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CA Intermediate · Advanced Accounting

AS 22 Accounting for Taxes on Income for CA Inter

AS 22 tells you how to account for the tax effect of differences between accounting profit and taxable income. Separate timing differences from permanent differences, create deferred tax only on timing differences, apply the enacted or substantively enacted tax rate, and apply the prudence rules for assets.

What this chapter covers

AS 22 deals with one question. Your books show an accounting profit, but the tax return shows a taxable income. The two are rarely equal. The standard explains how to record the tax expense so that it matches the accounting profit of the period, not only the tax payable.

The chapter has a clear logic. First you learn the definitions: accounting income, taxable income, tax expense, current tax and deferred tax. Then you split the differences into timing differences (which reverse in later periods) and permanent differences (which never reverse). Only timing differences create deferred tax assets (DTA) or deferred tax liabilities (DTL). After that come the rules for recognition, measurement, review and disclosure.

The chapter connects to the rest of Paper 1 in several ways. Depreciation differences link to the fixed assets and depreciation chapters. Company accounts and the Schedule III presentation link to the financial statements chapters. Amalgamation and other adjustments sometimes carry tax effects. The chapter can be tested through both MCQs on definitions and rules and descriptive numericals.

This chapter is compact and rule-based. The rules are few, and the working follows a clear pattern: find the difference, classify it, apply the rate, and pass the journal entry. That makes it manageable to prepare with limited study time, which suits you if you are working through articleship. MCQs can test definitions, such as whether an item is a timing difference or a permanent one, and written questions can reward a clean working table. Students who learn the classification well avoid the most common errors, while students who rely on memory get confused between DTA and DTL.

AS 22 Accounting for Taxes on Income: topics in the order to study them

  1. 1AS 22 Introduction, Scope and Key DefinitionsEvery later rule uses these terms, so learn accounting income, taxable income, current tax and deferred tax first.
  2. 2Timing Differences and Permanent DifferencesClassification decides whether deferred tax arises at all, so master it before touching recognition.
  3. 3Recognition of Deferred Tax Assets and LiabilitiesOnce you can classify differences, you learn when DTL and DTA are recognised and the prudence conditions for assets.
  4. 4Measurement, Tax Rates and Review of Deferred TaxMeasurement adds the tax rate and the yearly review, which you need before attempting any computation.
  5. 5Deferred Tax Computation Problems and Journal EntriesProblems apply everything above, so solve them only after the rules are clear.
  6. 6Presentation and Disclosure under AS 22Presentation is the last step, since it depends on balances you computed in the problems.

How to prepare AS 22 Accounting for Taxes on Income

Treat this chapter as a rule set plus one repeatable working. Build the rules first, then drill the working until it is automatic.

  1. Read the definitions once and write each in your own words, especially current tax versus deferred tax.
  2. Make a two-column list of timing differences and permanent differences, with examples such as depreciation differences and expenses disallowed by the tax law.
  3. For each timing difference, decide if the accounting figure or the tax figure is higher in the current year. That tells you whether it creates a DTL or a DTA.
  4. Learn the recognition rules: DTL is recognised on all taxable timing differences, while DTA is recognised only with the required level of certainty, and stricter where there are carried forward losses.
  5. Solve problems in a fixed table: accounting profit, add or deduct differences, taxable income, current tax, deferred tax, then total tax expense. Pass the journal entry last.
  6. Practise the year-end review: re-measure balances at the enacted or substantively enacted rate and check if a DTA is still supported.
  7. Finish with 15 to 20 MCQs on classification and disclosure, then rewrite the disclosure points from memory.

Common mistakes in AS 22 Accounting for Taxes on Income

  • Creating deferred tax on permanent differences

    Fix: Ask one question first: will this item reverse later? If not, it is permanent and gets no deferred tax.

  • Mixing up DTA and DTL

    Fix: If tax depreciation is higher than book depreciation, taxable income is lower now, so current tax is lower now. The difference reverses later, when taxable income becomes higher than accounting profit and more tax is payable. This is a taxable timing difference, so it gives rise to a DTL. Work it out each time.

  • Applying the wrong tax rate

    Fix: Measure deferred tax at the tax rate enacted or substantively enacted at the balance sheet date, and re-measure the opening deferred tax balance if that rate changes.

  • Recognising a DTA without checking certainty

    Fix: Check the certainty test first. Use the stricter virtual certainty test when losses or unabsorbed depreciation exist.

  • Forgetting to adjust opening deferred tax balance

    Fix: Charge to profit and loss only the change: closing balance minus opening balance.

  • Weak disclosure answers

    Fix: Keep a short checklist of disclosure points and presentation rules, and write them in bullet form with the exact condition for each.

Last-day revision: AS 22 Accounting for Taxes on Income

  • 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.

AS 22 Accounting for Taxes on Income practice questions

AS 22 Accounting for Taxes on Income in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 22 Accounting for Taxes on Income: frequently asked questions

Is AS 22 important for CA Intermediate Advanced Accounting?

Yes. It is a short chapter with clear rules, and it can be tested through both MCQs and descriptive numericals. Because the working follows a fixed pattern, it is manageable to prepare even with limited time.

What is the difference between timing and permanent differences?

A timing difference arises in one period and reverses in later periods, such as a difference in depreciation. A permanent difference never reverses, such as an expense that the tax law never allows. Only timing differences give rise to deferred tax.

How should I present a deferred tax problem in the exam?

Use a table. Start with accounting profit, adjust for differences, find taxable income, then compute current tax and deferred tax. Show the opening and closing balances so that the charge for the year is clear, then give the journal entry.

Does the Income-tax Act change affect AS 22 problems?

AS 22 itself is an accounting standard and its principles stay the same. Questions usually give the tax rate and the tax treatment of items, so follow the data in the question rather than recalling provisions.