CMA Intermediate · Financial Accounting

Accounting for Taxes on Income (AS 22): formula sheet

Full chapter guide

Key formulas

Tax expense: Tax expense = Current tax + Deferred tax; Deferred tax is the tax effect of timing differences. It can be a charge or a credit for the year.
Deferred tax for the year: Deferred tax = Tax rate × (Originating timing differences − Reversing timing differences); This follows the layout of Illustration 1 in the Standard. A negative result is a credit.
Timing difference: Originates in one period and is capable of reversal in later periods; Gives rise to deferred tax. Example: WDV tax depreciation versus straight-line book depreciation.
Permanent difference: Originates in one period and does not reverse subsequently; No deferred tax. Example: the disallowed part of an expenditure.
Current tax: Current tax = Tax rate × Taxable income; Taxable income is computed under tax laws, not from accounting profit directly.
Timing difference: Originates in one period and is capable of reversal in later periods; Total effect over time is the same in books and tax. Only the period differs. Leads to deferred tax.
Permanent difference: Originates in one period and does not reverse subsequently; Example in AS 22: part of an expenditure disallowed for tax. No deferred tax arises.
Total difference: Total difference = Accounting income − Taxable income = Permanent difference + Timing difference; Take timing difference as the balancing figure after removing permanent items. Mark each as originating (O) or reversing (R).
Depreciation timing difference: Timing difference = Tax depreciation − Book depreciation; Positive means taxable income is lower than accounting income in that year (originating, deferred tax liability). Negative means reversal.
Direction of deferred tax: Taxable income lower now, higher later → deferred tax liability. Taxable income higher now, lower later → deferred tax asset; Matches AS 22 examples: excess tax depreciation gives a liability; section 43B provision not yet allowed gives an asset.
Deferred tax on a timing difference: Deferred tax = Timing difference × Enacted (or substantively enacted) tax rate; Standard's example: (Rs. 100 - Rs. 60) × 40% = Rs. 16 DTL. Use the tax rate of the year as given in the question.
General DTA test (para 15): Recognise DTA only if reasonable certainty of sufficient future taxable income; Judged from past record and realistic estimates of future profits (para 16).
Losses and unabsorbed depreciation test (para 17): Recognise DTA only if virtual certainty + convincing evidence of sufficient future taxable income; Forecasts and business plans alone are not enough. Disclose the nature of evidence (para 32).
Direction of the difference: Tax depreciation > Book depreciation → DTL; Expense in books now, allowed for tax later → DTA; Both reverse in later years.
Offset of current tax (para 27): Offset only if legally enforceable right AND intention to settle net; Both conditions must be met.
Deferred tax balance: Deferred tax balance at year end = Accumulated timing difference at year end × Tax rate enacted or substantively enacted at balance sheet date; Use the closing accumulated difference, not only the difference arising this year.
Deferred tax charge or credit for the year: P&L effect = Closing deferred tax balance − Opening deferred tax balance; For a liability, an increase is a debit to Profit and Loss and a decrease is a credit. This also captures the effect of a rate change.
Timing difference from depreciation: Timing difference for the year = Tax depreciation − Book depreciation; Positive gives a deferred tax liability build-up; negative means reversal.
Rate to use: Rate = Enacted or substantively enacted rate at the balance sheet date (regular rate even in a MAT year); Where different rates apply to different slabs of income, use the average rate.
Current tax: Current tax = Taxable income × Applicable tax rate; Measured at the amount expected to be paid to (recovered from) the tax authorities.
Review of deferred tax assets: Write down DTA to the extent it is no longer reasonably / virtually certain that sufficient future taxable income will be available; Done at each balance sheet date (para 26). The write-down can be reversed if certainty returns.
Re-assessment of unrecognised DTA: Recognise earlier unrecognised DTA to the extent it has become reasonably / virtually certain that taxable income will be available; Done at each balance sheet date (para 19).
Offsetting deferred tax: Offset DTA and DTL only if (a) legal right to set off current tax assets against current tax liabilities AND (b) both relate to taxes on income levied by the same governing taxation laws; Both conditions must hold (para 29).
Offsetting current tax: Offset current tax assets and liabilities if (a) legally enforceable right to set off AND (b) intention to settle net; Para 27.
Presentation: Deferred tax shown under a separate heading, apart from current assets and current liabilities; Para 30. For non-company entities, net DTA may be shown after 'Investments' and net DTL after 'Unsecured Loans'.
Disclosures: Break-up into major components (para 31); nature of evidence if unabsorbed depreciation or carry forward losses (para 32); Pillar Two exception disclosure (para 32A); Notes to accounts.
MAT credit entitlement: MAT credit = MAT paid − normal tax payable (for the year, where MAT exceeds normal tax); Recognise only with convincing evidence of future normal tax within the allowed carry-forward period.
Utilisation of MAT credit: Credit used = lower of (normal tax − MAT of that year) and available credit; Applies only in a year when normal tax exceeds MAT. Reduces current tax payable in the year of use; reduce the asset by the same amount.
Deferred tax: Deferred tax = Timing difference × Tax rate; Use rates enacted or substantively enacted at the balance sheet date.
Accounting entry for MAT credit: Dr MAT Credit Entitlement; Cr Profit and Loss (MAT credit entitlement); Shown as an asset and disclosed separately from deferred tax.
Revaluation depreciation: Extra depreciation = (Revalued amount − Original book value) ÷ Remaining life; Valid when the remaining life is unchanged by the revaluation. If not allowed for tax, treat as a permanent difference with no deferred tax; otherwise follow the facts.

Quick revision

Taxes on income are an expense, accrued in the same period as the revenue and expenses they relate to.
Taxable income and accounting income differ because of item differences and amount or period differences.
Timing differences originate in one period and are capable of reversal in one or more later periods.
Permanent differences originate in one period and do not reverse later.
Permanent differences give no deferred tax asset or liability.
Deferred tax is the tax effect of timing differences.
Tax effects of timing differences go to the statement of profit and loss and to the balance sheet as deferred tax assets or liabilities.
Deferred tax assets are recognised subject to prudence.
Deferred tax assets and liabilities are not discounted.
Offset deferred tax assets and liabilities only if there is a legally enforceable right to set off current tax and both relate to taxes levied by the same governing tax laws.
Disclose the break-up of deferred tax balances into major components in the notes.
Disclose the nature of evidence supporting a deferred tax asset where unabsorbed depreciation or carried forward losses exist.

Common mistakes

Treating every difference between accounting and taxable income as giving deferred tax. Fix: Create deferred tax only for timing differences. Permanent differences never reverse, so they give none.
Defining deferred tax as tax payable for the year. Fix: Current tax is the income tax payable (recoverable) on taxable income. Deferred tax is the tax effect of timing differences.
Treating every disallowed expense as a permanent difference. Fix: Check whether it is allowed later. Section 43B items and payments to non-residents under section 40(a)(i) are allowed in later years when paid or tax is deducted, so they are timing differences.
Calling depreciation differences permanent. Fix: Total depreciation over the asset's life ends up the same in books and tax. Only the periods differ, so it is a timing difference.
Recognising a DTA on carried forward losses because the company expects future profits. Fix: For losses and unabsorbed depreciation, paragraph 17 needs virtual certainty supported by convincing evidence. Forecasts and business plans are not enough.
Computing deferred tax on the whole book value or on the whole expense. Fix: Take the difference between accounting and tax figures, then multiply by the tax rate.
Applying the rate to only the current year's timing difference instead of the accumulated difference. Fix: Always build the closing accumulated difference first, then apply the rate to it.
Leaving the opening deferred tax balance at the old rate when the rate changes. Fix: Restate the full accumulated difference at the new enacted rate. The movement in the balance goes to profit and loss.
Reviewing deferred tax assets only when they arise Fix: State that the review is at each balance sheet date, and that earlier write-downs can be reversed.
Offsetting a DTA against a DTL without checking conditions Fix: Check both tests: legal right to set off current tax, and taxes levied by the same governing taxation laws.

Exam tips

Learn the definitions of timing and permanent differences word for word. They are common short-answer and MCQ material.
For classification questions, always add the reason: reverses or does not reverse.
In numerical answers, show current tax, deferred tax and tax expense on separate lines for step marks.
Check that tax expense equals tax rate × accounting income when only timing differences exist. It is a quick self-check.
In theory answers, state the scope: taxes on income include all domestic and foreign taxes based on taxable income.
Write the definition in one line before classifying. Step marks often come from the reversal reasoning.
In MCQs on depreciation and section 43B items, the answer is almost always a timing difference. Check the direction for asset versus liability.
Present reconciliations as a small statement: accounting income, add or less permanent, add or less timing, taxable income.