PAS 12: Income Taxes

INCOME TAXES (PAS 12)

 
Key Definitions:

The tax base of an asset or liability is the amount attributed to that

Tax base
asset or liability for tax purposes

Temporary Differences between the carrying amount of an asset or liability in

differences the statement of financial position and its tax bases

Temporary differences that will result in taxable amounts in

Taxable temporary
determining taxable profit (tax loss) of future periods when the
differences
carrying amount of the asset or liability is recovered or settled

Temporary differences that will result in amounts that are

Deductible
deductible in determining taxable profit (tax loss) of future periods
temporary
when the carrying amount of the asset or liability is recovered or
differences
settled

Deferred tax The amounts of income taxes payable in future periods in respect of
liabilities taxable temporary differences

The amounts of income taxes recoverable in future periods in

respect of:
Deferred tax assets
deductible temporary differences, the carryforward of unused tax
losses, and the carryforward of unused tax credits

 
ACCOUNTING INCOME or financial income is the net income before deducting income
tax expense
 
TAXABLE INCOME is the income for the period determined in accordance with the rules
established by the taxation authorities upon which income taxes are payable or
recoverable
 
PERMANENT DIFFERENCES

 items of revenue and expenses which are included in either in accounting

income or taxable income but will never be included in the other
 pertain to non-deductible expenses and non-taxable revenue
 do not give rise to either deferred tax asset or liability

 
TEMPORARY DIFFERENCES

 differences between the carrying amount of an asset or liability and its tax
base
 include Timing Differences
o differences between accounting income and taxable income that
originate in one period and reverse in one or more subsequent
periods
 TAXABLE TEMPORARY DIFFERENCE
 temporary difference that will result in future
taxable amount in determining taxable income
of future periods when the carrying amount of
the asset or liability is recovered or settled
 DEDUCTIBLE TEMPORARY DIFFERENCE
 temporary difference that will result in future
deductible amount in determining taxable
income of future periods when the carrying
amount of the asset or liability is recovered or
settled
 give rise to either deferred tax asset or liability
 DEFERRED TAX LIABILITY is the amount of
income tax payable in future periods with
respect to a taxable temporary difference.

Deferred tax liability arises from the following:

 the accounting income is higher than the taxable income because of timing
differences
 the carrying amount of an asset is higher than its tax base
 the carrying amount of a liability is lower than its tax base
Note:     *Tax base is the amount attributable to the asset or liability for tax purposes.
 
RECOGNITION OF DEFERRED TAX LIABILITY

 Shall be recognized for all taxable temporary differences

 
Exception:
When taxable temporary differences arises from:

 goodwill resulting from business combination and which is non-deductible for

tax purposes
 initial recognition of an asset or liability in a transaction that is not a business
combination and affects neither accounting income nor taxable income
 undistributed profit of subsidiary, associate or joint venture when:
 the parent, investor or venturer is able to control the timing of the reversal of
the temporary difference
 it is probable that the temporary difference will not reverse in the foreseeable
future

 
Temporary differences that technically are not timing differences but nevertheless give
rise to deferred tax liability:

 asset is revalued upward and no equivalent adjustment is made for tax

purposes
 the carrying amount of investment in subsidiary, associate or joint venture is
higher than its tax base because the subsidiary, associate or joint venture has
not distributed its entire income to the parent or investor
 the cost of a business combination that is accounted for as an acquisition is
allocated to the identifiable assets and liabilities acquired at fair value and no
equivalent adjustment is made for tax purposes

 DEFERRED TAX ASSET is the amount of income tax recoverable in future

periods with respect to deductible temporary difference and operating loss
carry forward.

A deferred tax asset arises from the following:

  the taxable income is higher than the accounting income because of timing
differences
 the tax base of an asset is higher than its carrying amount
 the tax base of a liability is lower than its carrying amount

 
TEMPORARY DIFFERENCES that technically are not timing differences but nevertheless
give rise to deferred tax asset:

 asset is revalued downward and no equivalent adjustment is made for tax

purposes
 the tax base of an investment in subsidiary, associate or joint venture is higher
than its carrying amount because the subsidiary, associate or joint venture has
suffered continuing losses in the current and prior years
 financial asset is carried at fair value which is less than cost but no equivalent
adjustment is made for tax purposes

 
RECOGNITION OF DEFERRED TAX ASSET
Shall be recognized for all deductible temporary differences and operating loss carry
forward when it is probable that taxable income will be available against which the
deferred tax asset can be used
 
SUMMARY:

Temporary Deferred Tax

Acctg. Vs. SFP Relationship Difference Expense Effect
Type of SFP
Tax
Tax Deferral
Income
Current Future Current Future
Assets:

> Books > Tax Basis D T Liability + -

< Books < Tax Basis T D Asset - +

Liabilities:

< Books > Tax Basis T D Asset - +

> Books < Tax Basis D T Liability + -

Note:
Permanent Difference only impact the current year whereas Temporary Difference will
have future tax consequences.
Your ability to work on Income Tax accounting depends on your ability to identify
between permanent and temporary difference.

 
MEASUREMENT
CTA / CTL: measured using the tax rate that has been enacted and effective at the end
of the reporting
DTA / DTL: measured 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
 
Income Tax Expense  =  Current Tax Expense  +  Deferred Tax Expense 
Income Tax Expense  =  Income Tax Payable on +/- Change in Deferred Taxes
per Financial Reporting           Tax Return
 
PRESENTATION OF DEFERRED TAX LIABILITY AND DEFERRED TAX ASSET

 classified as both noncurrent regardless of reversal period

Note: Offsetting is not allowed except when

 levied by same taxing authority

 has legal enforceable right to offset a current tax liability against a current tax
asset

 
DEFERRED TAX CONSEQUENCE OF REVALUATION OF ASSET is recognized in other
comprehensive income.