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

Sagar Traders Ltd. has a deferred tax asset of Rs 40,000 recognised in earlier years on provision for doubtful debts. At the current year end, the company reviews it and finds that it is now reasonably certain, but not virtually certain, that sufficient future taxable income will exist. The asset arises from timing differences other than carried forward losses. What should the company do?

The company should continue carrying the deferred tax asset. For timing differences other than unabsorbed depreciation and carried forward losses, AS 22 requires only reasonable certainty of future taxable income, not virtual certainty, and that standard is met here.

  1. AContinue to carry the DTA, as reasonable certainty suffices for such timing differencesCorrect
  2. BWrite off the DTA fully, as virtual certainty is required
  3. CConvert it into a contingent asset disclosure
  4. DReduce it to 50% and carry the balance

Explanation

For deferred tax assets arising from timing differences other than unabsorbed depreciation or carried forward losses, AS 22 requires only reasonable certainty of future taxable income. Virtual certainty applies to the loss and unabsorbed depreciation cases. Hence the DTA continues to be carried and reviewed at each balance sheet date.

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