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

Under AS 22, Orion Ltd. has unabsorbed depreciation and carried forward business loss, and has no virtual certainty supported by convincing evidence of future taxable income. How should it treat the deferred tax asset on these items?

The company should not recognise the deferred tax asset. For unabsorbed depreciation and carried forward losses, AS 22 demands virtual certainty supported by convincing evidence of sufficient future taxable income, and in its absence the asset stays unrecognised.

  1. ARecognise it fully as an asset in the year
  2. BDo not recognise itCorrect
  3. CRecognise it only for unabsorbed depreciation
  4. DRecognise it only for the loss and not for depreciation

Explanation

AS 22 requires deferred tax assets on unabsorbed depreciation and carried forward losses to be recognised only if there is virtual certainty supported by convincing evidence of future taxable income. Without it, no asset is recognised. Options recognising either item ignore this test.

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