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.