INCOME TAXES

PAS 12 Income Taxes

PAS 12 INCOME TAXES

 PAS 12 prescribes the accounting for income taxes.

 Income taxes refer to taxes that are based on taxable
profits.
 Income tax expense reported in the statement of
comprehensive income may be different from the amount of
income tax required to be paid to the BIR.
 Income tax expense in the statement of comprehensive
income is computed using PFRSs.
 Current tax expense om the income tax return is computed
using Philippine tax laws.
PAS 12 INCOME TAXES

 Some items are appropriately recognized as income

(expense) under financial reporting but are either (a) non-
taxable (non-deductible) or (b) taxable (deductible) only ate
some other periods under Philippine tax laws.
 The varying treatments result to permanent and temporary
differences.
ACCOUNTING PROFIT AND TAXABLE PROFIT

 Accounting profit is profit or loss for a period before

deducting tax expense.
 Taxable profit (tax loss) is profit or loss for a period,
determined in accordance with the rules established by the
taxation authorities, upon which income taxes are payable
(recoverable).
PERMANENT DIFFERENCES

 Permanent differences arise when income and expenses

enter in the computation of either accounting profit or
taxable profit but not both.
 Permanent differences usually arises from non-taxable and
non-deductible expenses and those that have already been
subjected to final taxes.
 Permanent differences do not have future tax consequences
and do not give rise to deferred tax assets and liabilities.
PERMANENT DIFFERENCES

Examples:
a. Interest income on government bonds and treasury bills
b. Interest income on bank deposits
c. Dividend income
d. Fines, surcharges, and penalties arising from violation of
law
e. Life insurance premium on employees where the entity is
the irrevocable beneficiary
TEMPORARY DIFFERENCES

 Temporary differences are differences between the carrying

amount of an asset or liability in the statement of financial
position and its tax base. Temporary differences may be
either:
a) Taxable temporary differences – those that result to
future taxable amounts when the carrying amount of the
asset or liability is recovered or settled; or
b) Deductible temporary differences – those that result to
future deductible amounts when the carrying amount of
the asset or liability is recovered or settled.
TEMPORARY DIFFERENCES

 Temporary differences include timing differences.

 Timing differences arises when income and expenses are
recognized for financial reporting purposes in one period but
are recognized for taxation purposes in another period.
 It is called temporary difference because their effect
reverses in one or more subsequent periods.
 Taxable temporary differences give rise to deferred tax
liabilities.
 Deductible temporary differences give rise to deferred tax
assets.
TAXABLE TEMPORARY DIFFERENCES

 Taxable temporary differences arise when:

a) Financial income is greater than the taxable income;
b) The carrying amount of an asset is greater than its tax
base; or
c) The carting amount of a liability is less than its tax base.
 Deferred tax liabilities are the amounts of income taxes
payable in future periods in respect of taxable temporary
differences.
DEDUCTIBLE TEMPORARY DIFFERENCES

 Deductible temporary differences arise when:

a) Financial income is less than taxable income;
b) The carrying amount of an asset is less than its tax base;
or
c) The carrying amount of a liability is greater than its tax
base.
 Deferred assets are the amounts of income taxes
recoverable in future periods in respect of: (a) deductible
temporary differences; (b) the carryforward of unused tax
losses; and (c) the carryforward of unused tax credits.
ASSET-LIABILITY METHOD (BALANCE SHEET
LIABILITY METHOD)

 This method is a comprehensive approach in accounting for

deferred taxes in that it accounts both (a) timing differences
and (b) differences between the carrying amounts and tax
bases of assets and liabilities.
TAX BASE

 Tax base of an asset or liability is the amount attributed to

the asset or liability for tax purposes.
 Tax base of assets is the amount that will be deductible for
tax purposes against any taxable economic benefits that will
flow to the entity when it recovers the carrying mount of the
asset.
 Tax base of liabilities is the carrying amount, less any
amount that will be deductible for tax purposes in respect
of that liability in future periods.
INCOME TAX EXPENSE AND CURRENT TAX EXPENSE

 Tax expense or income tax expense (tax income) is the total

amount included in the determination of profit or loss of the
period. It comprises current tax expense and deferred tax
expense.
 Current tax (current tax expense) is the amount of income
taxes payable (recoverable) in respect of the taxable profit
for a period.
 Deferred tax expense (income or benefit) is the sum of the
net changes in deferred tax assets and deferred tax
liabilities during the period.
ACCOUNTING FOR CURRENT TAXES

 Unpaid current taxes are recognized as current tax liability.

 Excess tax payments over the current tax due are
recognized as current tax asset.
ACCOUNTING FOR CURRENT TAXES

Formula 1
Multiply
Description of items Description of items
by tax rate
Accounting profit (pretax income) xx
Permanent differences:
Add: Non-deductible expense xx
Less: Non-taxable income (xx)
Accounting profit subject to tax xx % Income tax expense xx
Temporary differences:
Less: Increase in taxable temporary difference (xx) % Less: Increase deferred tax liability (xx)
Less: Increase in deductible temporary difference xx % Add: Increase deferred tax asset xx
Taxable profit xx % Current tax expense xx
ACCOUNTING FOR CURRENT TAXES

Formula 2 (Application of Balance Sheet Liability Method)

The excess of an asset’s carrying amount over its tax base
results to taxable temporary difference.

For an asset:
CA > TB = TTD or FI > TI; TTD multiplied by tax rate results to
DTL
RECOGNITION OF DEFERRED TAXES

 Deferred tax liability is recognized for all taxable temporary

differences, except those that arise from the following:
a. Initial recognition of goodwill
b. Initial recognition of an asset or liability in a transaction
which is not a business combination and, at the time of the
transaction, effects neither accounting profit nor taxable
profit (tax loss).
c. Investment in subsidiaries, branches, and associates, and
interests in joint arrangements to the extent that the entity is
able to control the timing of the reversal of the differences
and it is probable that the reversal will occur in the
foreseeable future.
RECOGNITION OF DEFERRED TAXES

 Deferred tax asset is recognized for all deductible

temporary differences, including unused tax losses and
unused tax credits, to the extent that it is probable that
taxable profit will be available against which the deductible
temporary difference can be utilized, unless the deferred tax
asset arises from the initial recognition of an asset or a
liability in a transaction that is not a business combination
and, at the time of the transaction, affects neither accounting
profit nor taxable profit (tax loss).
LIMITATION ON THE RECOGNITION OF DEFERRED TAX
ASSET

 A deferred tax asset reduces the tax payment when it

reverses in a future periods. However, an entity can benefit
from this reduction only if it earned sufficient taxable profit
against which the reduction can be applied.
 PAS 12 permits an entity to recognize deferred tax assets
only when it is probable that taxable profits will be available
against which the deductible temporary differences can be
utilized or there is sufficient taxable temporary differences
that are expected to reverse in the same period that the
deductible temporary differences are expected to reverse.
LIMITATION ON THE RECOGNITION OF DEFERRED TAX
ASSET

 When it is not probable that a deferred tax asset will be

realized, it is either (a) not recognized or (b) reduced to its
realizable value, whichever is appropriate. The reduction in
deferred tax asset increases income tax expense but does
not affect current tax expense.