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CMA Intermediate · Financial Accounting · Accounting for Taxes on Income (AS 22)

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 same governing taxation laws. It has a legally enforceable right to set off assets against liabilities representing current tax. What is the presentation in the balance sheet?

The company should present a net deferred tax liability of ₹3,50,000. Because it has a legally enforceable right to set off current tax and both balances relate to taxes levied by the same laws, AS 22 requires the ₹6,00,000 asset to be offset against the ₹9,50,000 liability.

  1. ADeferred tax asset ₹6,00,000 and deferred tax liability ₹9,50,000 shown separately
  2. BNet deferred tax liability ₹3,50,000Correct
  3. CNet deferred tax asset ₹3,50,000
  4. DDeferred tax liability ₹15,50,000

Explanation

Both offset conditions are met: a legal right to set off current tax and the same governing tax laws. So the deferred tax asset is offset against the liability: 9,50,000 - 6,00,000 = 3,50,000 net liability. Showing both gross ignores the requirement to offset; a net asset has the wrong sign.

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