [35(2)]



Expenses debited to P & L A/c on accrual basis but allowed on actual payment.

– Payments made/ accrued to non-residents without TDS, but disallowed for tax purposes u/s 40(a)(i) / (ia) and allowed when relevant tax is deducted & paid subsequently


Examples of Timing differences (contd.) – Expenditure U/s 43B(e.g. taxes,

duty, cess, fees, etc.) of Income Tax Act, 1961; accrued in the statement of profit and loss on mercantile basis but allowed for tax purposes in subsequent years on payment basis.


Examples of Timing differences (contd.) – Provision for Gratuity u/s 40A

(7) (when it is not funded nor has crystalized)

– Provisions made in the statement of profit and loss in anticipation of liabilities where the relevant l iabi l i t ies are al lowed in subsequent years when they crystallize.



•  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



Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.


Examples of Permanent Difference •  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 •  R e m u n e r a t i o n t o p a r t n e r s

disallowed U/s 40(b)


Examples of Permanent Difference (Contd.) •  Scientific research expenditure.

(only weighted element) •  Exemptions u/s 10/10A/10B •  Deductions U/s 80IA / IB / IC •  Additional Depreciation on

Revaluation


5. Recognition

Tax expense for the period, comprising current tax and deferred tax, should be included in the determination of the net profit or loss for the period.


5. Recognition (contd.)

Deferred tax should be recognised for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets


5. Recognition (Explanation:) (a)The deferred tax in respect of timing differences which reverse during the tax holiday period is not recognised to the extent the enterprise’s gross total income is subject to the deduction during the tax holiday period as per the requirements of sections 80-IA/80- IB of the Income-tax Act, 1961 .


5. Recognition (Explanation- contd.) The deferred tax in respect of timing differences- u/s 10A/ 10B- which reverse during the tax holiday period is not recognised to the extent deduction from the total income of an enterprise is allowed during the tax holiday period as per the provisions of the said sections.


5. Recognition (Explanation- contd.) (b) Deferred tax in respect of timing differences which reverse after the tax holiday period is recognised in the year in which the timing differences originate. However, recognition of deferred tax assets is subject to the consideration of prudence.



Except, in the case of unabsorbed depreciation or carry forward of losses, allowed under tax laws; deferred tax assets should be recognised and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised.



In the case of unabsorbed depreciation or carry forward of losses, allowed under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.


5. Recognition (Explanations) Virtual certainty cannot be based merely on forecasts of performance such as business plans. Evidence is a matter of fact. To be convincing, the evidence should be available at the reporting date in a concrete form.


6. Re-assessment of Unrecognized Deferred Tax Assets

At each balance sheet date, an enterprise re-assesses and recognises previously unrecognised deferred tax assets to the extent that it has become reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which such deferred tax assets can be realised.


7. MEASUREMENT Current tax should be measured at the amount expected to be paid to (or recovered from) the taxing authorities, using the applicable tax rates and tax laws. CA Siddharth Ranjan 30

7. MEASUREMENT (contd.) Deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.


7. MEASUREMENT (contd.) When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using average rates.


Deferred tax assets and liabilities should not be discounted to their present value.


7. MEASUREMENT (contd.)

Rationale Discounting would render deferred tax assets and liabilities unfit for comparisons between enterprises.

8. Review of Deferred Tax Assets

The carrying amount of deferred tax assets should be reviewed at each balance sheet date. An enterprise should write-down the carrying amount of a deferred tax asset to the extent that it is no longer reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which deferred tax asset can be realised.


8. Review of Deferred Tax Assets (Contd.)

Any such write-down may be reversed to the extent that it becomes reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available.



Re-Assessment v/s Review

Re-Assessment (Right )

Review (Duty)

Relates to DTA Previously unrecognized

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-

Why?

9. PRESENTATION AND DISCLOSURE

An enterprise should offset deferred tax assets and deferred tax liabilities if: (a) the enterprise has a legally enforceable right to set off assets against liabilities representing current tax; and (b) the deferred tax assets and the deferred tax liabilities relate to taxes on income levied by the same governing taxation laws.


Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. 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.


9. PRESENTATION AND DISCLOSURE (Contd.)

Deferred tax assets (net of the deferred tax liabilities, if any, ) is disclosed on the face of the balance sheet separately after the head ‘Investments’ and deferred tax liabilities (net of the deferred tax assets, if any, is disclosed on the face of the balance sheet separately after the head ‘Unsecured Loans’.



Under Revised Schedule-‐VI

Equity & Liabilities

Shareholders’ funds

Share Capital

Reserve &

Surplus Money

received against share

warrants

Share application

money pending

allotment

Non Current Liabilities

Long Term Borrowings

Deferred Tax Liabilities ( Net )

Other Long Term Liabilities

Long Term Provisions

Current Liabilities

Short Term Borrowings

Trade Payables

Other Current

Liabilities

Short Term Provisions

Non Current Assets

Fixed Assets

Non Current Investments

Deferred Tax Assets ( Net )

Long Term Loans & Advances

Other Non Current Assets

Current Assets

Current Investment

Inventories

Trade Receivables

Cash & Cash Equivalents

Short Term Loans & Advances

Other Current Assets

Under Revised Schedule-‐VI

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. The nature of the evidence supporting the recognition of deferred tax assets should be disclosed, if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.



10. Transitional Provisions

On the first occasion that the taxes on income are accounted for in accordance with this Standard, the enterprise should recognise, in the financial statements, the deferred tax balance that has accumulated prior to the adoption of this Standard as deferred tax asset/liability with a corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in case of deferred tax assets. The amount so credited/charged to the revenue reserves should be the same as that which would have resulted if this Standard had been in effect from the beginning.


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)


Financial Implication of Deferred Tax (Contd.) (6)  Affects Net Profit Ratio (PAT/Net Sales) (7)  Affects EPS (8)  Affects Dividend declaration - No

specific reference in the Company Law on DT.

(9)  (PBT loss V PAT Profit position – Impact on dividend and Audit report)

(10)   Affects Capital Adequacy Norms in case of banks (Tier-I & Tier-II Capital) - Capital to Risk Weighted Assets Ratio (CRAR)


Emerging Issues:


Comparison with IFRS


Practical problems faced:


Teaching tips:


References

The Internet.

Books:


as 22 deferred taxes

Technology

tax depn

depn tax

relevant tax

taxpurposesca siddharth

tax savings

income tax act

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