Analysis of Financial Statements_18

AS-22

SCOPE

Taxes on income include all domestic & foreign taxes, which are based on taxable income.

Excludes tax payable on distribution of dividends & other distribution made by enterprise.

Difference between Accounting Profit and Taxable Income

Timing Difference

Permanent Difference

Timing Differences:

are differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Permanent Differences:

are differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.

Examples of timing difference

Differences due to different methods of depreciation.

Difference due to different rates of depreciation.

Sale of assets forming part of block of assets.

Tax Expense for the period

Current Tax : tax payable on the taxable income.

Deferred Tax : tax effect of timing differences.

Hence, Tax Expenses=Current Tax + Deferred Tax

If taxable Income > Accounting Income =Deferred Tax Asset.

Temporary difference, result in deductible amt. in future years.

If accounting Income > Taxable Income = Deferred Tax Liability.

T.D, result in taxable amt. in future years.

Deferred tax asset or liability do not arise on account of permanent differences.

Prudence in Recognizing Deferred Tax Asset

Enterprise with unabsorbed depreciation or carried forward losses - Deferred tax assets recognized only if there is `virtual certainty’ of set off supported by convincing evidence-- ASI 9.

In other cases, to recognize Deferred tax asset there should be `reasonable certainty’ of set off.

Under Liability Method tax effect is calculated considering current tax rate or other tax rate if applicable and available (substantively enacted tax rates)

Accordingly, tax effect is recomputed with every change in the tax rate and adjustment is made.

Deferred tax assets and liabilities are not discounted to present values.

Re-assessment - and Review

Unrecognized Deferred Tax Assets are reviewed.

Carrying amount of deferred tax asset is reviewed.

Presentation & Disclosure

Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities.

Deferred tax assets and liabilities should be separately disclosed.

Major components of deferred tax assets and liabilities should be disclosed by way of note.

Nature of evidence considered for recognizing deferred tax assets when enterprise has loss or unabsorbed depreciation should be disclosed.