Advanced Accounting · AS 22 Accounting for Taxes on Income

Recognition of Deferred Tax Assets and Liabilities under AS 22

Updated 4 October 2026 · Fact-checked

Under AS 22, you recognise deferred tax on timing differences. Taxable timing differences create a deferred tax liability, always recognised. Deductible timing differences create a deferred tax asset, recognised only if reasonably certain of future taxable income. For unabsorbed losses or depreciation, you need virtual certainty backed by convincing evidence.

Understand Recognition of Deferred Tax Assets and Liabilities

Accounting profit and taxable profit are different. Some items are counted in different years by accounting and by tax law. The gap that reverses in later years is a timing difference. AS 22 asks you to record the tax effect of these differences so that tax expense matches the profit shown.

A deferred tax liability (DTL) arises when taxable income is lower than accounting income now, so you pay more tax later. The classic case is depreciation: tax depreciation is higher than book depreciation, so taxable profit is lower today and the difference reverses later. A DTL is recognised for all taxable timing differences. Prudence does not allow you to skip it.

A deferred tax asset (DTA) arises when taxable income is higher than accounting income now, so you will pay less tax later. Examples are expenses disallowed now but allowed on payment, such as provision for gratuity or leave encashment charged in books but allowed in tax only when paid. Because an asset needs future profit to be used, AS 22 applies prudence. You recognise a DTA only to the extent there is reasonable certainty that sufficient future taxable income will be available.

The test is stricter for unabsorbed depreciation and carry forward of losses under tax laws. Here you recognise a DTA only if there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available. Virtual certainty cannot be based merely on a forecast of future profits. The existence of unabsorbed depreciation or carry forward losses is itself strong evidence that future taxable income may not be available. So you need convincing evidence, for example a firm order book or binding sales contracts that will give profits, or certain gains from the sale of assets. Management optimism is not enough.

At each balance sheet date you also reassess unrecognised DTAs. If virtual or reasonable certainty now exists, you recognise them. You also review carrying amounts of recognised DTAs and write them down if certainty is no longer there. Recognition itself is separate from measurement. Measurement uses the tax rates enacted or substantively enacted at the balance sheet date.

Key rules to remember

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.

How to solve Recognition of Deferred Tax Assets and Liabilities questions

Use this order for any recognition or computation question on deferred tax.

1List every difference between accounting profit and taxable profit given in the question.
2Separate permanent differences from timing differences. Ignore permanent differences for deferred tax, for example penalties or exempt income.
3For each timing difference, decide whether it will increase future tax (taxable, DTL) or reduce future tax (deductible, DTA).
4Multiply each difference by the enacted tax rate to get the deferred tax amount.
5For a DTA, check the certainty test. Use reasonable certainty for ordinary items and virtual certainty with convincing evidence for unabsorbed depreciation and losses.
6Set off DTA against DTL only if the enterprise has a legally enforceable right to set off current tax assets against current tax liabilities, and both deferred taxes relate to taxes on income levied by the same governing taxation law. Then compute the closing balance and the charge or credit for the year.
7Pass the journal entry and state the presentation: deferred tax is shown separately from current assets and liabilities, DTA and DTL are shown net only if the set-off conditions are met, and the reasons for recognition are disclosed.

Quickest way: Three-question filter for MCQs and short answers

When to use it: Use this when you have about two minutes per mark in MCQs or a short theory question.

Ask: does this difference reverse in later years? If not, it is permanent and no deferred tax arises.
Ask: does it make future tax higher or lower? Higher means DTL, recognised always. Lower means DTA, test for certainty.
Ask: is the DTA on carried forward loss or unabsorbed depreciation? If yes, the word to write is virtual certainty with convincing evidence.
In written answers, use the format: provision of AS 22, facts of the case, conclusion with amount. This earns step marks even if a number is wrong.

Common mistakes in Recognition of Deferred Tax Assets and Liabilities

Recognising a DTA on unabsorbed depreciation just because the company expects future profits.
Students treat all DTAs under the reasonable certainty test.
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.
Students think prudence applies to all deferred tax.
Fix: Prudence restricts DTAs only. DTL is recognised for all taxable timing differences.
Creating deferred tax on permanent differences.
Any gap between book and tax profit looks like a timing difference.
Fix: Ask whether the difference reverses. Fines, penalties and exempt income never reverse, so ignore them.
Using the wrong tax rate.
Students use the rate of the year the difference arose.
Fix: Use the rate enacted or substantively enacted at the balance sheet date.
Showing the whole closing balance as the year's expense.
Students forget the opening deferred tax balance.
Fix: The year's charge is the closing balance minus the opening balance. Journal only the change.
Mixing up the direction: tax depreciation higher means DTA.
Students link higher deduction with an asset.
Fix: Higher tax depreciation lowers taxable profit now and raises tax later, so it is a DTL.

Worked examples

Example 1

A company charges depreciation of ₹4,00,000 in its books for the year. Depreciation allowed under tax law is ₹6,50,000. Tax rate is 30%. There are no opening balances. Compute the deferred tax and pass the entry.

Show the solution

Tax depreciation exceeds book depreciation by ₹6,50,000 − ₹4,00,000 = ₹2,50,000.
Taxable profit is lower than accounting profit now by ₹2,50,000. Tax will be higher when this reverses, so it is a taxable timing difference.
Deferred tax liability = ₹2,50,000 × 30% = ₹75,000.
DTL is recognised in full. No certainty test is needed.
Entry: Profit and Loss A/c (Deferred Tax) Dr. ₹75,000 to Deferred Tax Liability A/c ₹75,000.

Answer: Deferred tax liability of ₹75,000 is created by debiting the Statement of Profit and Loss.

Example 2

A company has unabsorbed depreciation of ₹5,00,000 at the year end and a provision for doubtful debts of ₹1,00,000 disallowed in tax until written off. Tax rate is 30%. The company has made losses in recent years. It has no firm orders and only a management forecast of profits. Another company in the same position has a firm long-term sales contract that will definitely give profits well above the amount needed. Decide on recognition for the first company.

Show the solution

The provision for doubtful debts is a deductible timing difference. Unabsorbed depreciation is a carry forward item under tax law, not an ordinary timing difference.
Provision for doubtful debts: DTA = ₹1,00,000 × 30% = ₹30,000. This needs reasonable certainty of future taxable income.
Unabsorbed depreciation: potential DTA = ₹5,00,000 × 30% = ₹1,50,000. This needs virtual certainty supported by convincing evidence.
The first company has a recent loss history, no firm orders and only a forecast. There is no convincing evidence, so virtual certainty is not met and the ₹1,50,000 is not recognised.
For the provision, reasonable certainty is also not met. The loss history and the absence of any evidence of future profits mean sufficient future taxable income is not reasonably certain. The ₹30,000 DTA is not recognised.
Reassess both at each balance sheet date and disclose the unrecognised amounts if relevant.

Answer: The first company recognises no DTA, neither ₹1,50,000 on unabsorbed depreciation nor ₹30,000 on the provision. The company with the firm sales contract could recognise the DTA on unabsorbed depreciation because it has convincing evidence.

Exam tips

Quote the phrase virtual certainty supported by convincing evidence in theory answers. Examiners look for it.
In case studies, check what evidence the question gives: firm orders, binding contracts or certain gains from asset sales support recognition, while a forecast alone does not. Carry forward losses are strong evidence against future taxable income.
Always state the direction first: DTL or DTA. A wrong direction loses the entire answer.
Show the closing minus opening working in multi-year problems. It earns method marks.
In MCQs, remember that DTL is always recognised and only DTA has a certainty test.

Practice questions from AS 22 Accounting for Taxes on Income

Recognition of Deferred Tax Assets and Liabilities in other exams

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

Recognition of Deferred Tax Assets and Liabilities: frequently asked questions

What does virtual certainty mean in AS 22?

It means the future taxable income is almost sure, and this is backed by convincing evidence, not just a forecast. Examples are firm sales orders or contracts. It applies to DTAs on unabsorbed depreciation and carried forward losses.

Can I recognise a deferred tax asset on unabsorbed depreciation?

Yes, but only if there is virtual certainty supported by convincing evidence of sufficient future taxable income. Without this evidence you do not recognise it. You review the position at every balance sheet date.

What is the difference between a deferred tax asset and a deferred tax liability?

A DTL is tax payable in future periods on taxable timing differences. A DTA is tax recoverable in future periods on deductible timing differences and carried forward losses. A DTL is always recognised, while a DTA is subject to a certainty test.

How do I calculate deferred tax liability in the exam?

Find the timing difference, then multiply it by the enacted tax rate. For depreciation, the difference is tax depreciation minus book depreciation. The year's charge is closing balance minus opening balance.