The Hindu Business Line : Should a ‘tax balance sheet’ capture ‘deferred’ items?

In the balance sheet approach, a separate tax balance sheet is prepared and differences in each line item are designated as permanent or temporary differences.

D. Murali
C. Ramesh

Chennai, Aug. 11 Accounting Standard-22 (AS-22) is an important standard for presentation of true and fair view of accounts on any particular date, as it provides guidance for accounting of various aspects of taxation in a unified manner, says Mr S. Gopalakrishnan, Partner, Lovelock & Lewes.

The standard, issued by the Institute of Chartered Accountants of India (ICAI), and part of the Companies Act, 1956, as a result of being notified by Companies (Accounting Standards) Rules, 2006, is mandatory in respect of all enterprises for accounting of taxation.

Speaking to Business Line on the implications of adoption of this standard, Mr Gopalakrishnan, who is also Central Council Member of the ICAI, said that AS-22 specifically lays down the principles that ensure that accounting for tax ation is made correctly and more importantly, in the period when the income arose.

“Thus, if a company, in its income-tax returns, seeks to avail of higher depreciation allowance in a particular year and lower in subsequent year, the standard ensures that the difference in timing between the depreciations is provided for in the books and incidence of tax on higher depreciation claimed captured as liability in the books.”

This liability is subsequently reversed when the depreciation claimed in the returns is less than what is provided in the books, he added.

Similar treatment is mandated for other timing differences between book income and income as per income-tax returns.

According to Mr Gopalakrishnan, such accounting ensures that the reported profit after tax is indicative of the performance of the company for its earnings during the reported period.

Deferred tax

Similarly, in the case of a loss-making company, if it is virtually certain that the company will earn profits in future years, AS-22 allows for recognition of deferred tax assets as well.

This deferred tax asset will be offset against the liability whenever the enterprise starts earning taxable income.

“In India, we are still following the income approach to compute deferred tax liability/asset on a particular date, while worldwide the balance sheet approach is followed for such purposes.”

He informed that in the balance sheet approach, a separate tax balance sheet is prepared and differences in each line item are designated as permanent or temporary differences. Temporary differences that will reverse are captured as assets or liabilities. In Mr Gopalakrishnan’s view, creation of deferred tax assets and deferred tax liability is essential to reflect the “true and fair view” of profit after tax.