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CLARIFICATION ON ACCOUNTING STANDARD (AS) 22, ACCOUNTING
FOR TAXES ON INCOME
Accounting Standard (AS) 22, Accounting for
Taxes on Income, which is mandatory for certain enterprises, as specified
in the standard, in respect of accounting periods commencing on or after
1-4-2001, contains the following paragraph under Transitional Provisions
:
“33. On the first occasion that the
taxes on income are accounted for in accordance with this Statement, the
enterprise should recognise, in the financial statements, the deferred
tax balance that has accumulated prior to the adoption of this Statement
as deferred tax asset/liability with a corresponding credit/charge to
the revenue reserves, subject to the consideration of prudence in case
of deferred tax assets (see paragraphs 15-18). The amount so credited/charged
to the revenue reserves should be the same as that which would have resulted
if this Statement had been in effect from the beginning.”
An issue has been raised as to whether an
enterprise, which accounts for taxes on income as per AS 22 for the first
time for accounting period commencing on 1st April, 2001, should use the
rate of income-tax applicable on 31st March, 2001 or on 1st April, 2001,
for determination of the opening balance of the accumulated deferred tax.
The amount of deferred tax assets and liabilities
represents the amount recoverable/payable in future. Accordingly, the
amount of the opening balance of the accumulated deferred tax determined
by using the tax rate applicable on 1st April, 2001 will give the best
estimate of the amount expected to be recovered/paid on the settlement.
In this context, it may be noted that paragraphs 21 and 22 of AS 22 provide
that where announcements of tax rates and tax laws have the substantive
effect of actual enactment, deferred tax assets and liabilities are measured
using such announced tax rates and tax laws.
Accordingly, it is clarified that an enterprise, which applies AS 22 for
the first time in respect of accounting period commencing on 1st April,
2001, should determine the amount of the opening balance of the accumulated
deferred tax by using the rate of income tax applicable as on 1st April,
2001.
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