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

Tulsi Enterprises Ltd. had a deferred tax liability of ₹2,40,000 at the start of the year, computed at 30% on a cumulative timing difference of ₹8,00,000. During the year, the Finance Act reduced the tax rate to 25%, substantively enacted before the balance sheet date. No timing differences arose or reversed during the year. What is the correct treatment under AS 22?

The deferred tax liability should be remeasured to ₹2,00,000 at the new 25% rate and the ₹40,000 reduction credited to the statement of profit and loss. AS 22 requires measurement at rates substantively enacted by the balance sheet date, with the effect taken to profit or loss.

  1. ARetain the DTL at ₹2,40,000 until the differences reverse
  2. BRemeasure the DTL to ₹2,00,000 and credit ₹40,000 to the statement of profit and lossCorrect
  3. CRemeasure the DTL to ₹2,00,000 and credit ₹40,000 to general reserve
  4. DRemeasure the DTL to ₹2,00,000 and show ₹40,000 as a prior period item

Explanation

Deferred tax is measured using rates enacted or substantively enacted at the balance sheet date. New DTL = 8,00,000 x 25% = ₹2,00,000. The ₹40,000 reduction is a change in estimate of tax effect and is recognised in the statement of profit and loss for the year, not in reserves or as a prior period item.

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