CMA Intermediate · Financial Accounting · Accounting for Taxes on Income (AS 22)
Last year Rao Ltd did not recognise a deferred tax asset because future taxable income was uncertain. At this year's balance sheet date, improved trading conditions make it reasonably certain that sufficient taxable income will be available. What does AS 22 require?
Rao Ltd should recognise the previously unrecognised deferred tax asset to the extent realisation is now reasonably certain. AS 22 requires unrecognised deferred tax assets to be re-assessed at every balance sheet date, and improved trading conditions can make future taxable income sufficiently certain.
- AContinue to leave the asset unrecognised until the timing difference reverses
- BRecognise the previously unrecognised deferred tax asset to the extent it is now reasonably certain it can be realisedCorrect
- CRecognise the asset only by adjusting opening reserves of prior years
- DTreat the asset as a permanent difference and ignore it
Explanation
AS 22 requires re-assessment of unrecognised deferred tax assets at each balance sheet date. When it becomes reasonably or virtually certain, as applicable, that sufficient future taxable income will be available, the asset is recognised. The standard does not require waiting for reversal or adjusting reserves.
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