Page 3 of 3 FirstFirst 123
Results 21 to 28 of 28

Thread: 22 Accounting Standard 22 – Accounting for Taxes on Income (Objective) AS 22

  1. #21
    Accounting Standards
    Guest

    Default Accounting Standard Interpretation 3 of Accounting Standard 22 - Accounting for taxes on Income - AS 22

    Accounting Standards Interpretation (ASI) 3
    (Revised)
    Accounting for Taxes on Income in the situations of Tax Holiday under Sections
    80-IA and 80-IB of the Income-tax Act, 1961 Accounting Standard (AS) 22,Accounting for
    Taxes on Income


    ISSUE

    1. Sections 80-IA and 80-IB of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’) provide certain deductions, for certain years, in determining the taxable income of an enterprise. These deductions are commonly described as ‘tax holiday’ and the period during which these deductions are available is commonly described as ‘tax holiday period’.


    2. The issue is howAS 22 should be applied in the situations of tax-holiday under sections 80-IA and 80-IB of the Act.


    CONSENSUS

    3. The deferred tax in respect of timing differences which reverse during the tax holiday period should not be recognised to the extent the enterprise’s gross total income is subject to the deduction during the tax holiday period as per the requirements of the Act.

    4. Deferred tax in respect of timing differences which reverse after the tax holiday period should be recognised in the year in which the timing differences originate. However, recognition of deferred tax assets should be subject to the consideration of prudence as laid down in paragraphs 15 to 18
    of AS 22.


    5. For the above purposes, the timing differences which originate first should be considered to reverse first. The Appendix to this Interpretation illustrates the application of the above
    requirements.


    BASIS FOR CONCLUSIONS

    6. Section 80A (1) of the Act provides that in computing the total income of an assessee, there shall
    be allowed from his gross total income, in accordancewith and subject to the provisions of thisChapter, the deductions specified in sections 80C to 80U. Therefore, the deductions under sections 80-IA and 80-IB are the deductions from the gross total income of an assessee determined in accordance with the provisions of the Act. For example, depreciation under section 32 of the Act is provided for arriving at the amount of gross total income even if it is not claimed in view of Explanation 5 to clause (ii) of sub-section (1) of section 32 of the Act.

    7. In view of the above, the amount of the deduction under sections 80- IAand 80-IBof theAct, is based on the gross total incomewhich is determined in accordance with the provisions of the Act. In respect of the situations covered under sections 80-IA and 80-IB, the difference in the relevant
    accounting income and taxable income (relevant gross total income minus deduction allowed under sections 80-IAand 80-IB) of an enterprise during a tax holiday period is classified into permanent differences and timing differences. The amount of deduction in respect of sections 80-IA and 80-
    IB is a permanent difference whereas the differences which arise because of different treatment of items of income and expenses for determination of relevant accounting income and relevant gross total income such as depreciation are timing differences.

    8. The Framework for the Preparation and Presentation of Financial Statements provides that “An asset is recognised in the balance sheet when it is probable that the future economic benefits associated with itwill flowto the enterprise and the asset has a cost or value that can bemeasured reliably”. The Framework also provides that “A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably”. In the situation of tax holiday under Sections 80-IA and 80-IB of the Act, it is probable that deferred tax assets and liabilities in respect of timing differences which reverse during the tax holiday period, whether originated in the tax holiday period or before that (refer provisions of section 80-IA(2) of the Act), will not be realised or settled. Accordingly, a deferred tax asset or a liability for timing differences which reverse during the tax holiday period does not meet the above criteria for recognition of asset or liability, as the case may be, and therefore is not recognised to the extent the gross total income of the enterprise is subject to the deduction during the tax holiday
    period.


    9. Deferred tax assets/liabilities for timing differences which reverse after the tax holiday period, whether originated in the tax holiday period or before that, are recognised in the period in which these differences originate because these can be realised/paid after the expiry of the tax holiday period by payment of lesser or higher amount of tax after the tax holiday period because of reversal of timing differences.

    10. According to one view, during the tax holiday period, no deferred tax should be recognised even for the timing differences which reverse after the tax holiday period, because timing differences do not originate, for example, in the situation of a 100 percent tax holiday period the taxable income is nil. This view was not accepted because in the aforesaid situation, although the currnt tax is nil but deferred tax, on account of the timing differenceswhich will reverse after the tax holiday period, exists. Further, even in case of carry forward of losses which can be set-off against future taxable income, deferred tax may be recognised, as per AS 22, in respect of all timing differences irrespective of the fact that the taxable income of the enterprise is nil in the period in which the timing differences originate.


    11. According to another view, the timing differenceswhichwill reverse after the tax holiday period should be recognised at the beginning of the first year after the expiry of the tax holiday period and not in the year in which the timing differences originate. Accordingly, as per this view, during the tax
    holiday period, deferred tax should not be recognised. This view was also not accepted because as per AS 22 deferred tax should be recognised in the period in which the relevant timing differences originate.

  2. #22
    Accounting Standards
    Guest

    Default Appendix of Accounting Standard 22 - Accounting for taxes on income - AS 22

    Appendix of Accounting Standard 22 - Accounting for taxes on income - AS 22

    Click her for Appendix

    http://www.knowledgebible.com/forum/...axes-on-Income

  3. #23
    Accounting Standards
    Guest

    Default Accounting Standards Interpretation 4 of Accounting Standard 22 - Accounting for taxes on income - AS 22



    Accounting Standards Interpretation (ASI)4
    (Revised)
    Losses under the head Capital Gains
    Accounting Standard (AS) 22,Accounting for Taxes on Income


    [This revised Accounting Standards Interpretation replaces ASI 4 issued in December 2002.]

    ISSUE

    1. The issue is how AS 22 should be applied in respect of ‘loss’ arising under the head ‘Capital gains’ of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’), which can be carried forward and set-off in future years, only against the income arising under that head as per the requirements
    of the Act.

    CONSENSUS

    2. Where an enterprise’s statement of profit and loss includes an item of ‘loss’ which can be set-off in future for taxation purposes, only against the income arising under the head ‘Capital gains’ as per the requirements of the Act, that item is a timing difference to the extent it is not set-off in the
    current year and is allowed to be set-off against the income arising under the head ‘Capital gains’ in subsequent years subject to the provisions of theAct. In respect of such ‘loss’, deferred tax asset should be recognised and carried forward subject to the consideration of prudence.Accordingly, in respect of such ‘loss’, deferred tax asset should be recognised and carried forward only to the extent that there is a virtual certainty, supported by convincing evidence, that sufficient future taxable income will be available under the head ‘Capital gains’ against which the loss can be set-off as per the provisions of the Act. Whether the test of virtual certainty is fulfilled or not would
    depend on the facts and circumstances of each case. The examples of situations in which the test of virtual certainty, supported by convincing evidence, for the purposes of the recognition of deferred tax asset in respect of loss arising under the head ‘Capital gains’ is normally fulfilled, are sale of an asset giving rise to capital gain (eligible to set-off the capital loss as per the provisions of theAct) after the balance sheet date but before the financial statements are approved, and binding sale agreement which will give rise to capital gain (eligible to set-off the capital loss as per the provisions of the Act).


    3. In cases where there is a difference between the amounts of ‘loss’ recognised for accounting purposes and tax purposes because of cost indexation under the Act in respect of long-term capital assets, the deferred tax asset should be recognised and carried forward (subject to the consideration of prudence) on the amount which can be carried forward and set-off in future years as per the provisions of the Act.

    Transitional Provision

    4. Where an enterprise first applies this revised ASI, the deferred tax asset recognised previously considering the reasonable level of certainty, as per the pre-revised ASI 4, and no longer meets the recognition criteria laid down in the revised ASI, should be written-off with a corresponding charge
    to the revenue reserves.

    BASIS FOR CONCLUSIONS

    5. Section 71 (3) of the Act provides that “Where in respect of any assessment year, the net result of the computation under the head “Capital gains” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against income under the other head”.

    6. Section 74 (1) of the Act provides that “Where in respect of any assessment year, the net result of the computation under the head “Capital gains” is a loss to the assessee, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment
    year, and— (a) in so far as such loss relates to a short-term capital asset, it shall be set off against income, if any, under the head “Capital gains” assessable for that assessment year in respect of any other capital asset;


    (b) in so far as such loss relates to a long-term capital asset, it shall be set off against income, if any, under the head “Capital gains” assessable for that assessment year in respect of any other
    capital asset not being a short-term capital asset;


    (c) if the loss cannot be wholly so set-off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.”

    Section 74 (2) of the Act provides that “No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed”.

    7. AS 22 defines ‘timing differences’ as “the 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”.

    8. Where an enterprise’s statement of profit and loss includes an item of loss, which is considered a ‘loss’ under the head ‘Capital gains’ as per the provisions of the Act, the loss is a timing difference, to the extent the same is not set-off in the current year, because this loss can be allowed to be set-off against income arising under the head ‘Capital gains’ in future, subject to the provisions of the Act, and to that extent the amount of income under that head will not be taxable in the future year even though the said income would be included in the determination of the accounting income of that year.


    9. AS 22 provides that “Deferred tax should be recognised for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets as set out in paragraphs 15-18”. Paragraph 15 of AS 22 provides that “Except in the situations stated in paragraph 17, deferred tax assets should be recognised and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised.”

    “17. Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.

    18. The existence of unabsorbed depreciation or carry forward of losses under tax laws is strong evidence that future taxable income may not be available. Therefore,when an enterprise has a history of recent losses, the enterprise recognises deferred tax assets only to the extent that it has timing differences the reversal of which will result in sufficient income or there is other convincing evidence that sufficient taxable income will be available againstwhich such deferred tax assets can be realised. In such circumstances, the nature of the evidence supporting its recognition is disclosed.” The income under the head ‘Capital gains’ does not arise in the course of the operating activities of an enterprise. Thus, for the purpose of recognition of a deferred tax asset, the degree of certainty of such an income arising in future should be higher.Accordingly, in case of ‘loss’under the head ‘Capital gains’, deferred tax asset should be recognised and carried forward only to the extent that there is a virtual certainty, supported by convincing evidence, that sufficient future taxable incomewill be available under the head ‘Capital gains’ against which the loss can be set-off as per the provisions of the Act. In this regard, virtual certainty of the availability of sufficient future taxable income against which deferred tax assets can be realised, will be construed to mean virtual certainty of the availability of taxable income under the head “Capital gains” in future in accordance with the provisions of the Act.


    10. In cases where there is a difference between the amounts of ‘loss’ recognised for accounting purposes and tax purposes because of cost indexation under the Act in respect of long-term capital assets, deferred tax asset is recognised and carried forward (subject to the consideration of
    prudence) on the amount which can be carried forward and set-off in future years as per the provisions of the Act since that is the amount which will be available for set-off in future years as per the provisions of the Act.

    11. As per the requirements of the pre-revised ASI 4, deferred tax asset in respect of a loss arising under the head ‘CapitalGains’, in certain situations, was recognised on the consideration of the reasonable certainty. The revised ASI 4, however, requires that in all cases, deferred tax asset in respect of such loss is recognised only to the extent there is a virtual certainty, supported by convincing evidence, that sufficient future taxable incomewill be available under the head ‘Capital gains’ against which the loss can be set-off as per the provisions of the Act. As a result, a deferred tax asset, recognised as per the pre-revised ASI 4, may notmeet the recognition criteria laid down in
    the revised ASI and consequently, would be required to be written-off. A deferred tax asset, which is required to be written-off in this manner, is charged to the revenue reserves.

  4. #24
    Accounting Standards
    Guest

    Default Accounting Standards Interpretation 5 - Accounting Standard 22 - Accounting for Taxes on Income - AS 22


    Accounting Standards Interpretation (ASI) 5
    Accounting for Taxes on Income in the situations of Tax Holiday under Sections
    10A and 10B of the Income-tax Act, 1961
    Accounting Standard (AS) 22,Accounting for Taxes on Income


    ISSUE

    1. Chapter III of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’) deals with incomes which do not form part of total income. Sections 10A and 10B of the Act are covered under Chapter III. These sections allow certain deductions, for certain years, from the total income of an assessee. These deductions are commonly described as ‘tax holiday’ and the period during which these deductions are available is commonly described as ‘tax holiday period’.

    2. The issue is how AS 22 should be applied in the situations of taxholiday under sections 10A and 10B of the Act.

    CONSENSUS

    3. The deferred tax in respect of timing differenceswhich originate during the tax holiday period and reverse during the tax holiday period, should not be recognised to the extent deduction from the total income of an enterprise is allowed during the tax holiday period as per the provisions of sections
    10A and 10B of the Act.


    4. Deferred tax in respect of timing differences which originate during the tax holiday period but reverse after the tax holiday period should be recognised in the year in which the timing differences originate. However, recognition of deferred tax assets should be subject to the consideration of prudence as laid down in paragraphs 15 to 18 of AS 22.

    5. For the above purposes, the timing differences which originate first should be considered to reverse first.

    BASIS FOR CONCLUSIONS

    6. Sections 10A and 10B are covered under Chapter III of the Act. These sections allow certain deductions, for certain years, fromthe total income of the assessee.


    7. The Framework for the Preparation and Presentation of Financial Statements provides that “An asset is recognised in the balance sheet when it is probable that the future economic benefits associated with it will flow to the enterprise and the asset has a cost or value that can be measured
    reliably”. The Framework also provides that “A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably”. In the situation of tax holiday under sections 10A and 10B of the Act, it is probable that deferred tax assets and liabilities in respect of timing differences which originate and reverse during the tax holiday period will not be realised or settled. Accordingly, a deferred tax asset or a liability for timing differences which reverse during the tax holiday period does not meet the above criteria for recognition of asset or liability, as the case may be, and therefore is not recognised to the extent deduction from the total income of the enterprise is allowed during the tax holiday period as per the provisions of sections 10A and 10B of the Act.


    8. Deferred tax assets/liabilities for timing differenceswhich reverse after the tax holiday period are recognised in the period inwhich these differences originate because these can be realised/paid after the expiry of the tax holiday period by payment of lesser or higher amount of tax after the tax holiday period because of reversal of timing differences.

    9. This Interpretation prescribes the same accounting treatment for situations of tax holiday under sections 10Aand 10Bof theAct as prescribed for situations of tax holiday under sections 80-IA and 80-IB of the Act (see ASI 3).


    According to one view situation of tax holiday under sections 10A and 10B should be treated differently as compared to situations of tax holiday under sections 80-IA and 80-IB of the Act since sections 10A and 10B are covered under Chapter III of the Act which deals with incomes which do not form part of total income whereas sections 80-IA and 80-IB are covered under Chapter VI-A which deals with deductions to be made in computing total income.


    This view was not accepted because irrespective of the fact that Sections 10A and 10B are covered under Chapter III and Sections 80-IA and 80-IB are covered under Chapter VI-A, the substance of the reliefs, in terms of economic reality is the same. Keeping in view the ‘substance over form’ principle of accounting as laid down in AS 1, Disclosure of Accounting Policies, there should not be any difference between the treatment in respect of tax holiday under sections 80-IA, 80-IB and 10A, 10B.

  5. #25
    Accounting Standards
    Guest

    Default Accounting Standards Interpretation 6 of Accounting Standard 22 - Accounting for Taxes on Income - AS 22

    Accounting Standards Interpretation (ASI) 6
    Accounting for Taxes on Income in the context of Section 115JB of the Income-tax Act, 1961 Accounting Standard (AS) 22,Accounting for Taxes on Income
    ISSUES


    1. The issue is how AS 22 is applied in a situation where a company pays tax under section 115JB (commonly referred to as Minimum Alternative Tax) of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’).


    2. Another issue is howdeferred tax ismeasured on the timing differences originating during the current year if the enterprise expects that these differences would reverse in a period in which it may pay tax under section 115JB of the Act.

    CONSENSUS

    3. The payment of tax under section 115JB of the Act is a current tax for the period.

    4. In a period in which a company pays tax under section 115JB of the Act, the deferred tax assets and liabilities in respect of timing differences arising during the period, tax effect of which is required to be recognised under AS 22, should be measured using the regular tax rates and not the tax
    rate under section 115JB of the Act.

    5. In case an enterprise expects that the timing differences arising in the current period would reverse in a period in which it may pay tax under section 115JB of the Act, the deferred tax assets and liabilities in respect of timing differences arising during the current period, tax effect of which is
    required to be recognised under AS 22, should be measured using the regular tax rates and not the tax rate under section 115JB of the Act.


    BASIS FOR CONCLUSIONS


    6. Sub-section (1) of Section 115JB of the Act provides that “Notwithstanding anything contained in any other provision of thisAct,where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2001, is less than seven and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of incometax at the rate of seven and one-half per cent.” Tax paid/payable under section 115JB is the current tax and does not, in itself, give rise to any deferred tax since this payment of tax is pursuant to the special provision of the Act. This section only prescribes the mode of computation of tax payable for the current year.


    7. Paragraph 20 of AS 22 requires that current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws. Paragraph 21 of AS 22 provides that deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. In a period in which an enterprise pays tax under section 115JB of the Act, the rate of seven and one-half percent is relevant for the purpose of measurement of current tax and not for the purpose of measurement of deferred tax.

    8. There are two methods for recognition and measurement of tax effects of timing differences, viz., the “full provisionmethod” and “partial provision method”. Under the “full provision method”, the deferred tax is recognised and measured in respect of all timing differences(subject to consideration
    of prudence in case of deferred tax assets) without considering assumptions regarding future profitability, future capital expenditure etc. On the other hand, the ‘partial provisionmethod’ excludes the tax effects of certain timing differenceswhichwillnot reverse for some considerable period ahead. Thus, this method is based on many subjective judgements involving assumptions regarding future profitability, future capital expenditure etc. In other words, partial provision method is based on an assessment of what would be the position in future. Keeping in view the elements of subjectivity, the ‘partial provision method’ under which deferred tax is recognised on the basis of assessment as to what would be the expected position, has generally been discarded theworld-over.AS 22 also does not consider the above assumptions and, therefore, is based on ‘full provision method’.


    The expectation that the timing differences arising in the current period would reverse in a period in which the enterprise may pay tax under section 115JB of the Act, also involves assessment of the future taxable income and accounting income and therefore, is considerably subjective. It can not be
    known beforehand, with a reasonable degree of certainty, whether in future an enterprise would pay tax under section 115JB of the Act because that determination can only be made after the fact.
    Recognition and measurement of deferred tax using the rate under section 115JB of the Act, i.e., seven and one-half percent, on the basis of an assessment that the timing differenceswould reverse in a period inwhich the enterprise may pay tax under section 115JB of theAct, would be a situation
    analogous to the adoption of the ‘partial provisionmethod’which has already been rejected.
    In view of the above, this Interpretation requires that even if an enterprise expects that the timing differences arising in the current period would reverse in a period in which it may pay tax under section 115JB of the Act, the deferred tax assets and liabilities in respect of timing differences arising during the current period, tax effect of which is required to be recognised under AS 22, should be measured using the regular tax rates and not the tax rate under section 115JB of the Act.

  6. #26
    Accounting Standards
    Guest

    Default Accounting Standards Interpretation 7 of Accounting Standard 22 – Accounting for Taxes on Income (Objective) AS 22

    Accounting Standards Interpretation (ASI) 7
    Disclosure of deferred tax assets and deferred tax liabilities in the balance sheet of a company Accounting Standard (AS) 22,Accounting for Taxes on Income
    ISSUE



    1. The issue is how should deferred tax assets and deferred tax liabilities be disclosed in the balance sheet of a company.


    CONSENSUS

    2. In case of a company, deferred tax assets should be disclosed on the face of the balance sheet separately after the head ‘Investments’ and deferred tax liabilities should be disclosed on the face of the balance sheet separately after the head ‘Unsecured Loans’.

    BASIS FOR CONCLUSIONS

    3. Paragraph 30 of Accounting Standard (AS) 22, Accounting for Taxes on Income, provides as follows:

    “30. Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. Deferred tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and current liabilities.”
    From the above, it may be noted that the deferred tax assets and deferred tax liabilities should be disclosed separately from current assets and current liabilities.


    4. Part I of Schedule VI to the Companies Act, 1956, does not contain a specific head for disclosure of deferred tax assets/liabilities. Section 211(1) of the CompaniesAct, 1956, provides that every balance sheet of a company shall be prepared in the form set out in Part I of Schedule VI, or as near
    thereto as circumstances admit. It is, therefore, clear that format of balance sheet as set out in Part I of Schedule VI to the Companies Act, 1956, has inbuilt flexibility to accommodate necessary modifications. A deferred tax asset is normally more liquid (realisable) as compared to fixed assets and investments and less liquid as compared to current assets. Therefore, in case of a company, it is appropriate to present the amount of the deferred tax assets after the head ‘Investments’. Similarly, keeping in viewthe nature of a ‘deferred tax liability’, it is appropriate that the same is presented in the balance sheet of a company after the head ‘Unsecured Loans’.

  7. #27
    Accounting Standards
    Guest

    Default Accounting Standards Interpretation 9 of Accounting Standards 22 - Accounting for Taxes on Income - AS 22

    Accounting Standards Interpretation (ASI) 9
    Virtual certainty supported by convincing evidence
    Accounting Standard (AS) 22,Accounting for Taxes on Income

    ISSUE


    1. Paragraph 17 of AS 22 requires that “Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that
    there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised”.


    2. The issue is what amounts to ‘virtual certainty supported by convincing evidence’ for the purpose of paragraph 17 of AS 22.

    CONSENSUS

    3. Determination of virtual certainty that sufficient future taxable income will be available is a matter of judgement and will have to be evaluated on a case to case basis. Virtual certainty refers to the extent of certainty, which, for all practical purposes, can be considered certain. Virtual certainty cannot be based merely on forecasts of performance such as business plans.


    4. Virtual certainty is not amatter of perception and it should be supported by convincing evidence. Evidence is a matter of fact. To be convincing, the evidence should be available at the reporting date in a concrete form, for example, a profitable binding export order, cancellation ofwhich will result in payment of heavy damages by the defaulting party. On the other hand, a projection of the future profits made by an enterprise based on the future capital expenditures or future restructuring etc., submitted even to an outside agency, e.g., to a credit agency for obtaining loans and accepted by that agency cannot, in isolation, be considered as convincing evidence.


    BASIS FOR CONCLUSIONS


    5. In a situationwhere an enterprise does not have unabsorbed depreciation or carry forward of losses, the degree of certainty required under AS 22 for recognition of deferred tax asset is ‘reasonable certainty’. In contrast, as a measure of greater prudence, AS 22 prescribes a much higher level of certainty, i.e., virtual certainty, for recognition of deferred tax asset in a situation where an enterprise has unabsorbed depreciation or carry forward of losses. Therefore, the level of certainty required for recognition of deferred tax asset in a situation where an enterprise has unabsorbed depreciation or carry forward of losses is much more than the situation where the enterprise does not have the same.


    6. Projections on the basis of future actions of an enterprise cannot be considered as convincing evidence since the enterprisemay change its plans on the basis of subsequent developments.

  8. #28
    Accounting Standards
    Guest

    Default Accounting Standards Interpretation 11 of Accounting standard 22 - Accounting for taxes on Income - AS 22

    Accounting Standards Interpretation (ASI) 11
    Accounting for Taxes on Income in case of an Amalgamation
    Accounting Standard (AS) 22,Accounting for Taxes on Income
    ISSUES



    1. The following issues relating to accounting for taxes on income in the case of an amalgamation are dealt with in this Interpretation:


    (i) In an amalgamation in the nature of purchase, where the consideration for the amalgamation is allocated to the individual identifiable assets/liabilities of the transferor enterprise on the basis of their fair values at the date of amalgamation as per AS 14, ‘Accounting for Amalgamations’, and the
    carrying amounts thereof for tax purposes continue to be the same as that for the transferor enterprise, whether deferred tax on the difference between the values of the assets/liabilities arrived at for accounting purposes on the basis of their fair values and the carrying amounts thereof for tax purposes should be recognised.

    (ii) If any deferred tax asset, including in respect of unabsorbed depreciation and carry forward of losses, was not recognised by the transferor enterprise, because the conditions relating to prudence laid down in paragraph 15 or paragraph 17, as the case may be, of AS 22, were not satisfied, whether the transferee enterprise can recognise the same if the conditions relating to
    prudence as per AS 22 are satisfied.


    CONSENSUS

    2. In an amalgamation in the nature of purchase, where the consideration for the amalgamation is allocated to the individual identifiable assets/liabilities on the basis of their fair values at the date of amalgamation as per AS 14, ‘Accounting for Amalgamations’, and the carrying amounts thereof for tax purposes continue to be the same as that for the transferor enterprise, deferred tax on the difference between the values of the assets/liabilities, arrived at for accounting purposes on the basis of their fair values, and the carrying amounts thereof for tax purposes should not be recognised as this constitutes a permanent difference. The consequent differences between the amounts of depreciation for accounting purposes and tax purposes in respect of such assets in subsequent years would also be permanent differences.

    3. In a situation where any deferred tax asset, including in respect of unabsorbed depreciation and carry forward of losses, was not recognised by the transferor enterprise, because the conditions relating to prudence laid down in paragraph 15 or paragraph 17, as the case may be, of AS 22, were
    not satisfied, the transferee enterprise can recognise the same if the conditions relating to prudence as perAS 22 are satisfied. In such a case, the accounting treatment, as described below, depends on the nature of amalgamation as well as the accounting treatment adopted for amalgamation in accordance with AS 14.

    (i) Where the amalgamation is in the nature of purchase and theconsideration for the amalgamation is allocated to individual identifiable assets/ liabilities on the basis of their fair values at the date of amalgamation as permitted in AS 14, the deferred tax assets should be recognised by the transferee enterprise at the time of amalgamation itself considering these as identifiable assets. These deferred tax assets can be recognised at the time of amalgamation only if the conditions relating to prudence laid down in paragraph 15 or paragraph 17, as the case may be, of AS 22, are satisfied from the point of view of the transferee enterprise at the time of amalgamation. The recognition of deferred tax assets will automatically affect the amount of the goodwill/capital reserve arising on amalgamation. In a case where the conditions for recognition of deferred tax assets as per AS 22 are not satisfied at the time of the amalgamation, but are satisfied bythe first annual balance sheet date following the amalgamation, the deferred tax assets are recognised in accordance with paragraph 19 of AS 22. The corresponding adjustment should be made to the goodwill/capital reserve
    arising on the amalgamation. If, however, the conditions for recognition of deferred tax assets are not satisfied even by the first annual balance sheet date following the amalgamation, the corresponding effect of any subsequent recognition of the deferred tax asset on the satisfaction of the conditions should be given in the statement of profit and loss of the year in which the conditions are satisfied and not in the goodwill/capital reserve.

    (ii) Where the amalgamation is in the nature of purchase and the transferee enterprise incorporates the assets/liabilities of the transferor enterprise at their existing carrying amounts as permitted in AS 14, the deferred tax assets should not be recognised at the time of amalgamation. However, if, by the first annualbalance sheetdate subsequent to amalgamation, the unrecognised deferred tax assets are recognised pursuant to the provisions of paragraph 19 of AS 22 relating to re-assessment of unrecognised deferred tax assets, the corresponding adjustment should be made to goodwill/ capital reserve arising on the amalgamation. In a case where the conditions for recognition of deferred tax assets as per AS 22 are not satisfied by the first annual balance sheet date following the amalgamation, the corresponding effect of any subsequent recognition of the deferred tax asset on the satisfaction of the conditions should be given in the statement of profit and loss of the year
    in which the conditions are satisfied and not in the goodwill/capital reserve.


    (iii) Where the amalgamation is in the nature of merger, the deferred tax assets should not be recognised at the time of amalgamation.However, if, by the first annual balance sheet date subsequent to the amalgamation, the unrecognised deferred tax assets are recognised pursuant to the provisions of paragraph 19 of AS 22 relating to re-assessment of unrecognised deferred tax assets, the corresponding adjustment should be made to the revenue reserves. In a case where the conditions for recognition of deferred tax assets as per AS 22 are not satisfied by the first annual balance sheet date following the amalgamation, the corresponding effect of any subsequent recognition of the deferred tax asset on the satisfaction of the conditions should be given in the statement of profit and loss of the year in which the conditions are satisfied and not in the revenue reserves.


    BASIS FOR CONCLUSIONS

    4. AS 22 is based on the ‘income statement approach’. In an amalgamation in the nature of purchase, recognition of individual identifiable assets/liabilities of the transferor enterprise on the basis of their fair values at the date of amalgamation does not affect the statement of profit and loss. In a situation where, as per the tax laws, the carrying amounts of the assets/liabilities acquired as a result of amalgamation in the nature of purchase continue to be the same as that for the transferor enterprise, the difference between the carrying amounts of assets/liabilities (with reference to fair values) for accounting purposes and the carrying amounts thereof for tax purposes will never be allowed for deduction for tax purposes.Accordingly, the difference between the carrying amounts of assets/liabilities for accounting purposes and that for tax purposes is a permanent difference. The consequent differences between the amounts of depreciation for accounting purposes and tax purposes in respect of such assets in subsequent years would also be
    permanent differences.


    5. There may be certain deferred tax assets that were not recognised by the transferor enterprise before the amalgamation because there was no reasonable certainty or virtual certainty, as the casemay be, of the availability of future taxable income against which such assets can be realised. On amalgamation, the availability of future taxable income may become reasonably certain or virtually certain, as the case may be, against which such assets can be realised. In the case of amalgamation in the nature of purchase where the consideration for amalgamation is allocated to individual identifiable assets and liabilities on the basis of their fair values, the deferred tax assets
    are recognised, subject to the requirements of AS 22, considering these as identifiable assets
    at the time of amalgamation itself since identifiable assets and liabilities acquired include assets, such as deferred tax assets, and liabilities not recorded in the financial statements of transferor enterprise. The recognition of deferred tax assets will automatically affect the amount of the goodwill/ capital reserve arising on amalgamation.

    In case of amalgamation in the nature of purchase where the transferee enterprise incorporates the assets and liabilities of the transferor enterprise at their existing carrying amounts as per AS 14, the deferred tax assets are not recognised at the time of amalgamation since, as per AS 14, assets/
    liabilities of the transferor enterprise are recognised at their existing carrying amounts in the balance sheet of the transferee enterprise. Therefore, the assets which are not appearing in the balance sheet of the transferor enterprise at the time of amalgamation can not be recognised. However, by the first annual balance sheet date following the amalgamation, the deferred tax assets are recognised by the transferee enterprise subject to the provisions of paragraph 19 ofAS 22.The corresponding adjustment ismade in the goodwill/ capital reserve, since, normally, the benefits to be received from deferred tax assets are in-built in the purchase consideration. Since, in such a case,
    the benefits to be received from deferred tax assets get clubbed with the goodwill/capital reserve, on a separate recognition of deferred tax assets by the first annual balance sheet date followingthe amalgamation, it is appropriate to adjust the same against goodwill/capital reserve and not in the statement of profit and loss of the transferee enterprise. In a case where the conditions of recognition of deferred tax assets as per AS 22 are not satisfied by the first annual balance sheet date following the amalgamation, the corresponding effect of any subsequent recognition of the deferred tax asset on the satisfaction of the conditions is given in the statement of profit and loss of
    the year in which the conditions are satisfied and not in the goodwill/capital reserve. The reason for this is that after the first annual balance sheet following the amalgamation, the satisfaction of conditions relatingto prudence as laid down in AS 22, is not attributed to the amalgamation but is a result of the operations of the combined enterprises. Therefore, it is not appropriate to adjust the goodwill/capital reserves arising on amalgamation. In case of amalgamation in the nature of merger, since as per AS 14, assets/ liabilities of the transferor enterprise are recognised at their existing carrying amounts in the balance sheet of the transferee enterprise, at the time of amalgamation, no deferred tax asset is recognised. However, by the first annualbalance sheetdate followingthe amalgamation, the deferred tax assets are recognised subject to the provisions of paragraph 19 of AS 22. The corresponding adjustment is made to the revenue reserves, since in case of amalgamation in the nature of merger the situation should be the same had merged entities were continuing as one entity from the beginning. Keeping in view this objective, the corresponding effect is given to revenue reserves since had themerged entities been continuing as one entity fromthe beginning, the deferred tax assets would have been recognised earlier and would have affected the revenue reserves and not the profit or loss for the year. In a case where the conditions of recognition of deferred tax assets as per AS 22 are not satisfied by the first annual balance sheet date following the amalgamation, the corresponding effect of any subsequent recognition of the deferred tax assets on the satisfaction of the conditions is given in the statement of profit and loss of the year in which the conditions are satisfied and not to the revenue reserves. The reason for this is that after the first annual balance sheet following the amalgamation, the satisfaction of conditions relating to prudence as laid down in AS 22, is not attributed to the merger but is a result of the operations of the merged entities. Therefore, it is not appropriate to adjust the revenue reserves.

Tags for this Thread

Bookmarks

Posting Permissions

  • Register / Login to post new threads
  • Register / Login to post replies
  • Register / Login to post attachments
  • You may not edit your posts
  •