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CA Intermediate · Advanced Accounting · AS 22 Accounting for Taxes on Income

Arjun Pharma Ltd. has a deferred tax liability of Rs 90,000 at the start of the year, created at a 30% tax rate on cumulative timing differences of Rs 3,00,000. During the year the tax rate for future periods is enacted as 25%, and timing differences at year end are still Rs 3,00,000 (no new differences). What is the effect in the profit and loss statement for the year?

A credit of Rs 15,000 to the profit and loss statement. Deferred tax must be remeasured at the enacted rate at the balance sheet date, so the liability falls from Rs 90,000 to Rs 75,000 and the reduction reduces tax expense.

  1. ACredit of Rs 15,000 to deferred tax expenseCorrect
  2. BDebit of Rs 15,000 to deferred tax expense
  3. CCredit of Rs 90,000
  4. DNo effect, as rate changes are ignored

Explanation

Under AS 22, deferred tax is measured at rates enacted or substantively enacted at the balance sheet date. Required liability = 3,00,000 x 25% = Rs 75,000. The opening balance of Rs 90,000 is reduced by Rs 15,000, which is credited to the profit and loss statement. Ignoring the rate change would leave the liability overstated.

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