Statements of Account|ng Standards (AS 22

)
ACCCUN1ING ICk 1AkLS CN INCCML
(lo tbls Accoootloq 5tooJotJţ tbe stooJotJ pottloos bove beeo set lo bo/d ito/ic typeŦ 1bese
sboolJ be teoJ lo tbe cootext of tbe bockqtoooJ motetlol wblcb bos beeo set lo ootmol typeţ
ooJ lo tbe cootext of tbe ´ltefoce to tbe 5totemeots of Accoootloq 5tooJotJs´1)
AccounLlng SLandard (AS) 22ţ 'AccounLlng for 1axes on lncome'ţ lssued by Lhe Councll of Lhe
lnsLlLuLe of CharLered AccounLanLs of lndlaţ comes lnLo effecL ln respecL of accounLlng perlods
commenclng on or afLer 1Ŵ4Ŵ2001Ŧ lL ls mandaLory ln naLure2 forť
(a) All Lhe accounLlng perlods commenclng on or afLer 01Ŧ04Ŧ2001ţ ln respecL of Lhe followlngť
lŦ LnLerprlses whose equlLy or debL securlLles are llsLed on a recognlsed sLock
exchange ln lndla and enLerprlses LhaL are ln Lhe process of lssulng equlLy or debL
securlLles LhaL wlll be llsLed on a recognlsed sLock exchange ln lndla as evldenced by Lhe
board of dlrecLors' resoluLlon ln Lhls regardŦ
llŦ All Lhe enLerprlses of a groupţ lf Lhe parenL presenLs consolldaLed flnanclal
sLaLemenLs and Lhe AccounLlng SLandard ls mandaLory ln naLure ln respecL of any of Lhe
enLerprlses of LhaL group ln Lerms of (l) aboveŦ
(b) All Lhe accounLlng perlods commenclng on or afLer 01Ŧ04Ŧ2002ţ ln respecL of companles noL
covered by (a) aboveŦ

(c) All Lhe accounLlng perlods commenclng on or afLer 01Ŧ04Ŧ2003ţ ln respecL of all oLher
enLerprlsesŦ
1he Culdance noLe on AccounLlng for 1axes on lncomeţ lssued by Lhe lnsLlLuLe of CharLered
AccounLanLs of lndla ln 1991ţ sLands wlLhdrawn from 1Ŧ4Ŧ2001Ŧ 1he followlng ls Lhe LexL of Lhe
AccounLlng SLandardŦ
Cb[ect|ve
1he ob[ecLlve of Lhls SLaLemenL ls Lo prescrlbe accounLlng LreaLmenL for Laxes on lncomeŦ 1axes
on lncome ls one of Lhe slgnlflcanL lLems ln Lhe sLaLemenL of proflL and loss of an enLerprlseŦ ln
accordance wlLh Lhe maLchlng concepLţ Laxes on lncome are accrued ln Lhe same perlod as Lhe
revenue and expenses Lo whlch Lhey relaLeŦ MaLchlng of such Laxes agalnsL revenue for a perlod
poses speclal problems arlslng from Lhe facL LhaL ln a number of casesţ Laxable lncome may be
slgnlflcanLly dlfferenL from Lhe accounLlng lncomeŦ 1hls dlvergence beLween Laxable lncome
and accounLlng lncome arlses due Lo Lwo maln reasonsŦ llrsLlyţ Lhere are dlfferences beLween
lLems of revenue and expenses as appearlng ln Lhe sLaLemenL of proflL and loss and Lhe lLems
whlch are consldered as revenueţ expenses or deducLlons for Lax purposesŦ Secondlyţ Lhere are
dlfferences beLween Lhe amounL ln respecL of a parLlcular lLem of revenue or expense as
recognlsed ln Lhe sLaLemenL of proflL and loss and Lhe correspondlng amounL whlch ls
recognlsed for Lhe compuLaLlon of Laxable lncomeŦ
Scope
Ŧ 1his 5totement shou/d be opp/ied in occountinq for toxes on incomeŦ 1his inc/udes the
determinotion of the omount of the expense or sovinq re/oted to toxes on income in respect of
on occountinq period ond the disc/osure of such on omount in the finoncio/ stotementsŦ
2Ŧ lor Lhe purposes of Lhls SLaLemenLţ Laxes on lncome lnclude all domesLlc and forelgn Laxes
whlch are based on Laxable lncomeŦ

3Ŧ 1hls SLaLemenL does noL speclfy whenţ or howţ an enLerprlse should accounL for Laxes LhaL
are payable on dlsLrlbuLlon of dlvldends and oLher dlsLrlbuLlons made by Lhe enLerprlseŦ
ef|n|t|ons
Ŧ lor the purpose of this 5totementţ the fo//owinq terms ore used with the meoninqs
specifiedť

4ccountinq income {/oss) is the net profit or /oss for o periodţ os reported in the stotement of
profit ond /ossţ before deductinq income tox expense or oddinq income tox sovinqŦ

1oxob/e income {tox /oss) is the omount of the income {/oss) for o periodţ determined in
occordonce with the tox /owsţ bosed upon which income tox poyob/e {recoverob/e) is
determinedŦ

1ox expense {tox sovinq) is the oqqreqote of current tox ond deferred tox chorqed or credited
to the stotement of profit ond /oss for the periodŦ

current tox is the omount of income tox determined to be poyob/e {recoverob/e) in respect of
the toxob/e income {tox /oss) for o periodŦ

ueferred tox is the tox effect of timinq differencesŦ

1iminq differences ore the differences between toxob/e income ond occountinq income for o
period thot oriqinote in one period ond ore copob/e of reverso/ in one or more subsequent
periodsŦ

Permonent differences ore the differences between toxob/e income ond occountinq income
for o period thot oriqinote in one period ond do not reverse subsequent/yŦ
Ŧ 1axable lncome ls calculaLed ln accordance wlLh Lax lawsŦ ln some clrcumsLancesţ Lhe
requlremenLs of Lhese laws Lo compuLe Laxable lncome dlffer from Lhe accounLlng pollcles
applled Lo deLermlne accounLlng lncomeŦ 1he effecL of Lhls dlfference ls LhaL Lhe Laxable lncome
and accounLlng lncome may noL be Lhe sameŦ

6Ŧ 1he dlfferences beLween Laxable lncome and accounLlng lncome can be classlfled lnLo
permanenL dlfferences and Llmlng dlfferencesŦ ÞermanenL dlfferences are Lhose dlfferences
beLween Laxable lncome and accounLlng lncome whlch orlglnaLe ln one perlod and do noL
reverse subsequenLlyŦ lor lnsLanceţ lf for Lhe purpose of compuLlng Laxable lncomeţ Lhe Lax
laws allow only a parL of an lLem of expendlLureţ Lhe dlsallowed amounL would resulL ln a
permanenL dlfferenceŦ

7Ŧ 1lmlng dlfferences are Lhose dlfferences beLween Laxable lncome and accounLlng lncome for
a perlod LhaL orlglnaLe ln one perlod and are capable of reversal ln one or more subsequenL
perlodsŦ 1lmlng dlfferences arlse because Lhe perlod ln whlch some lLems of revenue and
expenses are lncluded ln Laxable lncome do noL colnclde wlLh Lhe perlod ln whlch such lLems of
revenue and expenses are lncluded or consldered ln arrlvlng aL accounLlng lncomeŦ lor
exampleţ machlnery purchased for sclenLlflc research relaLed Lo buslness ls fully allowed as
deducLlon ln Lhe flrsL year for Lax purposes whereas Lhe same would be charged Lo Lhe
sLaLemenL of proflL and loss as depreclaLlon over lLs useful llfeŦ 1he LoLal depreclaLlon charged
on Lhe machlnery for accounLlng purposes and Lhe amounL allowed as deducLlon for Lax
purposes wlll ulLlmaLely be Lhe sameţ buL perlods over whlch Lhe depreclaLlon ls charged and
Lhe deducLlon ls allowed wlll dlfferŦ AnoLher example of Llmlng dlfference ls a slLuaLlon whereţ
for Lhe purpose of compuLlng Laxable lncomeţ Lax laws allow depreclaLlon on Lhe basls of Lhe
wrlLLen down value meLhodţ whereas for accounLlng purposesţ sLralghL llne meLhod ls usedŦ
Some oLher examples of Llmlng dlfferences arlslng under Lhe lndlan Lax laws are glven ln
Appendlx 1Ŧ

8Ŧ unabsorbed depreclaLlon and carry forward of losses whlch can be seLŴoff agalnsL fuLure
Laxable lncome are also consldered as Llmlng dlfferences and resulL ln deferred Lax asseLsţ
sub[ecL Lo conslderaLlon of prudence (see paragraphs 1Ŵ18)Ŧ
kecogn|t|on
Ŧ 1ox expense for the periodţ comprisinq current tox ond deferred toxţ shou/d be inc/uded in
the determinotion of the net profit or /oss for the periodŦ

10Ŧ 1axes on lncome are consldered Lo be an expense lncurred by Lhe enLerprlse ln earnlng
lncome and are accrued ln Lhe same perlod as Lhe revenue and expenses Lo whlch Lhey relaLeŦ
Such maLchlng may resulL lnLo Llmlng dlfferencesŦ 1he Lax effecLs of Llmlng dlfferences are
lncluded ln Lhe Lax expense ln Lhe sLaLemenL of proflL and loss and as deferred Lax asseLs
(sub[ecL Lo Lhe conslderaLlon of prudence as seL ouL ln paragraphs 1Ŵ18) or as deferred Lax
llablllLlesţ ln Lhe balance sheeLŦ

11Ŧ An example of Lax effecL of a Llmlng dlfference LhaL resulLs ln a deferred Lax asseL ls an
expense provlded ln Lhe sLaLemenL of proflL and loss buL noL allowed as a deducLlon under
SecLlon 438 of Lhe lncomeŴLax AcLţ 1961Ŧ 1hls Llmlng dlfference wlll reverse when Lhe deducLlon
of LhaL expense ls allowed under SecLlon 438 ln subsequenL year(s)Ŧ An example of Lax effecL of
a Llmlng dlfference resulLlng ln a deferred Lax llablllLy ls Lhe hlgher charge of depreclaLlon
allowable under Lhe lncomeŴLax AcLţ 1961ţ compared Lo Lhe depreclaLlon provlded ln Lhe
sLaLemenL of proflL and lossŦ ln subsequenL yearsţ Lhe dlfferenLlal wlll reverse when
comparaLlvely lower depreclaLlon wlll be allowed for Lax purposesŦ

12Ŧ ÞermanenL dlfferences do noL resulL ln deferred Lax asseLs or deferred Lax llablllLlesŦ

Ŧ ueferred tox shou/d be recoqnised for o// the timinq differencesţ subject to the
considerotion of prudence in respect of deferred tox ossets os set out in poroqrophs ŴŦ

14Ŧ 1hls SLaLemenL requlres recognlLlon of deferred Lax for all Lhe Llmlng dlfferencesŦ 1hls ls
based on Lhe prlnclple LhaL Lhe flnanclal sLaLemenLs for a perlod should recognlse Lhe Lax effecLţ
wheLher currenL or deferredţ of all Lhe LransacLlons occurrlng ln LhaL perlodŦ

Ŧ £xcept in the situotions stoted in poroqroph ţ deferred tox ossets shou/d be recoqnised
ond corried forword on/y to the extent thot there is o reosonob/e certointy thot sufficient
future toxob/e income wi// be ovoi/ob/e oqoinst which such deferred tox ossets con be
reo/isedŦ

16Ŧ Whlle recognlslng Lhe Lax effecL of Llmlng dlfferencesţ conslderaLlon of prudence cannoL be
lgnoredŦ 1hereforeţ deferred Lax asseLs are recognlsed and carrled forward only Lo Lhe exLenL
LhaL Lhere ls a reasonable cerLalnLy of Lhelr reallsaLlonŦ 1hls reasonable level of cerLalnLy would
normally be achleved by examlnlng Lhe pasL record of Lhe enLerprlse and by maklng reallsLlc
esLlmaLes of proflLs for Lhe fuLure Ŧ where on enterprise hos unobsorbed depreciotion or
corry forword of /osses under tox /owsţ deferred tox ossets shou/d be recoqnised on/y to the
extent thot there is virtuo/ certointy supported by convincinq evidence thot sufficient future
toxob/e income wi// be ovoi/ob/e oqoinst which such deferred tox ossets con be reo/isedŦ

18Ŧ 1he exlsLence of unabsorbed depreclaLlon or carry forward of losses under Lax laws ls sLrong
evldence LhaL fuLure Laxable lncome may noL be avallableŦ 1hereforeţ when an enLerprlse has a
hlsLory of recenL lossesţ Lhe enLerprlse recognlses deferred Lax asseLs only Lo Lhe exLenL LhaL lL
has Llmlng dlfferences Lhe reversal of whlch wlll resulL ln sufflclenL lncome or Lhere ls oLher
convlnclng evldence LhaL sufflclenL Laxable lncome wlll be avallable agalnsL whlch such deferred
Lax asseLs can be reallsedŦ ln such clrcumsLancesţ Lhe naLure of Lhe evldence supporLlng lLs
recognlLlon ls dlsclosedŦ
keŴassessment of Unrecogn|sed eferred 1ax Assets
19Ŧ AL each balance sheeL daLeţ an enLerprlse reŴassesses unrecognlsed deferred Lax asseLsŦ 1he
enLerprlse recognlses prevlously unrecognlsed deferred Lax asseLs Lo Lhe exLenL LhaL lL has
become reasonably cerLaln or vlrLually cerLalnţ as Lhe case may be (see paragraphs 1 Lo 18)ţ
LhaL sufflclenL fuLure Laxable lncome wlll be avallable agalnsL whlch such deferred Lax asseLs
can be reallsedŦ lor exampleţ an lmprovemenL ln Lradlng condlLlons may make lL reasonably
cerLaln LhaL Lhe enLerprlse wlll be able Lo generaLe sufflclenL Laxable lncome ln Lhe fuLureŦ
Measurement
Ŧ current tox shou/d be meosured ot the omount expected to be poid to {recovered from)
the toxotion outhoritiesţ usinq the opp/icob/e tox rotes ond tox /owsŦ

Ŧ ueferred tox ossets ond /iobi/ities shou/d be meosured usinq the tox rotes ond tox /ows
thot hove been enocted or substontive/y enocted by the bo/once sheet doteŦ

22Ŧ ueferred Lax asseLs and llablllLles are usually measured uslng Lhe Lax raLes and Lax laws LhaL
have been enacLedŦ Poweverţ cerLaln announcemenLs of Lax raLes and Lax laws by Lhe
governmenL may have Lhe subsLanLlve effecL of acLual enacLmenLŦ ln Lhese clrcumsLancesţ
deferred Lax asseLs and llablllLles are measured uslng such announced Lax raLe and Lax lawsŦ

23Ŧ When dlfferenL Lax raLes apply Lo dlfferenL levels of Laxable lncomeţ deferred Lax asseLs and
llablllLles are measured uslng average raLesŦ

Ŧ ueferred tox ossets ond /iobi/ities shou/d not be discounted to their present vo/ueŦ

2Ŧ 1he rellable deLermlnaLlon of deferred Lax asseLs and llablllLles on a dlscounLed basls
requlres deLalled schedullng of Lhe Llmlng of Lhe reversal of each Llmlng dlfferenceŦ ln a number
of cases such schedullng ls lmpracLlcable or hlghly complexŦ 1hereforeţ lL ls lnapproprlaLe Lo
requlre dlscounLlng of deferred Lax asseLs and llablllLlesŦ 1o permlLţ buL noL Lo requlreţ
dlscounLlng would resulL ln deferred Lax asseLs and llablllLles whlch would noL be comparable
beLween enLerprlsesŦ 1hereforeţ Lhls SLaLemenL does noL requlre or permlL Lhe dlscounLlng of
deferred Lax asseLs and llablllLlesŦ
kev|ew of eferred 1ax Assets
Ŧ 1he corryinq omount of deferred tox ossets shou/d be reviewed ot eoch bo/once sheet
doteŦ 4n enterprise shou/d writeŴdown the corryinq omount of o deferred tox osset to the
extent thot it is no /onqer reosonob/y certoin or virtuo//y certoinţ os the cose moy be {see
poroqrophs to )ţ thot sufficient future toxob/e income wi// be ovoi/ob/e oqoinst which
deferred tox osset con be reo/isedŦ 4ny such writeŴdown moy be reversed to the extent thot it
becomes reosonob/y certoin or virtuo//y certoinţ os the cose moy be {see poroqrophs to )ţ
thot sufficient future toxob/e income wi// be ovoi/ob/eŦ
9resentat|on and |sc|osure
Ŧ 4n enterprise shou/d offset ossets ond /iobi/ities representinq current tox if the enterpriseť
{o) hos o /eqo//y enforceob/e riqht to set off the recoqnised omountsŤ ond

{b) intends to sett/e the osset ond the /iobi/ity on o net bosisŦ
28Ŧ An enLerprlse wlll normally have a legally enforceable rlghL Lo seL off an asseL and llablllLy
represenLlng currenL Lax when Lhey relaLe Lo lncome Laxes levled under Lhe same governlng
LaxaLlon laws and Lhe LaxaLlon laws permlL Lhe enLerprlse Lo make or recelve a slngle neL
paymenLŦ
Ŧ 4n enterprise shou/d offset deferred tox ossets ond deferred tox /iobi/ities ifť
{o) the enterprise hos o /eqo//y enforceob/e riqht to set off ossets oqoinst /iobi/ities
representinq current toxŤ ond

{b) the deferred tox ossets ond the deferred tox /iobi/ities re/ote to toxes on income
/evied by the some qoverninq toxotion /owsŦ
Ŧ ueferred tox ossets ond /iobi/ities shou/d be distinquished from ossets ond /iobi/ities
representinq current tox for the periodŦ ueferred tox ossets ond /iobi/ities shou/d be disc/osed
under o seporote heodinq in the bo/once sheet of the enterpriseţ seporote/y from current
ossets ond current /iobi/itiesŦ

Ŧ 1he breokŴup of deferred tox ossets ond deferred tox /iobi/ities into mojor components of
the respective bo/onces shou/d be disc/osed in the notes to occountsŦ

Ŧ 1he noture of the evidence supportinq the recoqnition of deferred tox ossets shou/d be
disc/osedţ if on enterprise hos unobsorbed depreciotion or corry forword of /osses under tox
/owsŦ
1rans|t|ona| 9rov|s|ons
Ŧ On the first occosion thot the toxes on income ore occounted for in occordonce with this
5totementţ the enterprise shou/d recoqniseţ in the finoncio/ stotementsţ the deferred tox
bo/once thot hos occumu/oted prior to the odoption of this 5totement os deferred tox
osset//iobi/ity with o correspondinq credit/chorqe to the revenue reservesţ subject to the
considerotion of prudence in cose of deferred tox ossets {see poroqrophs Ŵ)Ŧ 1he omount
so credited/chorqed to the revenue reserves shou/d be the some os thot which wou/d hove
resu/ted if this 5totement hod been in effect from the beqinninqŦ

34Ŧ lor Lhe purpose of deLermlnlng accumulaLed deferred Lax ln Lhe perlod ln whlch Lhls
SLaLemenL ls applled for Lhe flrsL Llmeţ Lhe openlng balances of asseLs and llablllLles for
accounLlng purposes and for Lax purposes are compared and Lhe dlfferencesţ lf anyţ are
deLermlnedŦ 1he Lax effecLs of Lhese dlfferencesţ lf anyţ should be recognlsed as deferred Lax
asseLs or llablllLlesţ lf Lhese dlfferences are Llmlng dlfferencesŦ lor exampleţ ln Lhe year ln whlch
an enLerprlse adopLs Lhls SLaLemenLţ Lhe openlng balance of a flxed asseL ls 8sŦ 100 for
accounLlng purposes and 8sŦ 60 for Lax purposesŦ 1he dlfference ls because Lhe enLerprlse
applles wrlLLen down value meLhod of depreclaLlon for calculaLlng Laxable lncome whereas for
accounLlng purposes sLralghL llne meLhod ls usedŦ 1hls dlfference wlll reverse ln fuLure when
depreclaLlon for Lax purposes wlll be lower as compared Lo Lhe depreclaLlon for accounLlng
purposesŦ ln Lhe above caseţ assumlng LhaL enacLed Lax raLe for Lhe year ls 40Ʒ and LhaL Lhere
are no oLher Llmlng dlfferencesţ deferred Lax llablllLy of 8sŦ 16 ż(8sŦ 100 Ŵ 8sŦ 60) x 40ƷŽ would
be recognlsedŦ AnoLher example ls an expendlLure LhaL has already been wrlLLen off for
accounLlng purposes ln Lhe year of lLs lncurrance buL ls allowable for Lax purposes over a perlod
of LlmeŦ ln Lhls caseţ Lhe asseL represenLlng LhaL expendlLure would have a balance only for Lax
purposes buL noL for accounLlng purposesŦ 1he dlfference beLween balance of Lhe asseL for Lax
purposes and Lhe balance (whlch ls nll) for accounLlng purposes would be a Llmlng dlfference
whlch wlll reverse ln fuLure when Lhls expendlLure would be allowed for Lax purposesŦ
1hereforeţ a deferred Lax asseL would be recognlsed ln respecL of Lhls dlfference sub[ecL Lo Lhe
conslderaLlon of prudence (see paragraphs 1 Ŵ 18)Ŧ
Append|x 1
Lxamp|es of 1|m|ng |fferences
-ote ť 1bls oppeoJlx ls lllosttotlve ooly ooJ Joes oot fotm pott of tbe Accoootloq 5tooJotJŦ 1be
potpose of tbls oppeoJlx ls to osslst lo clotlfyloq tbe meooloq of tbe Accoootloq 5tooJotJŦ 1be
sectloos meotlooeJ beteooJet ote tefeteoces to sectloos lo tbe locomeŴtox Actţ 1961ţ os
omeoJeJ by tbe lloooce Actţ 2001Ŧ
1Ŧ Lxpenses deblLed ln Lhe sLaLemenL of proflL and loss for accounLlng purposes buL allowed for
Lax purposes ln subsequenL yearsţ eŦgŦ
a) LxpendlLure of Lhe naLure menLloned ln secLlon 438 (eŦgŦ Laxesţ duLyţ cessţ feesţ eLcŦ)
accrued ln Lhe sLaLemenL of proflL and loss on mercanLlle basls buL allowed for Lax
purposes ln subsequenL years on paymenL baslsŦ

b) ÞaymenLs Lo nonŴresldenLs accrued ln Lhe sLaLemenL of proflL and loss on mercanLlle
baslsţ buL dlsallowed for Lax purposes under secLlon 40(a)(l) and allowed for Lax
purposes ln subsequenL years when relevanL Lax ls deducLed or paldŦ

c) Þrovlslons made ln Lhe sLaLemenL of proflL and loss ln anLlclpaLlon of llablllLles where
Lhe relevanL llablllLles are allowed ln subsequenL years when Lhey crysLalllzeŦ
2Ŧ Lxpenses amorLlzed ln Lhe books over a perlod of years buL are allowed for Lax purposes
wholly ln Lhe flrsL year (eŦgŦ subsLanLlal adverLlsemenL expenses Lo lnLroduce a producLţ eLcŦ
LreaLed as deferred revenue expendlLure ln Lhe books) or lf amorLlzaLlon for Lax purposes ls
over a longer or shorLer perlod (eŦgŦ prellmlnary expenses under secLlon 3uţ expenses lncurred
for amalgamaLlon under secLlon 3uuţ prospecLlng expenses under secLlon 3L)Ŧ

3Ŧ Where book and Lax depreclaLlon dlfferŦ 1hls could arlse due Loť
a) ulfferences ln depreclaLlon raLesŦ

b) ulfferences ln meLhod of depreclaLlon eŦgŦ SLM or WuvŦ
c) ulfferences ln meLhod of calculaLlon eŦgŦ calculaLlon of depreclaLlon wlLh reference Lo
lndlvldual asseLs ln Lhe books buL on block basls for Lax purposes and calculaLlon wlLh
reference Lo Llme ln Lhe books buL on Lhe basls of full or half depreclaLlon under Lhe
block basls for Lax purposesŦ
d) ulfferences ln composlLlon of acLual cosL of asseLsŦ
4Ŧ Where a deducLlon ls allowed ln one year for Lax purposes on Lhe basls of a deposlL made
under a permlLLed deposlL scheme (eŦgŦ Lea developmenL accounL scheme under secLlon 33A8
or slLe resLoraLlon fund scheme under secLlon 33A8A) and expendlLure ouL of wlLhdrawal from
such deposlL ls deblLed ln Lhe sLaLemenL of proflL and loss ln subsequenL yearsŦ
Ŧ lncome credlLed Lo Lhe sLaLemenL of proflL and loss buL Laxed only ln subsequenL years eŦgŦ
converslon of caplLal asseLs lnLo sLock ln LradeŦ
6Ŧ lf for any reason Lhe recognlLlon of lncome ls spread over a number of years ln Lhe accounLs
buL Lhe lncome ls fully Laxed ln Lhe year of recelpLŦ
Append|x 2
-ote ť 1bls oppeoJlx ls lllosttotlve ooly ooJ Joes oot fotm pott of tbe Accoootloq 5tooJotJŦ 1be
potpose of tbls oppeoJlx ls to lllosttote tbe oppllcotloo of tbe Accoootloq 5tooJotJŦ íxttocts
ftom stotemeot of ptoflt ooJ loss ote ptovlJeJ to sbow tbe effects of tbe ttoosoctloos JesctlbeJ
belowŦ
I||ustrat|on 1
A companyţ A8C LLdŦţ prepares lLs accounLs annually on 31sL MarchŦ Cn 1sL Aprllţ 20x1ţ lL
purchases a machlne aL a cosL of 8sŦ 1ţ0ţ000Ŧ 1he machlne has a useful llfe of Lhree years and
an expecLed scrap value of zeroŦ AlLhough lL ls ellglble for a 100Ʒ flrsL year depreclaLlon
allowance for Lax purposesţ Lhe sLralghLŴllne meLhod ls consldered approprlaLe for accounLlng
purposesŦ A8C LLdŦ has proflLs before depreclaLlon and Laxes of 8sŦ 2ţ00ţ000 each year and Lhe
corporaLe Lax raLe ls 40 per cenL each yearŦ

1he purchase of machlne aL a cosL of 8sŦ 1ţ0ţ000 ln 20x1 glves rlse Lo a Lax savlng of 8sŦ 60ţ000Ŧ
lf Lhe cosL of Lhe machlne ls spread over Lhree years of lLs llfe for accounLlng purposesţ Lhe
amounL of Lhe Lax savlng should also be spread over Lhe same perlod as shown belowť
Statement of 9rof|t and Loss

(for the three years end|ng 31st Marchţ 20x1ţ 20x2ţ 20x3)
(8upees ln Lhousands)
20x1 20x2 20x3
ÞroflL before depreclaLlon and Laxes 200 200 200
Lessť uepreclaLlon for accounLlng purposes 0 0 0
ÞroflL before Laxes 10 10 10
Lessť 1ax expense
CurrenL Lax
0Ŧ40 (200 Ŵ 10) 20
0Ŧ40 (200) 80 80
ueferred Lax
1ax effecL of Llmlng dlfferences orlglnaLlng
durlng Lhe year 0Ŧ40 (10 Ŵ 0)
40
1ax effecL of Llmlng dlfferences reverslng durlng
Lhe year 0Ŧ40 (0 Ŵ 0)
(20) (20)
1ax expense 60 60 60
ÞroflL afLer Lax 90 90 90
neL Llmlng dlfferences 100 0 0
ueferred Lax llablllLy 40 20 0
ln 20x1ţ Lhe amounL of depreclaLlon allowed for Lax purposes exceeds Lhe amounL of
depreclaLlon charged for accounLlng purposes by 8sŦ 1ţ00ţ000 andţ Lhereforeţ Laxable lncome ls
lower Lhan Lhe accounLlng lncomeŦ 1hls glves rlse Lo a deferred Lax llablllLy of 8sŦ 40ţ000Ŧ ln
20x2 and 20x3ţ accounLlng lncome ls lower Lhan Laxable lncome because Lhe amounL of
depreclaLlon charged for accounLlng purposes exceeds Lhe amounL of depreclaLlon allowed for
Lax purposes by 8sŦ 0ţ000 each yearŦ Accordlnglyţ deferred Lax llablllLy ls reduced by 8sŦ 20ţ000
each ln boLh Lhe yearsŦ As may be seenţ Lax expense ls based on Lhe accounLlng lncome of each
perlodŦ

ln 20x1ţ Lhe proflL and loss accounL ls deblLed and deferred Lax llablllLy accounL ls credlLed wlLh
Lhe amounL of Lax on Lhe orlglnaLlng Llmlng dlfference of 8sŦ 1ţ00ţ000 whlle ln each of Lhe
followlng Lwo yearsţ deferred Lax llablllLy accounL ls deblLed and proflL and loss accounL ls
credlLed wlLh Lhe amounL of Lax on Lhe reverslng Llmlng dlfference of 8sŦ 0ţ000Ŧ

1he followlng !ournal enLrles wlll be passedť
ear 20x1
ÞroflL and Loss A/c urŦ 20ţ000
1o CurrenL Lax A/c 20ţ000
(8elng Lhe amounL of Laxes payable for Lhe year 20x1 provlded for)
ÞroflL and Loss A/c urŦ 40ţ000
1o ueferred Lax A/c 40ţ000
(8elng Lhe deferred Lax llablllLy creaLed for orlglnaLlng Llmlng dlfference of 8sŦ 1ţ00ţ000)
ear 20x2
ÞroflL and Loss A/c urŦ 80ţ000
1o CurrenL Lax A/c 80ţ000
(8elng Lhe amounL of Laxes payable for Lhe year 20x2 provlded for)
ueferred Lax A/c urŦ 20ţ000
1o ÞroflL and Loss A/c 20ţ000
(8elng Lhe deferred Lax llablllLy ad[usLed for reverslng Llmlng dlfference of 8sŦ 0ţ000)
ear 20x3
ÞroflL and Loss A/c urŦ 80ţ000
1o CurrenL Lax A/c 80ţ000
(8elng Lhe amounL of Laxes payable for Lhe year 20x3 provlded for)
ueferred Lax A/c urŦ 20ţ000
1o ÞroflL and Loss A/c 20ţ000
(8elng Lhe deferred Lax llablllLy ad[usLed for reverslng Llmlng dlfference of 8sŦ 0ţ000)
ln year 20x1ţ Lhe balance of deferred Lax accounL lŦeŦţ 8sŦ 40ţ000 would be shown separaLely
from Lhe currenL Lax payable for Lhe year ln Lerms of paragraph 30 of Lhe SLaLemenLŦ ln ?ear
20x2ţ Lhe balance of deferred Lax accounL would be 8sŦ 20ţ000 and be shown separaLely from
Lhe currenL Lax payable for Lhe year as ln year 20x1Ŧ ln ?ear 20x3ţ Lhe balance of deferred Lax
llablllLy accounL would be nllŦ
I||ustrat|on 2
ln Lhe above lllusLraLlonţ Lhe corporaLe Lax raLe has been assumed Lo be same ln each of Lhe
Lhree yearsŦ lf Lhe raLe of Lax changesţ lL would be necessary for Lhe enLerprlse Lo ad[usL Lhe
amounL of deferred Lax llablllLy carrled forward by applylng Lhe Lax raLe LhaL has been enacLed
or subsLanLlvely enacLed by Lhe balance sheeL daLe on accumulaLed Llmlng dlfferences aL Lhe
end of Lhe accounLlng year (see paragraphs 21 and 22)Ŧ lor exampleţ lf ln lllusLraLlon 1ţ Lhe
subsLanLlvely enacLed Lax raLes for 20x1ţ 20x2 and 20x3 are 40Ʒţ 3Ʒ and 38Ʒ respecLlvelyţ Lhe
amounL of deferred Lax llablllLy would be compuLed as followsť

1he deferred Lax llablllLy carrled forward each year would appear ln Lhe balance sheeL as underť
31sL Marchţ 20x1 ƹ 0Ŧ40 (1ţ00ţ000) ƹ 8sŦ 40ţ000
31sL Marchţ 20x2 ƹ 0Ŧ3 (0ţ000) ƹ 8sŦ 17ţ00
31sL Marchţ 20x3 ƹ 0Ŧ38 (Zero) ƹ 8sŦ Zero
Accordlnglyţ Lhe amounL deblLed/(credlLed) Lo Lhe proflL and loss accounL (wlLh correspondlng
credlL or deblL Lo deferred Lax llablllLy) for each year would be as underť
31sL Marchţ 20x1 ueblL ƹ 8sŦ 40ţ000
31sL Marchţ 20x2 (CredlL) ƹ 8sŦ (22ţ00)
31sL Marchţ 20x3 (CredlL) ƹ 8sŦ (17ţ00)

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