ACCOUNTING FOR INCOME TAX
between the carrying amount of an
Accounting income- or financial income is the
net income for the period before deducting
income tax expense.
-appearing on the traditional income statement
and computed in accordance with accounting
standards
Taxable income- income for the period
determined in accordance with the rules
established by the taxation authorities upon
which income taxes are payable or recoverable.
- Appearing on the ITR and computed in
accordance with the income tax law.
- Excess of taxable revenue over tax
deductible expense and exemptions for
the period as defined by BIR.
Differences between Acct Income and Tax.
Income may be classified into:
Permanent differences- items of revenue and
expense which are included in EITHER Acct.
Income or Tax. Income but will NEVER be
included in the other.
-pertain to nontaxable revenue and
nondeductible expenses.
-DO NOT give rise to deferred tax asset and
liability because they have no future tax
consequences.
EXAMPLES:
a) Interest income on deposits
b) Dividends received
c) Life insurance premium
Entity as beneficiary of a life insurance
policy on an officer or employee,
premium paid by the entity is not
deductible as expense for tax purposes
but said premium is an expense for
financial reporting purposes.
d) Tax penalties, surcharges and fines are
nondeductible.
Temporary differences- differences
asset or liability and the tax base.
-include timing differences- differences
between Acctng. Income and Tax.
Income that originate in one period and
reverse in one or more subsequent
periods.
-items of income and expenses which
are INCLUDED in both acctg income and
taxable income but at different time
periods
- GIVE RISE either to:
a) Deferred Tax liability
b) Deferred Tax Asset
Kinds of temporary difference
a) Taxable Temporary Difference-
results in future taxable amount in
determining taxable income of
future periods when the carrying
amount of the asset or liability is
recovered or settled.
b) Deductible Temporary Difference-
results in future deductible amount
determining taxable income of
future periods when the carrying
amount of the asset or liability is
recovered or settled
Tax base- the amount of the asset
or liability that is recognized or
allowed for tax purposes
Tax base of an asset- amount that
will be deductible for tax purpose
against future income
A 1M software development cost,
the CA is 1M for accounting
purposes. However, if this amount
is allowed as a one-time deduction
for tax purposes, the tax base is
zero because the entire amount is 2. Expenses and losses are
expensed in the current year. deductible for tax purposes in
the current period but
Tax base of a liability- the carrying deductible for acctg purposes in
amount less the amount that wil be future periods.
deductible for tax purposes in the a) Accelerated dep’t for tax
future. purposes and straight line
Recognition of estimated warranty dep’t for acctg purposes.
liability of 500000, the CA is 500000 b) Development cost may be
for accounting purposes. An capitalized and amortized
estimated warranty cost is over future periods in
deductible only when paid. Tax base determining accounting
is zero because the estimated income but deducted in
warranty cost is a future deductible determining taxable income
amount. in the period in which it is
paid.
Deferred tax liability- amount of c) Prepaid expense has
income tax payable in future already been deducted on a
periods with respect to a taxable cash basis in determining
temporary difference taxable income of the
-is the deferred tax consequence current period.
attributable to a taxable temporary
Other taxable temporary
difference of future taxable
differences
amount.
-arises from the following when: a) Asset is revalued upward
a) Accounting income > taxable and no equivalent
income because of timing adjustment is made for tax
differences purposes.
b) CA of asset > tax base b) The CA of investment in
c) CA of liability < tax base subsidiary etc. is higher
than the tax base because
Temporary differences that results the subsidiary etc. has not
in Accounting income higher than distributed its entire
taxable income include the income to the parent or
following: investor.
1. Revenues and gains are c) The cost of a business
included in accounting income combination that is
of the current period but are accounted for as an
taxable in future periods. acquisition is allocated to
Ex. Installment sale is included the identifiable assets and
in acctg income at the time of liabilities acquired at FV
sale and included in taxable
income when cash is collected
in future periods.
RECOGNITION of dtl:
-shall be recognized for ALL taxable temporary
differences.
It is not recognized when the taxable temporary
difference arises from:
a) Goodwill resulting from a business
combination and which is
nondeductible for tax purposes.
b) Initial recognition of an asset or
liability in a transaction that is not a
business combination and affects
neither accounting income nor taxable
income.
c) Undistributed profit of subsidiary etc.
when the parent, investor or venture is
able to control the timing of the
reversal of the temporary difference.
Deferred Tax Asset
- Amount of income tax recoverable in
future periods with respect to
deductible temporary difference and
operating loss carryforward.
- The deferred tax consequence
attributable to a future deductible
amount and operating loss
carryforward.
- Arises from the following when:
a) Taxable income > accounting
income because of timing
differences
b) Tax base of asset is > CA
c) Tax base of liability < CA
Temporary differences that will result to
Taxable income higher than accounting income
because of timing differences include the
following:
1. Revenues and gains are included in
taxable income of current period but
are included in accounting income of
future periods
Rent received in advance is taxable at
the time of receipt but deferred in
future periods for accounting purposes.
2. Expenses and losses are deducted from
accounting income of current period
but are deductible for tax purposes in
future periods.
FUTURE DEDUCTIBLE TEMPORARY
DIFFERENCES INCLUDE THE FOLLOWING:
a) A probable and measurable litigation
loss is recognized for accounting
purposes but deducted in determining
taxable income when actually incurred
or paid.
b) Estimated product warranty cost is
recognized for accounting purposes in
the current period but deducted in
determining taxable income when
actually incurred or paid.
c) Research cost is recognized as expense
in determining accounting income but
not permitted as a deduction in
determining taxable income until a later
period.
d) An impairment loss is recognized for
accounting purposes but ignored for tax
purposes until the asset is sold.
e) Doubtful accounts are recognized as
expense for accounting purposes but
deductible for tax purposes only when
written off as worthless.
OTHER DEDUCTIBLE TEMPORARY
DIFFERENCES
a) Asset is revalued downward and no
equivalent adjustment is made for tax
purposes.
b) The tax base of investment in
subsidiary, etc is higher than the
carrying amount because the subsidiary
etc has suffered continuing losses in
current and prior years.
 RECOGNITION of Deferred Tax Asset Taxable temporary difference x tax rate= DTL
- Shall be recognized for ALL deductible
ITE XX
temporary differences and operating
loss carryforward when it is probable DTL xx
that taxable income will be available
against which the deferred tax asset Deductible temporary difference x tax rate= DTA
can be used. DTA xx
Operating loss carryforward- is an
excess of tax deductions over gross IT Benefit xx
income in a year that may be carried IT Benefit reduces the current tax expense for
forward to reduce taxable income in a the year and is a deduction from current tax
future year expense
Certain entities registered with the
Board of Investments are permitted to The total income tax expense for the year is
carry over net operating loss for tax the current tax expense + the deferred tax
purposes subject to limitations of the expense arising from TTD – the income tax
relevant law and implementing benefit arising from deductible temporary
regulations of BOI. difference
METHOD OF ACCOUNTING
Income before IT xx
a) Income Statement Approach
-focuses on timing differences only Income Tax expense:
in the computation of deferred tax
Current tax expense xx
asset or DTL
Deferred tax expense xx
-timing differences affect the I.S of
Income tax benefit (xx) xx
one period and will reverse in the
Net Income xx
I.S of one or more subsequent
periods
The total income tax expense for the year is
b) SFP approach equal to the accounting income subject to tax x
tax rate assuming there is no future enacted IT
-considers all temporary differences
rate.
including timing differences
Computation:

Accounting income per book xx

Interperiod tax allocation- recognition of
All Permanent Differences:
deferred tax asset or deferred tax liability
Nondeductible expenses xx
Current tax expense- amount of income tax Nontaxable revenue (xx)
paid or payable for a year as determined by Accounting income subject to tax xx
applying provisions of the enacted tax law to Deductible Temporary differences
the taxable income. Ex. Doubtful accounts xx
Est. warranty cost xx
Taxable income x tax rate = current tax expense Taxable Temporary Differences
ITE xx EX. Excess tax depreciation (xx)
Gross income on Installment (xx)
ITP xx Taxable Income xx

 (Change in DTA)
— Change in DTL
Net deferred tax (benefit) or expense
Increase in DTA> Increase in DTL= Net DTB
Increase in DTL> Increase in DTA= Net DTE
Current tax liability is the current tax expense
or the amount of income tax ACTUALLY
payable. Classified as current liability.
Current tax asset is the excess if the the
amount of tax already paid for the current
period exceeds the amount actually payable for
the period. Classified as prepaid income tax and
a current asset.
CTL or CTA shall be measured using the tax
rate that has been enacted and effective at the
end of the reporting period.
Presentation of DTA or DTL
DTA- noncurrent asset *
DTL- noncurrent liability *
*regardless of reversal period
*shall not be discounted
DTA and DTL shall be offset when:
a) The DTA and DTL relate to income taxes
levied by the same tax authority
b) The entity has legal enforceable right to
set off a current asset against a current
tax liability.
MEASUREMENT of DTL AND DTA
-using the tax rate that has been enacted by
the end of the reporting period and
expected to apply to the period when the
asset is realized or the liability is settled.
EX. CTL or CTA is measured at 30% but the
DTL or DTA is measured using the new
enacted tax rate of 25%.
SFP APPROACH
The following procedures are then
followed:
1. Determine the tax base of the assets
and liabilities in the SFP.
2. Compare the carrying amounts with the
tax base
3. CA –Tax base = DTA OR DTL
4. Permanent diffrences do not give rise to
dtl or dta
5. Apply the tax rate to the temporary
differences
6. Determine the beginning and ending
balance of DTA or DTL.
7. Recognize the net change between the
BEG. And END. Balance of DTL OR DTA.
DISCLOSURES
1) Components of total income tax
expense (i.eg. current tax expense,
deferred tax expense and deferred
tax benefit)
2) An explanation of the relationship
between total income tax expense
and accounting profit
This essentially discloses the
accounting profit subject to tax
which is accounting profit after
considering permanent differences
3) The applicable tax rate, the basis on
which the tax rate has been applied,
and the explanation for any change
in the applicable tax rate.
4) The aggregate amount of current
and deferred tax relating to items
recognized directly in equity.
5) The aggregate amount of
temporary differences associated
with investements in subsidiary,
associate and joint venture for
which no deferred tax liability has
been recognized
6) Analysis of the beginning and
ending balance of deferred tax
asset and deferred tax liability.