CHAPTER 4 they are never included in the
computation of taxable profit,
INCOME TAXES
NATURE OF INCOME TAXES
- Income taxes are normally treated as a cost
of doing business and therefore, require
recognition in the same period as the
related income
- Two types of income or profit are reported:
o Taxable income – reported to taxing
authority for imposition of income
taxes
o Profit – for financial accounting
purposes; measured in accordance
with the financial reporting
standards
CURRENT TAX LIABILITIES AND CURRENT TAX
ASSETS
- Income tax for current and prior periods
should, to the extent unpaid, be recognized
as a liability
- If the amount already paid in respect of the
current and prior periods exceeds the
amount due for those periods, the excess
should be recognized as an asset
- Current tax liabilities (or current tax assets)
– computed based on taxable profit (or tax
loss) determined in accordance with the
rules established by the taxation authorities
- Taxable revenues – revenues recognized for
tax purposes
- Allowed deductions or deductible expenses
– expenses allowed to be deducted
therefrom
- Taxable income (or loss) – resulting net
amount
ACCOUNTING PROFIT AND TAXABLE PROFIT
- Accounting profit – pre-tax profit computed
based on the requirements of the
accounting standards and the definition,
recognition, and measurement criteria in the
Conceptual Framework; sometimes called
pre-tax financial income
- Taxable income – derived based on
regulations of the tax code and taxing
authorities
Difference between accounting income and
taxable income
A. Permanent differences
o Revenue and expense items
recorded for accounting purposes
because they met the recognition
criteria in the Conceptual Framework
and the accounting standards but
because the items are non-taxable
and the expense items are non-
deductible
a. Non-taxable revenue
o Revenues that have been included in
the financial income but will never be
included in taxable income
o Examples are:
 Gain from settlement of life
insurance of officers and
employees where the
corporation is the named
beneficiary
 Dividend revenue by a
domestic corporation or non-
resident corporation from a
domestic corporation
 Gains that are already
subjected to final withholding
tax, such as the capital gains
and taxes withheld on bank
deposits
b. Non-deductible expenses
o Expenses that are deducted from
accounting revenues (to arrive at
accounting profit) but will never be
allowed to be deducted from taxable
revenues (to arrive to at taxable
income)
o Examples are:
 Fines and penalties for
violation of law
 Charitable contributions in
excess of tax limitation
 Insurance premiums for life
insurance of officers, where
the corporation is the
designated beneficiary
When reconciling accounting profit to taxable
income, non-taxable revenues are to be deducted
from accounting income and non-deductible
expenses are to be added back to accounting
income.
DEFERRED TAX LIABILITIES AND DEFERRED TAX
LIABILITIES
- Deferred tax liabilities – amounts of income
taxes payable in future periods in respect of
taxable temporary differences
- Deferred tax assets – amounts of income
taxes recoverable in future periods in
respect of deductible temporary differences,
the carryforward of unused tax losses, and
the carryforward of unused tax credits
Temporary differences
- Statement of financial position perspective –
difference between the carrying amount of
 an asset or liability in the statement of
financial position and its tax base
- Statement of income perspective – occurs
when a revenue or expense is included in
financial profit in one period but reported for
tax purposes in another period
A. Taxable temporary differences
o Statement of financial position
perspective – when the carrying
value of an asset exceed its tax base
or when the carrying value of the
liability is less than its tax base
o Income statement perspective –
results in accounting profit being
more than taxable profit
o A taxable temporary difference
creates a deferred tax liability (this
needs to be deducted)
Statement of Financial Income Statement
Position Approach Approach
Carrying amount of Interest revenue is
interest receivable is recognized in
more than its tax base accounting profit on a
time proportion basis
but reported in taxable
profit when collected
Carrying amount of Depreciation expense
PPE is more than its for tax purposes is
tax base more than depreciation
expense for accounting
purposes in the earlier
years of the asset life
Carrying amount of Expense is recognized
prepaid expense is in accounting profit
more than its tax base using accrual basis but
reported in taxable
profit when paid
Carrying amount of Revenue for sales is
installment receivable recognized in
is more than its tax accounting profit
base during the period of
delivery but reported in
taxable profit during
the period of collection
method based on
expected credit losses
for financial reporting
purposes, but
recognized for tax
purposes using the
direct write off method
Carrying amount of Rent collectible
unearned rent is more applicable to future
than its tax base period/s is not yet
recorded as revenue
but is taxable during
period of collection
Carrying amount of Estimated cost of
warranty liability is warranty is reported as
more than its tax base expense or adjustment
to recorded revenue for
financial reporting
during period of sales
of goods but is
deductible as expense
of tax purposes when
repair is actually made
IN SUMMARY
- Taxable temporary difference (TTD) or
Future taxable amount (FTA) leading to the
recognition of deferred tax liability (DTL)
(this is a deduction)
o Financial income > Taxable income
o Carrying amount of an asset > tax
base for an asset
o Carrying amount < tax base for a
liability
- Deductible temporary difference (DTD) or
Future deductible amount (FDA) leading to
the recognition of deferred tax asset (DTA)
(this is an addition)
o Financial income < Taxable income
o Carrying amount of an asset < tax
base for an asset
o Carrying amount of a liability > tax
base for a liability

B. Deductible temporary differences

o Statement of financial position
perspective – the carrying value of
the asset is less than its tax base or
when the carrying amount of the
liability exceeds its tax base
o Income statement perspective –
accounting profit is less than a
taxable profit
o Deductible temporary differences
create a deferred tax asset (this
needs to be added)

Statement of Financial Income Statement

Position Approach Approach
Carrying amount of Uncollectible accounts
accounts receivable is expense is recognized
less than its tax base using the allowance