Advanced Accounting · AS 22 Accounting for Taxes on Income

AS 22 Measurement, Tax Rates and Review of Deferred Tax

Updated 4 October 2026 · Fact-checked

Under AS 22, you measure deferred tax assets and liabilities at the tax rates enacted or substantively enacted at the balance sheet date. You do not discount them. You review the carrying amount of deferred tax assets at every balance sheet date and write them down or reverse the write-down based on certainty.

Understand Measurement, Tax Rates and Review of Deferred Tax

Once you know a timing difference exists, you must put a rupee figure on it. AS 22 says the figure is the timing difference multiplied by a tax rate. The key question is which rate.

Use the rate that is enacted or substantively enacted at the balance sheet date. Enacted means the law is already passed. Substantively enacted means the announcement has the effect of law even though the formal steps remain, for example where the remaining steps are a formality. A rate only proposed or hoped for is not used. Use the rate expected to apply when the timing difference reverses, as known on the balance sheet date.

Deferred tax is not discounted. Even if a liability reverses after ten years, you show the full undiscounted amount. This keeps the computation simple and consistent.

Deferred tax is not a one-time entry. At each balance sheet date you do two things. First, remeasure the opening balances if the tax rate has changed. The effect of the change goes to the Statement of Profit and Loss, as part of tax expense for the period. Second, review the carrying amount of deferred tax assets. If there is no longer reasonable certainty (or virtual certainty, where the asset arises from unabsorbed depreciation or carry-forward of losses) that enough taxable income will be available, write the asset down. If certainty returns later, reverse the write-down to the extent of that certainty.

Minimum Alternate Tax (MAT) credit works differently. MAT paid under the tax law that is eligible to be set off in future years is a credit, and it is recognised as an asset only when there is convincing evidence that it will be used within the specified period. The ICAI Guidance Note on Accounting for Credit Available in respect of Minimum Alternate Tax treats it as an asset, not as a deferred tax asset under AS 22 itself. For May 2027 onwards, read the MAT provision it deals with as the corresponding provision under the Income-tax Act, 2025. The credit is shown as an asset in the balance sheet, for example MAT credit entitlement, and as a separate line item in the Statement of Profit and Loss (a credit to the P&L, as MAT credit entitlement). It is reviewed every balance sheet date. The principle of review is the same as for deferred tax assets.

Key rules to remember

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.

How to solve Measurement, Tax Rates and Review of Deferred Tax questions

Use this order for any measurement, rate change or review question.

1List each timing difference and mark it as creating a DTL (taxable income higher in the future) or a DTA (taxable income lower in the future).
2Identify the rate enacted or substantively enacted at the balance sheet date. Ignore rates merely proposed.
3Compute the closing deferred tax balance: cumulative timing difference × that rate. Do not discount.
4Find the opening balance as already recorded at the old rate, and remeasure it at the new rate if the rate changed.
5Take the difference between closing and opening balances and show it as a charge or credit in the Statement of Profit and Loss.
6For each DTA, test whether reasonable certainty (or virtual certainty for losses and unabsorbed depreciation) exists. Write down or reverse the write-down accordingly.
7Pass the journal entry in the right direction. For an increase in DTL: Profit and Loss A/c Dr. to Deferred Tax Liability A/c. For a decrease in DTL: Deferred Tax Liability A/c Dr. to Profit and Loss A/c. For an increase in DTA: Deferred Tax Asset A/c Dr. to Profit and Loss A/c. For a decrease or write-down of DTA: Profit and Loss A/c Dr. to Deferred Tax Asset A/c.
8State the closing balance and where it appears in the balance sheet.

Quickest way: Rate change shortcut: closing minus opening, one line

When to use it: Use when a question gives opening deferred tax balances and a new rate, and asks for the charge or the closing balance.

Compute the closing cumulative timing difference. Multiply it by the new rate to get the closing balance at once.
Subtract the opening balance as recorded. The gap is the P&L charge, including the rate-change effect, so you need not split it unless asked.
If asked for the rate-change effect separately, compute opening timing difference × rate change. The remainder is the current year effect.
For MCQs, check first whether a rate is only proposed. If it is, the old rate stays.
In written answers, show the formula, the figures and the journal entry. These lines carry step marks.

Common mistakes in Measurement, Tax Rates and Review of Deferred Tax

Using a proposed or announced rate that is not yet enacted or substantively enacted.
Students see a new rate in the question and apply it automatically.
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.
Students carry over present value thinking from financial management.
Fix: AS 22 prohibits discounting. Always show the full tax effect.
Applying the new rate only to current year differences and leaving the opening balance at the old rate.
Students forget that the whole accumulated balance is remeasured.
Fix: Remeasure the entire closing cumulative difference at the new rate and charge the movement to P&L.
Not reviewing deferred tax assets, or writing off a DTA on losses with only reasonable certainty.
Students treat all DTAs alike.
Fix: Use reasonable certainty for normal timing differences and virtual certainty with convincing evidence for unabsorbed depreciation and carry-forward losses.
Treating MAT credit as a normal deferred tax asset with no evidence test, or ignoring its annual review.
Students link all tax credits to AS 22 recognition.
Fix: Recognise MAT credit entitlement only with convincing evidence of use within the specified period, show it separately, and review it at each balance sheet date.
Posting the effect of a tax rate change directly to reserves.
Students think it is an adjustment of past years.
Fix: Take the effect through the Statement of Profit and Loss as tax expense for the period of the change.

Worked examples

Example 1

A company has a deferred tax liability of ₹3,00,000 on 31 March 20X1, computed at 30% on a cumulative timing difference of ₹10,00,000 on depreciation as at 31 March 20X1. During 20X1-22, a further timing difference of ₹2,00,000 arises. Before 31 March 20X2, a rate of 25% is enacted, and this is the rate expected to apply when the differences reverse. Compute the closing DTL at 31 March 20X2 and the charge for the year.

Show the solution

Opening (31 March 20X1) cumulative timing difference = ₹10,00,000. Opening DTL = ₹10,00,000 × 30% = ₹3,00,000.
Closing (31 March 20X2) cumulative timing difference = ₹10,00,000 + ₹2,00,000 = ₹12,00,000.
The rate enacted at the balance sheet date and expected to apply on reversal is 25%.
Closing DTL = ₹12,00,000 × 25% = ₹3,00,000.
Charge for the year = closing ₹3,00,000 − opening ₹3,00,000 = nil.
Split: rate change effect on opening difference = ₹10,00,000 × (25% − 30%) = ₹(50,000), a credit. Current year effect = ₹2,00,000 × 25% = ₹50,000, a charge. Net = nil.
No journal entry is needed for the year since the net movement is nil.

Answer: Closing DTL is ₹3,00,000 and the net deferred tax charge is nil, made up of a ₹50,000 credit from the rate change and a ₹50,000 charge for the new difference.

Example 2

On 31 March 20X2, X Ltd has a DTA of ₹1,20,000 on provision for doubtful debts (timing difference ₹4,00,000 at 30%). On 31 March 20X3, the cumulative difference on this item is ₹5,00,000 and the enacted rate is 30%. The company expects continued profits and has reasonable certainty. Separately, it has a DTA of ₹1,80,000 on unabsorbed depreciation (unabsorbed depreciation of ₹6,00,000 at 30%), recognised in earlier years when virtual certainty existed. Owing to continued losses, there is no longer virtual certainty of recovery. Record the position.

Show the solution

Provision item: closing DTA = ₹5,00,000 × 30% = ₹1,50,000.
Opening DTA = ₹1,20,000, so increase = ₹30,000. Reasonable certainty exists, so recognise it.
Journal: Deferred Tax Asset A/c Dr. ₹30,000 to Statement of Profit and Loss ₹30,000.
Unabsorbed depreciation DTA: it was recognised at ₹1,80,000 in earlier years (₹6,00,000 × 30%). The test of virtual certainty with convincing evidence now fails.
Write down the DTA of ₹1,80,000 to nil.
Journal: Statement of Profit and Loss Dr. ₹1,80,000 to Deferred Tax Asset A/c ₹1,80,000.
Net P&L effect = ₹1,80,000 charge − ₹30,000 credit = ₹1,50,000 net charge.

Answer: DTA on the provision rises to ₹1,50,000 (credit of ₹30,000 to P&L). DTA on unabsorbed depreciation is written down by ₹1,80,000 (charge to P&L). Net charge is ₹1,50,000.

Exam tips

Always state the rate status in one line: enacted or substantively enacted at the balance sheet date. Examiners look for it.
Show the rate-change effect as a separate line when the question gives an opening balance. It earns step marks and helps you check your total.
Write the test words correctly: reasonable certainty for ordinary DTAs, virtual certainty with convincing evidence for losses and unabsorbed depreciation.
In theory questions, state that deferred tax is not discounted and that DTA carrying amounts are reviewed at every balance sheet date.
For MAT credit, give the entry and the evidence condition, and say it is shown separately as MAT credit entitlement.

Practice questions from AS 22 Accounting for Taxes on Income

Measurement, Tax Rates and Review of Deferred Tax in other exams

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

Measurement, Tax Rates and Review of Deferred Tax: frequently asked questions

Which tax rate do I use to measure deferred tax under AS 22?

Use the rate enacted or substantively enacted at the balance sheet date that is expected to apply when the timing difference reverses. A rate that is only proposed is not used. Include any surcharge and cess if they form part of the effective rate.

Where is the effect of a tax rate change shown?

The remeasurement of opening deferred tax balances goes to the Statement of Profit and Loss as part of tax expense in the period of the change. It does not go directly to reserves.

Why is deferred tax not discounted?

AS 22 does not permit discounting because reliable discounting needs detailed scheduling of the reversal of each timing difference, which is impracticable or highly complex. So you show the full undiscounted amount.

How is MAT credit entitlement treated?

Under the ICAI Guidance Note on Accounting for Credit Available in respect of Minimum Alternate Tax, MAT paid that can be set off against future tax is recognised as an asset only when there is convincing evidence of use within the specified period. For May 2027 onwards, read the MAT provision as the corresponding provision under the Income-tax Act, 2025. It is shown as an asset in the balance sheet (MAT credit entitlement) and as a separate line item in the Statement of Profit and Loss, as a credit to the P&L. It is reviewed at each balance sheet date.