Accounting Standard 22: Accounting for Taxes on IncomeEffective date when mandatory (a) For listed companies and their subsidiaries 1-4-2001 (b) For other companies - 1-4-2002 (c) All other enterprises - 1-4-2003.The differences between taxable income and accounting income to be classified into permanent differences and timing differences.Permanent differences are those differences between taxable income and accounting income, which originate in one period and do not get reverse subsequently.Timing differences are those 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.Deferred tax should be recognised for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets (DTA).When enterprise has carry forward tax losses, DTA to be recognised only if there is virtual certainty supported by convincing evidence of future taxable income. Unrecognised DTA to be reassessed at each balance sheet date. Virtual certainty refers to the fact that there is practically no doubt regarding the determination of availability of the future taxable income. Also, convincing evidence is required to support the judgment of virtual certainty (ASI-9).In respect of loss under the head Capital Gains, DTA shall be recognised only to the extent that there is a reasonable certainty of sufficient future taxable capital gain (ASI - 4). DTA to be recognised on the amount, which is allowed as per the provisions of the Act; i.e., loss after considering the cost indexation as per the Income Tax Act.Treatment of deferred tax in case of Amalgamation(ASI-11)in case of amalgamation in nature of purchase, where identifiable assets / liabilities are accounted at the fair value and the carrying amount for tax purposes continue to be the same as that for the transferor enter price, the difference between the values shall be treated as a permanent difference and hence it will not give rise to any deferred tax. The consequent difference in depreciation charge of the subsequent years shall also be treated as a permanent difference.The transferee company can recognise a DTA in respect of carry forward losses of the transferor enterprise, if conditions relating to prudence as per AS 22 are satisfied, though transferor enterprise would not have recognised such deferred tax assets on account of prudence. Accounting treatment will depend upon nature of amalgamation, which shall be as follows :oIn case of amalgamation is in the nature of purchase and assets and liabilities are accounted at the fair value, DTA should be recognised at the time of amalgamation (subject to prudence).oIn case of amalgamation is in the nature of purchase and assets and liabilities are accounted at their existing carrying value, DTA shall not be recognised at the time of amalgamation. However, if DTA gets recognised in the first year of amalgamation, the effect shall be through adjustment to goodwill/ capital reserve.oIn case of amalgamation is in the nature of merger, the deferred tax assets shall not be recognised at the time of amalgamation. However, if DTA gets recognised in the first year of amalgamation, the effect shall be given through revenue reserves.oIn all the above if the DTA cannot be recognised by the first annual balance sheet following amalgamation, the corresponding effect of this recognition to be given in the statement of profit and loss.Tax expenses for the period, comprises of current tax and deferred tax.Current tax [includes payment u/s 115JB of the Act(ASI-6)] should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates.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 and should not be discounted to their present value. Deferred Tax to be measured using the regular tax rates for companies that pay tax u/s 115JB of the Act (ASI-6).DTA should be disclosed separately after the head Investments and deferred tax liability (DTL) should be disclosed separately after the head Unsecured Loans(ASI-7) in the balance sheet of the enterprise. Assets and liabilities to be netted off only when the enterprise has a legally enforceable right to set off.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.The deferred tax assets and liabilities in respect of timing differences which originate during the tax holiday period and reverse during the tax holiday period, should not be recognised to the extent deduction from the total income of an enterprise is allowed during the tax holiday period. However, if timing differences reverse after the tax holiday period, DTA and DTL should be recognised in the year in which the timing differences originate. Timing differences, which originate first, should be considered for reversal first (ASI-3) and (ASI-5).On the first occasion of applicability of this AS the enterprise should recognise, the deferred tax balance that has accumulated prior to the adoption of this Statement as deferred tax asset / liability with a corresponding credit / charge to the revenue reserves.

Why AS-22 Accounting for taxes on income is applied?Posted InFinance|Articles|3 Comments Esha AgrawalWHY AS 22 IS APPLIEDMy aim of writing this article is to discuss with you all why AS 22 is applied, generally thishappenswe study the whole AS, solve the questions, but we dont know the crux of it. So friends AS 22 is Accounting for taxes on income and the reason for its application is mentioned below.There could be situations where depreciation is charged in the books over its useful life but for which the entire deduction is claimed in the first year as pertax laws. In other words, the income is charged to tax in year other than the year in which it is recorded in the books of accounts due to varied tax provisions. Thus higher book profits and less tax in the current year cannot completely justify about the profitability of the company, ifthe taxburden changesin the future. Thus for the purpose of making aprovisionfor tax an income in the same year of its accrual irrespective of its actual due, is the main punch line of this Accounting Standard.For the purpose of this standard following terms are used with the meaning below:-1)Accounting income(loss) is thenet profitor loss for a period, as reported in the statement ofprofit and loss, before deducting income tax expense or adding incometax saving.2)Taxable income(tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined.3)Tax expense(tax saving) is the aggregate of current tax anddeferred taxcharged or credited to the statement of profit and loss for the period.4)Current taxis the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period.5)Deferred taxis the tax effect of timing difference6)Timing differenceare the difference between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent period7)Permanent differenceare the difference between taxable income and accounting income for the period that originate in one period and do not reverses subsequently .Permanent difference do not result in deferred tax assets or deferred tax liabilities.ILLUSTRATIONA company, ABC Ltd., prepares its accounts annually on 31st March. On1st April, 2011, it purchases a machine for research purpose at a cost of Rs. 1,50,000. The machine has a useful life of three years and an expected scrap value of zero. Although it is eligible for a 100% first year depreciation allowance for tax purposes the straight-line method is considered appropriate for accounting purposes.ABC Ltd. has profits before depreciation and taxes of Rs. 2,00,000 each year and thecorporate taxrate is 40 per cent each year.The purchase of machine at a cost of Rs. 1,50,000 in 2011 gives rise to a tax saving of Rs. 60,000. If the cost of the machine is spread over three years of its life for accounting purposes, the amount of the tax saving should also be spread over the same period as shown below:Statement Of Profit And Loss Account

(for the year ending 31stMarch 2011, 2012, 2013)

( Rupees in thousands)

201120122013

Profit before depreciation and taxes200200200

Less: Depreciation for accounting purposes505050

Profit before taxes150150150

Less: Tax expense

Current tax208080

Deffered tax40(20)(20)

Profit after tax909090

Working note 1:- calculation of current tax

Profit before tax150150150

Add:- Depreciation for accounting purposes505050

Less:- Depreciation for tax purpose15000

Taxable Income50200200

Tax @ 40%208080

Working note 2:- calculation of deferred taxTiming DifferenceOpening balance010050

Add:- creation15000

Less:- reversal505050

Closing balance100500

Deffered tax liability4000

Reversal of deferred tax liability0200

Less:- opening balance040(20)

Transfer to P/L account40( 20)(20)

In 2011, the amount of depreciation allowed for tax purposes exceeds the amount of depreciation charged for accounting purposes by Rs. 1,00,000 and, therefore, taxable income is lower than the accounting income. This gives rise to a deferred tax liability of Rs. 40,000. In 2012 and 2013,accounting income is lower than taxable income because the amount of depreciation charged for accounting purposes exceeds the amount of depreciation allowed for tax purposes by Rs. 50,000 each year. Accordingly, deferred tax liability is reduced by Rs. 20,000 each in both the years. As may be seen, tax expense is based on the accounting income of each period. In 2011, the profit and loss account is debited and deferred tax liability account is credited with the amount of tax on the originating timing difference of Rs. 1,00,000 while in each of the following two years, deferred tax liability account is debited and profit and loss account is credited with the amount of tax on the reversing timing difference of Rs. 50,000.So from the above example we come to know we dont get any additional depreciation as per income tax on asset in fact whatever additional depreciation we get that get reverse in subsequent years, and we get depreciation as per thelife of themachine.

ACCOUNTING STANDARDS

Accounting Standards are formulated with a view to harmonize different accounting policies and practices in use in a country. The objective of Accounting Standards is, therefore, to reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises with a view to provide meaningful information to various users of financial statements to enable them to make informed economic decisions.Recognizing the need for international harmonization of accounting standards, in 1973, the International Accounting Standards Committee (IASC) was established. It may be mentioned here that the IASC has been reconstituted as the International Accounting Standards Board (IASB). The objectives of IASC included promotion of the International Accounting Standards for worldwide acceptance and observance so that the accounting standards in different countriesare harmonized. In recent years, need for international harmonization of Accounting Standards followed in different countries has grown considerably as the cross-border transfers of capital are becoming increasingly common.

The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonize the diverse accounting policies and practices in use in India. After the avowed adoption of liberalization and globalization as the corner stones of Indian economic policies inearly 90s, and the growing concern about the need of effective corporate governance of late, the Accounting Standards have increasingly assumed importance. While formulating accounting standards, the ASB takes into consideration the applicable laws, customs, usages and business environment prevailing in the country. The ASB also gives due consideration to International Financial Reporting Standards (IFRSs)/ International Accounting Standards (IASs) issued by IASB and tries to integrate them, to the extent possible, in the light of conditions and practices prevailing in India.

Composition of the Accounting Standards BoardThe composition of the ASB is broad-based with a view to ensuring participation of all interest groups in the standard-setting process. These interest-groups include industry, representatives of various departments of government and regulatory authorities, financial institutions and academic and professional bodies. Industry is represented on the ASB by their apex level associations, viz., Associated Chambers of Commerce & Industry (ASSOCHAM), Confederation of Indian Industries (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI). As regards government departments and regulatory authorities, Reserve Bank of India, Ministry of Company Affairs, Comptroller & Auditor General of India, Controller General of Accounts and Central Board of Excise and Customs are represented on the ASB. Besides these interest-groups, representatives of academic and professional institutions such as Universities, Indian Institutes of Management, Institute of Cost and Works Accountants of India and Institute of Company Secretaries of India are also represented on the ASB. Apart from these interest groups, certain elected members of the Central Council of ICAI are also on the ASB.

Compliance with Accounting StandardsAccounting Standards issued by the ICAI have legal recognition through the Companies Act, 1956, whereby every company is required to comply with the Accounting Standards and the statutory auditors of every company are required to report whether the Accounting Standards have been complied with or not. Also, the Insurance Regulatory and Development Authority (IRDA) (Preparation of Financial Statements and Auditors Report of Insurance Companies)Regulations, 2000 requires insurance companies to follow the Accounting Standards issued by the ICAI. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India also require compliance with the Accounting Standards issued by the ICAI from time to time.

The Accounting Standards-setting ProcessThe accounting standard setting, by its very nature, involves reaching an optimal balance of the requirements of financial information for various interest-groups having a stake in financial reporting. With a view to reach consensus, to the extent possible, as to the requirements of the relevant interest-groups and thereby bringing about general acceptance of the Accounting Standards among such groups, considerable research, consultations and discussions with the representatives of the relevant interest-groups at different stages of standard formulation becomes necessary. The standard-setting procedure of the ASB, as briefly outlined below, is designed in such a way so as to ensure such consultation and discussions:Identification of the broad areas by the ASB for formulating the Accounting Standards.Constitution of the study groups by the ASB for preparing the preliminary drafts of theproposed Accounting Standards.Consideration of the preliminary draft prepared by the study group by the ASB and revision,if any, of the draft on the basis of deliberations at the ASB.Circulation of the draft, so revised, among the Council members of the ICAI and 12 specifiedoutside bodies such as Standing Conference of Public Enterprises (SCOPE), Indian BanksAssociation, Confederation of Indian Industry (CII), Securities and Exchange Board of India(SEBI), Comptroller and Auditor General of India (C& AG), and Department of CompanyAffairs, for comments.Meeting with the representatives of specified outside bodies to ascertain their views on thedraft of the proposed Accounting Standard.Finalization of the Exposure Draft of the proposed Accounting Standard on the basis ofcomments received and discussion with the representatives of specified outside bodies.Issuance of the Exposure Draft inviting public comments.Consideration of the comments received on the Exposure Draft and finalization of the draftAccounting Standard by the ASB for submission to the Council of the ICAI for itsconsideration and approval for issuance.Consideration of the draft Accounting Standard by the Council of the Institute, and if foundnecessary, modification of the draft in consultation with the ASB.The Accounting Standard, so finalized, is issued under the authority of the Council.

The Accounting Standards as given by the ASB are listed below:

AS 1 Disclosure of Accounting PoliciesAS 2 Valuation of InventoriesAS 3 Cash Flow StatementsAS 4 Contingencies and Events Occurring after the Balance Sheet DateAS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting PoliciesAS 6 Depreciation AccountingAS 7 Construction ContractsAS 8 Accounting for Research and Development (Withdrawn pursuant to AS 26 becoming mandatory)AS 9 Revenue RecognitionAS 10 Accounting for Fixed AssetsAS 11 The Effects of Changes in Foreign Exchange RatesAS 12 Accounting for Government GrantsAS 13 Accounting for InvestmentsAS 14 Accounting for AmalgamationsAS 15 Employee BenefitsAS 16 Borrowing CostsAS 17 Segment ReportingAS 18 Related Party DisclosuresAS 19 LeasesAS 20 Earnings Per ShareAS 21 Consolidated Financial StatementsAS 22 Accounting for Taxes on IncomeAS 23 Accounting for Investments in Associates in Consolidated Financial StatementsAS 24 Discontinuing OperationsAS 25 Interim Financial ReportingAS 26 Intangible AssetsAS 27 Financial Reporting of Interests in Joint VenturesAS 28 Impairment of AssetsAS 29 Provisions, Contingent Liabilities and Contingent AssetsAS 30 Financial Instruments: Recognition and MeasurementAS 31 Financial Instruments: PresentationAS 32 Financial Instruments: Disclosures

AS 22 Accounting for Taxes on Income ( Effective from 1st April, 2001)The objective of this Statement is to prescribe accounting treatment for taxes on income. Taxes on income is one of the significant items in the statement of profit and loss of an enterprise. In accordance with the matching concept, taxes on income are accrued in the same period as the revenue and expenses to which they relate. Matching of such taxes against revenue for a period poses special problems arising from the fact that in a number of cases, taxable income may be significantly different from the accounting income. This divergence between taxable income and accounting income arises due to two main reasons. Firstly, there are 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 purposes. Secondly, there are differences between the amount in respect of a particular item of revenue or expense as recognised in the statement of profit and loss and the corresponding amount which is recognised for the computation oftaxable income.This Statement should be applied in accounting for taxes on income. This includes the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements.For the purposes of this Statement, taxes on income include all domestic and foreign taxes which are based on taxable income.Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving.Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined