CMA Intermediate · Financial Accounting
Accounting for Taxes on Income (AS 22) Study Guide
AS 22 matches tax expense to the period of the revenue and expenses it relates to. Taxable income and accounting income often differ. Permanent differences create no deferred tax. Timing differences reverse later, so you record their tax effect as a deferred tax asset or liability. Find the difference, apply the tax rate, then present it.
What this chapter covers
AS 22 deals with one problem. The profit in your statement of profit and loss is not the same as the income on which tax is computed. The standard says taxes on income are an expense and are accrued in the same period as the revenue and expenses they relate to. This is the matching concept applied to tax.
The gap between accounting income and taxable income has two causes. Some items are treated differently by tax law and by accounting. Some items are recognised in different amounts or in different periods. The chapter teaches you to sort these differences into permanent differences and timing differences, and to record deferred tax only for the second kind.
This chapter connects to the rest of Paper 6 through the statement of profit and loss, the balance sheet and the notes to accounts. It also links to depreciation, provisions and other accounting standards. In the exam, expect numerical questions asking for deferred tax and the journal entry, plus short theory questions on definitions and disclosure.
AS 22 is a compact chapter with clear rules, so effort here pays off quickly. Numerical questions follow a repeatable pattern: classify each difference, work out the tax effect, and show the closing balance. Theory questions are often direct, such as defining timing and permanent differences, or stating the offset and disclosure conditions. The MCQs in Section A also reward you for knowing the definitions exactly. If you practise the layout, you can earn step marks even when one figure goes wrong.
Accounting for Taxes on Income (AS 22): topics in the order to study them
- 1AS 22 Objectives, Scope and Key DefinitionsStart here because every later rule uses these terms, including deferred tax, which the standard defines as the tax effect of timing differences.
- 2Timing Differences and Permanent DifferencesThis is the core classification. You cannot decide whether deferred tax arises until you can tell the two kinds apart.
- 3Recognition of Deferred Tax Assets and LiabilitiesOnce you can classify differences, learn when a deferred tax asset or liability is recognised, including the role of prudence for assets.
- 4Measurement and Computation of Deferred TaxNow apply the rules to numbers. Practise the tax-effect computation and remember that deferred tax is not discounted.
- 5Review, Presentation and Disclosure under AS 22Learn this after computation, because presentation depends on balances you can now calculate. It covers offsetting and note disclosures.
- 6Special Cases: MAT Credit and Amalgamation EffectsKeep this last. It builds on the basic rules and needs a firm grasp of recognition and measurement before you attempt it.
How to prepare Accounting for Taxes on Income (AS 22)
Prepare this chapter in layers: language first, then classification, then numbers, then presentation. Short daily sessions work well on a phone for the theory, and a notebook is best for the numerical layout.
- Read the definitions of timing differences, permanent differences and deferred tax until you can write each in your own words.
- Make a two-column list of common items and mark each as permanent or timing. Say why for every item.
- Learn the recognition rules: deferred tax is recognised on timing differences, never on permanent differences, and assets are subject to prudence.
- Practise computation in a fixed layout: accounting income, differences, taxable income, tax effect, then opening and closing deferred tax balances.
- Write the journal entry for each year's movement and state clearly whether the balance is an asset or a liability.
- Revise presentation: the offset conditions, the break-up of components in notes, and the evidence disclosure for unabsorbed depreciation or carried forward losses.
- Finish with the special cases, then attempt a full MCQ set and two written questions under timed conditions.
Common mistakes in Accounting for Taxes on Income (AS 22)
Creating deferred tax on a permanent difference
Fix: Ask one question first: will this difference reverse later? If not, it is permanent and creates no deferred tax.
Confusing the direction of the difference when deciding asset or liability
Fix: Compare current tax with the tax on accounting income. If tax is paid in advance of the book charge, think asset. If tax is deferred, think liability.
Discounting deferred tax balances
Fix: Remember that the standard neither requires nor permits discounting of deferred tax assets and liabilities.
Offsetting assets and liabilities without checking both conditions
Fix: Offset only when there is a legally enforceable right to set off current tax and both relate to taxes levied by the same governing tax laws.
Showing only the final deferred tax figure
Fix: Show each difference, its tax effect, the opening balance and the movement before the journal entry.
Skipping disclosure points in written answers
Fix: Learn the two disclosure rules, the component break-up and the evidence for assets arising from unabsorbed depreciation or losses, and add them to relevant answers.
Last-day revision: Accounting for Taxes on Income (AS 22)
- 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.
Accounting for Taxes on Income (AS 22) practice questions
- A company reports accounting income of Rs 10,00,000 before tax. Under AS 22, how is accounting income defined?
- Under AS 22, when will an enterprise normally have a legally enforceable right to set off an asset and liability representing current tax?
- For a year, a company's accounting depreciation is Rs. 10 lakhs against tax depreciation of Rs. 16 lakhs. It also debited Rs. 2 lakhs as a p…
- Mehta Traders provided Rs 2,00,000 for doubtful debts in its books this year. The expense is allowed for tax only when the debts are written…
- Kaveri Textiles Ltd has deferred tax assets of ₹6,00,000 and deferred tax liabilities of ₹9,50,000, all on taxes on income levied by the sam…
- Under AS 22, an enterprise should offset assets and liabilities representing current tax only if it has a legally enforceable right to set o…
- According to AS 22, which of the following is covered within the meaning of 'taxes on income' for the purposes of the Standard?
- Under AS 22, the tax effects of timing differences are included in the tax expense in the statement of profit and loss. Where do they appear…
Accounting for Taxes on Income (AS 22) in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Accounting for Taxes on Income (AS 22): frequently asked questions
What is the difference between a timing difference and a permanent difference?
A timing difference originates in one period and can reverse in one or more later periods. A permanent difference originates in one period and never reverses. Only timing differences give rise to deferred tax.
Is deferred tax discounted under AS 22?
No. The standard says it does not require or permit discounting of deferred tax assets and liabilities. Discounting needs detailed scheduling of reversals, which is often impractical, and permitting it would reduce comparability.
When can deferred tax assets and liabilities be offset?
Only when two conditions are met. The enterprise must have a legally enforceable right to set off assets against liabilities representing current tax. The deferred tax balances must also relate to taxes on income levied by the same governing tax laws.
What must be disclosed about deferred tax in the notes?
You must disclose the break-up of deferred tax assets and liabilities into their major components. If the enterprise has unabsorbed depreciation or carried forward losses under tax laws, you must also disclose the nature of the evidence supporting recognition of the deferred tax asset.
How should I answer a deferred tax numerical in the exam?
Set out the accounting income, the timing and permanent differences, the tax effect and the opening and closing balances. Then give the journal entry and state whether the balance is an asset or a liability. This layout earns step marks even if one figure is wrong.