PAS 12: ACCOUNTING FOR INCOME TAX

(Results to higher
ACCOUNTING INCOME VS. TAXABLE INCOME depreciation in
the earlier years)
Accounting Income Taxable Income Bad Debts Allowance Direct Write off /
Income appearing on the Income appearing on the
income statement ITR (No bad debts
Basis: GAAP Basis: tax laws expense should
Accrual basis Cash basis be recognized)
Prepaid Accrual Cash /
Expense

(May cash
outflow na from
payment so dapat
i-record na lahat
as expense)
Unearned Accrual Cash /
Income

(May cash inflow

na from advance
payment so dapat
i-record na lahat
PERMANENT DIFFERENCES as income)
- Items of revenue and expense which are included in *Provided that it is explicitly stated that depreciation expense recognized by the
accounting is higher than tax
accounting income but never in taxable income
- Composed of: Provision
1. Non-taxable revenues
o Interest income on deposits* Acctg Tax FTA FDA
o Dividends received* Warranty Estimated Actual repair /
*Because these items are subject to FTW not NCIT repair
(Normal Corporate Income Tax)
2. Non-deductible expenses
o Life insurance premiums (ONLY IF: Litigation Estimated Actual /
settlement Settlement
Beneficiary  Corporation) amount Amount
o Tax penalties, surcharges, and fines
Unrealized Gain/Loss - FVPL

TEMPORARY DIFFERENCES Acctg Tax FTA FDA

- Difference between the carrying amount of an asset or
liability and the tax base of that asset or liability Unrealized Change in FV Actual Sale /
Gain (Realized)
- Composed of: Unrealized Change in FV Actual Sale /
1. Taxable Temporary Difference (FTA) Loss (Realized)
2. Deductible Temporary Difference (FDA) Impairment and Sale

Acctg Tax FTA FDA

Taxable Temporary Deductible Temporary
Installment Upon Sale Upon /
Difference (FTA) Difference (FDA) Sale Collection
Taxable in the future (-) Deductible in the future (+) Impairment RV – CV SP < CV /
Income: Income: Loss (Impairment (Sale)
Test)
Acctg > Tax Acctg < Tax *Impairment loss on GOODWILL
Expense: Expense:  Permanent Difference (Nondeductible expense)
Acctg < Tax Acctg > Tax
CV, asset > TB, asset CV, asset < TB, asset RECONCILIATION
CV, liab < TB, liab CV, liab > TB, liab Pretax Accounting Profit XXX JE
*TIP: Si tax ang bida dahil PAS 12: Income Tax. Therefore, si tax ang
Permanent Differences
masusunod.
Non-taxable Revenues (XXX)
Technique: Non-deductible Expenses XXX XXX
FTALE: Future Taxable Amount Liability Expense
Financial Income subject to tax XXX
 Net Income is Overstated
 Capital is Overstated Temporary Differences
 Adjustment: Deduct Future Taxable Amounts (XXX) 3
Future Deductible Amounts XXX XXX 2
FDAAB: Future Deductible Amount Asset Benefit Taxable Income (Per ITR) XXX 1
 Net Income is Understated
 Capital is Understated
JOURNAL ENTRIES
 Adjustment: Add
1) Current tax expense/Current tax payable
(Taxable Income x Tax Rate)
ITEMS OF TAXABLE TEMPORARY DIFFERENCES
Adjustments Income tax expense xxx
Income tax payable xxx
Acctg Tax FTA FDA

Depreciation Straight line Accelerated / */ 2) Deferred Tax Asset/Benefit

 (Future Deductible Amount x Future Tax Rate) Minimum Corporate Income Tax
- MCIT shall be imposed starting the fourth year from
Deferred Tax Asset xxx the year of corporate registration
Income tax expense xxx - HIGHER BETWEEN:
1. Computed taxable profit (taxable revenues –
3) Deferred Tax Liability/Expense taxable expenses)
(Future Taxable Amount x Future Tax Rate) 2. 2% of Gross Income (Gross Sales – COGS – SRA
– SD)
Income tax expense xxx
Deferred Tax Liability xxx
MCIT > Normal Tax Due
4) Total Income Tax Expense (TITE) - Recognize as Deferred Tax Asset if the corporation
(Current ITE + Deferred ITE) expects that the results of operations in the future
years is higher than MCIT
TAX RATE CONSIDERATIONS - Any resulting DTA shall be recognized, only to the
 Current tax liabilities (assets) for the current and prior extent realizable
periods are measured using the tax rates (and tax laws)
that have been enacted or substantially enacted by the *Journal entry:
end of the reporting period. Income Tax Expense – current xxx
 Deferred tax assets and liabilities should be measured Deferred Tax Asset xxx
at the tax rates that are expected to apply to the period Income Tax Payable xxx
when the asset is realized or the liability is settled, based
on tax rates (and tax laws) that have been enacted or *DTA is the difference between the computed MCIT and
substantially enacted by the end of the reporting period. normal income tax.
 Tax laws and rates for the current year are used to
measure deferred tax asset or deferred tax liability if - If the company expects to be subjected to MCIT for
at the end of the reporting period, there are no changes the next 3 years then no deferred tax asset shall be
that have been enacted or substantially enacted for future recognized
years.
 If tax rates are different for future years, the deferred **Journal entry:
income tax amount to be reported in the statement of Income Tax Expense – current xxx
financial position is obtained by multiplying the Income Tax Payable xxx
temporary difference expected to reverse in the future
years by the enacted tax rates applicable to the year/s **Recognize full amount of MCIT
when the temporary differences are expected to
reverse. - BIR allows a 3-year carryover that will reduce the
income tax due on normal income tax
OPERATING LOSS CARRYFORWARDS
 Excess of tax reductions over gross income in a year that INCOME TAX TAKEN TO EQUITY AND OCI
may be carried forward to reduce taxable income in a
future year Taken to Equity Taken to OCI
 Applies the same recognition as the deferred tax assets Adjustment to the 1. Change in CA arising
from deductible temporary difference opening balance of RE from revaluation of PPE or
 DEFERRED TAX ASSET should be recognized for the resulting from a Intangible Assets
retrospective treatment 2. UGL on FA-FVOCI
carryover of unused tax losses and unused tax credits
of change in 3. Exchange differences from
 Existence of unused tax losses is strong evidence that accounting policy & translation of the FS of
future taxable profit may not be available correction of prior foreign corporations
 When a company has a recent history of losses, the period errors
enterprise recognizes a deferred tax asset arising from
unused tax losses/tax credits only to the extent:
o The enterprise has sufficient taxable
temporary differences
o There is convincing evidence that sufficient
taxable profit will be available
 If it is not probable that taxable profit will be available
against which the unused tax losses or unused tax credits
can be utilized, DEFERRED TAX ASSET IS NOT
RECOGNIZED.

MINIMUM CORPORATE INCOME TAX IN THE

PHILIPPINES

National Internal Revenue Code (NIRC) of the PH

- Imposes a minimum corporate income tax to
domestic/resident foreign corporation