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

Sunrise Pharma Ltd. has a deferred tax liability of ₹2,40,000 and a recognised deferred tax asset of ₹1,50,000, both relating to taxes levied by the same governmental authority under the Income-tax law, and the company has a legal right to set off current tax assets against current tax liabilities. How should these be presented in the balance sheet as per AS 22?

A net deferred tax liability of ₹90,000 should be shown. AS 22 allows deferred tax assets and liabilities to be set off when the enterprise has a legal right to set off current tax and both relate to taxes under the same law. Here ₹2,40,000 less ₹1,50,000 leaves ₹90,000.

  1. AShow a deferred tax liability of ₹2,40,000 and a deferred tax asset of ₹1,50,000 separately
  2. BShow a net deferred tax liability of ₹90,000Correct
  3. CShow a net deferred tax asset of ₹90,000
  4. DShow only the deferred tax liability of ₹2,40,000 and ignore the asset

Explanation

AS 22 permits an enterprise to offset deferred tax assets and liabilities only if it has a legal right to set off assets against liabilities representing current tax and the deferred balances relate to taxes levied by the same governing taxation law. Both conditions are met, so the net is 2,40,000 - 1,50,000 = ₹90,000 liability. Separate presentation would be incorrect here.

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