AS 22 ACCOUNTING FOR TAXES ON INCOME PART 2

Introduction

This tutorial covers the essentials of accounting for taxes on income as discussed in the video "AS 22 ACCOUNTING FOR TAXES ON INCOME PART 2" by Professional Dreamerz. Understanding tax accounting is crucial for ensuring compliance and accurate financial reporting. This guide will break down the key concepts and steps to effectively manage income taxes in your accounting practices.

Step 1: Understanding Deferred Tax Assets and Liabilities

• Definition: A deferred tax asset arises when taxes paid exceed taxes owed, while a deferred tax liability occurs when taxes owed exceed taxes paid.
• Identification:
  • Review temporary differences between accounting income and taxable income to identify potential deferred tax assets or liabilities.
  • Common examples include:
    • Depreciation methods
    • Provision for bad debts

Step 2: Recognizing and Measuring Deferred Tax

• Initial Recognition:
  • Recognize deferred tax assets and liabilities in the financial statements when there are temporary differences.
• Measurement:
  • Measure deferred tax based on the expected tax rates at the time the asset is realized or the liability is settled.
  • Use the enacted tax rates that are applicable to the period when the temporary difference is expected to reverse.

Step 3: Evaluating the Need for Valuation Allowances

• Valuation Allowance: Assess whether it is necessary to establish a valuation allowance for deferred tax assets.
• Criteria:
  • Consider whether it is more likely than not that some portion of the deferred tax asset will not be realized.
  • Evaluate historical profitability, future taxable income, and tax planning strategies.

Step 4: Presentation in Financial Statements

• Balance Sheet:
  • Classify deferred tax assets and liabilities as current or non-current based on the expected timing of reversal.
• Income Statement:
  • Report the tax expense incorporating the effects of deferred taxes.
  • Ensure that the tax expense reflects both current and deferred tax components.

Step 5: Disclosures Required

• Financial Statement Disclosures:
  • Provide detailed disclosures regarding:
    • The components of income tax expense
    • The types of temporary differences
    • Any valuation allowances established
• Importance of Transparency:
  • Ensure that disclosures offer insights into the company's tax position and the potential impact on future cash flows.

Conclusion

Understanding how to account for taxes on income is vital for accurate financial reporting and strategic tax planning. Key takeaways from this tutorial include the recognition and measurement of deferred tax assets and liabilities, the need for valuation allowances, and appropriate presentation and disclosure in financial statements. As you apply these concepts, consider consulting with tax professionals to navigate complex tax regulations effectively.