CA Intermediate · Advanced Accounting

AS 22 Accounting for Taxes on Income: formula sheet

Full chapter guide

Key formulas

Tax expense: Tax expense = Current tax + Deferred tax; Deferred tax can be a charge (liability increase or asset decrease) or a credit. Current tax is on taxable income.
Current tax: Current tax = Taxable income × Tax rate; Use the tax rate that applies to the period, including any applicable surcharge and cess if the question includes them.
Taxable income from accounting income: Taxable income = Accounting income + Disallowed expenses (permanent) − Exempt income (permanent) + Timing differences that make taxable income higher − Timing differences that make taxable income lower; Add timing differences that raise taxable income in the year they originate (for example, provisions disallowed until paid). Deduct those that lower it (for example, tax depreciation higher than book depreciation). Reversals work the opposite way: a reversal of an item that earlier raised taxable income now lowers it, and vice versa.
Deferred tax for the year: Deferred tax = (Originating timing differences − Reversing timing differences) × Enacted or substantively enacted tax rate; This is the tax effect of the net originating timing difference for the year. If the net difference makes taxable income lower than accounting income (for example, tax depreciation higher than book depreciation), it is a deferred tax liability (DTL). If it makes taxable income higher (for example, a provision disallowed until paid), it is a deferred tax asset (DTA), recognised only if the AS 22 certainty condition is met. If reversals exceed originations, the net amount reverses an earlier DTL or DTA.
Type of difference test: Reverses in later periods → timing difference. Never reverses → permanent difference.; Only timing differences give deferred tax. Permanent differences give none.
Accounting income vs taxable income: Taxable income = Accounting income + permanent disallowances − exempt income + (timing items that increase taxable income now) − (timing items that reduce taxable income now). Items that increase taxable income now: expenses booked now but disallowed now (allowed later), and the excess of book depreciation over tax depreciation. Items that reduce taxable income now: the excess of tax depreciation over book depreciation, and amounts disallowed earlier that are allowed this year. Whether an item is originating or reversing is a separate question from the direction of the adjustment. Count each timing item once.; Use this to reconcile the two incomes. Keep permanent items and timing items in separate groups so nothing is counted twice. Permanent differences affect only the current tax, not deferred tax.
Deferred tax on timing differences: Deferred tax = Timing difference × Tax rate enacted or substantively enacted at the balance sheet date; Use the rate in force at the balance sheet date, not the rate at the date the difference arose.
Deferred tax liability (DTL): For each category of timing difference (for example, depreciation), net the originating and reversing differences. If the net result is that accounting income is recognised earlier than taxable income, or the tax deduction is taken earlier than the book expense → DTL for that category; Example: tax depreciation higher than book depreciation. Taxable income is lower now and higher later. Reversing differences unwind balances already created in the same category. DTL and DTA are worked out category by category. Do not net a DTL of one category against a DTA of another category in the computation. They are set off only on presentation, and only if the AS 22 set-off conditions are met.
Deferred tax asset (DTA): For each category of timing difference, net the originating and reversing differences. If the net result is that the book expense is recognised earlier than the tax deduction, or income is taxed earlier than it is booked → DTA for that category; Example: a specified expense disallowed now and allowed on payment. A DTA is recognised only if there is reasonable certainty of future taxable income against which it can be realised. Where there are unabsorbed depreciation or carried forward losses, AS 22 requires virtual certainty supported by convincing evidence.
Test for classification: Reverses in later period → timing difference. Never reverses → permanent difference; Apply this test to every item in the question before computing anything.
Deferred tax on a timing difference: Deferred tax = Timing difference × Tax rate; Use the tax rate enacted or substantively enacted at the balance sheet date. Include surcharge and cess if applicable.
Taxable timing difference: Tax depreciation > Book depreciation → DTL; Taxable income is lower now and the difference reverses later. DTL is recognised in full.
Deductible timing difference: Expense in books now, allowed in tax later → DTA; Recognise only if reasonable certainty of future taxable income exists.
Unabsorbed depreciation and carried forward losses: DTA recognised only if virtual certainty supported by convincing evidence; Stricter than the test for other DTAs. Disclose the nature of evidence.
Closing deferred tax balance: Closing DTL (or DTA) = Cumulative timing difference at year end × Rate; Charge or credit to Statement of Profit and Loss = Closing balance − Opening balance.
Deferred tax amount: Deferred tax = Timing difference × Enacted or substantively enacted tax rate; Use the rate at the balance sheet date that is expected to apply when the difference reverses. Include surcharge and cess if they form part of the rate.
Effect of rate change on opening balance: Adjustment = Opening cumulative timing difference × (New rate − Old rate); Charge or credit goes to the Statement of Profit and Loss. For a DTL, a rate fall reduces the liability and a rate rise increases it.
No discounting rule: Deferred tax assets and liabilities are not discounted to present value; Show the full undiscounted amount even if reversal is many years away.
Recognition certainty: DTA on other timing differences: reasonable certainty. DTA on unabsorbed depreciation or carry-forward of losses: virtual certainty supported by convincing evidence; Review at every balance sheet date. Write down if certainty is lost and reverse the write-down when it returns.
Closing deferred tax: Deferred tax charge for the year = Closing DTL (or DTA) − Opening DTL (or DTA); Treat a DTL and a DTA with correct signs. Keep a DTA and DTL net only if the legal right to set off and the same taxation authority conditions are met.
Deferred tax for a timing difference: Deferred tax = Timing difference × Enacted tax rate; Use the rate enacted or substantively enacted at the balance sheet date. Compute on the cumulative difference to get the closing balance.
Timing difference for depreciation: Timing difference = Tax depreciation − Book depreciation (for the year); A positive value (tax depreciation higher) means taxable income is lower now, giving a DTL. A negative value (book depreciation higher) gives a DTA.
Tax expense: Tax expense = Current tax + Deferred tax charge − Deferred tax credit; A DTL increase is a charge. A DTA increase is a credit.
Current tax: Current tax = Taxable income × Tax rate; Taxable income = Accounting profit ± timing differences ± permanent differences.
Closing DTL/DTA movement: Deferred tax charge for the year = Closing DTL − Opening DTL (net DTL position); This formula applies to the net DTL position. A positive result is a charge to the Statement of Profit and Loss. For a DTA, work the other way round: if the closing DTA is higher than the opening DTA, the increase is a credit to the Statement of Profit and Loss, and a fall is a charge. If the position flips between DTL and DTA, take the movement in the net position carefully, not a simple closing-minus-opening. Also adjust for a tax rate change on the opening balance.
Recognition test: DTL: always. DTA: reasonable certainty. DTA on losses or unabsorbed depreciation: virtual certainty; Virtual certainty needs convincing evidence, not just a forecast or management's expectation.
Balance sheet classification: DTA and DTL are shown separately from current assets and current liabilities; Under Schedule III, the captions are deferred tax assets (net) and deferred tax liabilities (net), among non-current items. The net figure is shown only where the offset conditions are met. Otherwise show them gross.
Offsetting condition 1: Legally enforceable right to set off current tax assets against current tax liabilities; Both offsetting conditions must be met.
Offsetting condition 2: DTA and DTL relate to taxes on income levied by the same governing taxation law; If not met, show DTA and DTL gross.
Net deferred tax position: Net = Total DTL − Total DTA (if offset is allowed); A positive result is a net DTL. A negative result is a net DTA.
Deferred tax in profit and loss: Deferred tax charge/(credit) for the year = Closing net DTL − Opening net DTL; Assumes no deferred tax adjusted directly elsewhere. Treat an increase in net DTL as an expense. The charge is the total of the movements in the individual DTA and DTL balances, whether presented gross or net.
Recognition test for DTA: DTA on other timing differences: reasonable certainty. DTA on unabsorbed depreciation or carried forward losses: virtual certainty; Virtual certainty must be supported by convincing evidence of future taxable income. The carrying amount of all deferred tax assets is reviewed at each balance sheet date, and unrecognised deferred tax assets are reassessed too.
Key disclosures: Break-up of DTA and DTL by major components; amount of DTA and nature of evidence where DTA is recognised on unabsorbed depreciation or carried forward losses; Disclose both the DTA amount and the evidence. Also show the deferred tax charge or credit in the statement of profit and loss.

Quick revision

Tax expense = current tax + deferred tax.
Timing differences originate in one period and reverse in one or more later periods.
Permanent differences never reverse, so they create no deferred tax.
Taxable timing difference creates a DTL, and a deductible timing difference creates a DTA.
Deferred tax is calculated with the tax rates enacted or substantively enacted at the balance sheet date.
Deferred tax is not discounted.
DTL is recognised on all taxable timing differences. The exception to learn is the special reserve that certain specified financial institutions create and maintain under the income-tax law. Deferred tax on timing differences relating to that reserve is not recognised to the extent ICAI guidance provides, for example where the enterprise is reasonably certain it will not withdraw the reserve.
DTA is recognised only if there is reasonable certainty of future taxable income to absorb it.
Where there are unabsorbed depreciation or carried forward losses, a DTA needs virtual certainty supported by convincing evidence.
Review deferred tax balances at each balance sheet date and reassess unrecognised DTAs.
An enterprise should offset deferred tax assets and deferred tax liabilities if it has a legally enforceable right to set off assets against liabilities representing current tax, and the deferred tax assets and liabilities relate to taxes on income levied by the same governing taxation laws.
Presentation: deferred tax assets and liabilities are shown separately from current assets and current liabilities. Under Schedule III, the net figure appears as deferred tax liability (net) under non-current liabilities or deferred tax asset (net) under non-current assets, but only where the set-off conditions are met.
Profit and loss treatment: the deferred tax charge or credit for the year goes to the statement of profit and loss.
Disclosure: show the breakup of DTA and DTL by major components.
Disclosure: when an enterprise has unabsorbed depreciation or carried forward losses and recognises a DTA, it must also disclose the nature of the evidence supporting the recognition.

Common mistakes

Creating deferred tax on permanent differences. Fix: Deferred tax arises only from timing differences. Disallowed penalties and exempt income never reverse, so ignore them for deferred tax.
Confusing accounting income with taxable income. Fix: Accounting income is the book profit before tax. Taxable income is computed under tax law. Always state which one you are using.
Creating deferred tax on a permanent difference such as a penalty for breach of law or exempt income. Fix: Always ask if the gap reverses. If it never reverses, it affects only current tax.
Treating all depreciation difference as permanent because the rates differ. Fix: Depreciation difference is a timing difference. It originates early and reverses later as the asset is written off.
Recognising a DTA on unabsorbed depreciation just because the company expects future profits. Fix: For losses and unabsorbed depreciation, look for virtual certainty backed by convincing evidence such as firm sales orders or binding contracts. A forecast of future profits alone does not qualify, and carry forward losses are themselves strong evidence against future taxable income.
Skipping DTL because of prudence. Fix: Prudence restricts DTAs only. DTL is recognised for all taxable timing differences.
Using a proposed or announced rate that is not yet enacted or substantively enacted. Fix: Check the status of the rate at the balance sheet date. Use the new rate only if it is enacted or substantively enacted.
Discounting a deferred tax liability that reverses after many years. Fix: AS 22 prohibits discounting. Always show the full tax effect.
Creating deferred tax on permanent differences such as disallowed penalties or exempt income. Fix: Ask whether the difference will reverse. If not, it is permanent. Use it only for current tax.
Recognising a DTA on carried forward losses just because future profits are expected. Fix: For losses or unabsorbed depreciation, recognise a DTA only if there is virtual certainty supported by convincing evidence. Otherwise do not recognise it.

Exam tips

Expect a short question such as 'distinguish timing and permanent differences' with examples. Give a definition, the reversal test and two examples each.
In MCQs, always read whether the question asks for current tax, deferred tax or total tax expense. Examiners use that confusion.
In reconciliations, show taxable income step by step with each adjustment labelled. A wrong figure still earns step marks.
Learn the definitions as given in AS 22 for accounting income, taxable income, current tax and deferred tax. Definition questions are easy marks.
Use the rate given in the question. Do not add surcharge or cess unless the question tells you to.
Start every answer by classifying items as timing or permanent. Examiners give separate marks for this.
Write the reason in one line: for example, allowed on payment so it reverses. A bare label earns fewer marks.
Show tax rate and the multiplication on its own line, then state DTA or DTL.