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

Gomti Traders Ltd. has an unabsorbed business loss of ₹4,00,000 carried forward under tax law, with no deferred tax liabilities against which it can be set off. The company has been making losses, and there is only a reasonable expectation, not virtual certainty supported by convincing evidence, of future profits. Tax rate is 30%. Under AS 22, what should the company do?

The company should not recognise a deferred tax asset on the carried forward loss. AS 22 demands virtual certainty, supported by convincing evidence, of future taxable income for such assets; a mere reasonable expectation is insufficient, so the ₹1,20,000 potential asset stays unrecognised.

  1. ARecognise deferred tax asset of ₹1,20,000
  2. BRecognise deferred tax asset of ₹60,000
  3. CRecognise no deferred tax asset on the loss, and disclose the unrecognised amount if appropriateCorrect
  4. DRecognise deferred tax liability of ₹1,20,000

Explanation

AS 22 requires that deferred tax assets on carried forward losses be recognised only if there is virtual certainty supported by convincing evidence of sufficient future taxable income. Here that standard is not met, so no asset is recognised. The unrecognised amount is disclosed as appropriate.

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