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

Ganga Foods Ltd. had a deferred tax liability of Rs 2,00,000 at the start of the year, computed at a 30% rate on a timing difference of about Rs 6,66,667. During the year the enacted tax rate for the future changed to 25%, with the timing difference unchanged. Under AS 22, how should the balance be dealt with at year end?

The liability is remeasured at the new 25% rate to about Rs 1,66,667, and the reduction of about Rs 33,333 is credited to the statement of profit and loss. AS 22 requires deferred tax balances to be measured at rates enacted or substantively enacted at the balance sheet date.

  1. ARemeasure the liability at 25%, giving about Rs 1,66,667, with the reduction credited to profit and lossCorrect
  2. BRetain at Rs 2,00,000 until the timing difference reverses
  3. CRemeasure at 25% and credit the reduction directly to reserves
  4. DRemeasure at 25% and disclose the reduction only as a note without adjusting the books

Explanation

AS 22 requires deferred tax assets and liabilities to be reviewed at each balance sheet date using the tax rates enacted or substantively enacted by then. New liability = 6,66,667 x 25% = about Rs 1,66,667. The decrease of about Rs 33,333 reduces tax expense in the statement of profit and loss. Retaining the old rate or taking the effect to reserves is not permitted.

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