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

Sundaram Auto Ltd. has a deferred tax asset of ₹1,50,000 on provision for warranty at the start of the year. At year end, the company reviews it and finds that it is no longer reasonably certain that sufficient future taxable income will be available to recover ₹50,000 of this asset. What should the company do under AS 22?

The company should reduce the deferred tax asset's carrying amount by ₹50,000 and charge it to the Statement of Profit and Loss. AS 22 requires a review of deferred tax assets at each balance sheet date, and any portion not reasonably certain to be realised is written down.

  1. AIgnore the review until the asset actually expires
  2. BWrite down the carrying amount of the DTA by ₹50,000 and charge it to the Statement of Profit and LossCorrect
  3. CReverse ₹50,000 directly against general reserve
  4. DTreat ₹50,000 as a contingent liability

Explanation

AS 22 requires deferred tax assets to be reviewed at each balance sheet date. If the company is no longer reasonably certain (or virtually certain, where losses exist) of realisation, the carrying amount is reduced, and the reduction goes to the Statement of Profit and Loss. It is not adjusted to reserves nor reported as a contingent liability.

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