PAS 12 INCOME TAXES

I. NATURE
PAS 12 prescribes the accounting for the income tax
The varying treatments of economic activities between the PFRSs and tax laws result to permanent and
temporary differences.
Permanent differences are those that do not have future tax consequences.
Temporary differences are either taxable temporary differences or deductible temporary differences.
Taxable temporary differences arise, for example, when financial income is greater than taxable
income or the carrying amount of an asset is greater than its tax base. Deductible temporary
differences arise in case of the opposites of the foregoing.
Taxable temporary differences result to deferred tax liabilities while deductible temporary differences
result to deferred tax assets.
If the increase in deferred tax liability exceeds the increase in deferred tax assets, difference is deferred
tax expense. If it is the opposite, the difference is deferred tax income or benefit.
Income tax expense (benefit) is computed using PFRSs. It comprises current tax expense and deferred
tax expense (income or benefit).
Current tax expense is computed using tax laws.
II. RECOGNITION
And entity shall, with certain limited exceptions, recognize a deferred tax liability (asset) whenever
recovery or settlement of the carrying amount of an asset or liability would make future tax payments
larger (smaller) than they would be if such recovery or settlement were to have no tax consequences.
 Deferred tax liability is recognized for all taxable temporary differences, except those that arise from
the following: o Initial recognition of goodwill o Initial recognition of an asset or liability in a transaction
which is not a business combination and, at the time of the transaction, affects neither accounting
profit nor taxable profit (tax loss). o 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 not occur in the foreseeable
future.
 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 liability in transaction that is not a business combination and, at
the time of the transaction affects either accounting profit nor taxable profit (tax loss).
III. MEASUREMENT
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the
period of their reversal, based on tax rates that have been substantively enacted by the end of the
reporting period.
PAS 12 prohibits the discounting of deferred tax assets and liabilities.
IV. TRANSACTION
Permanent Differences
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 the law e. Life insurance
premium on employees where the entity is the irrevocable beneficiary.
Taxable Temporary Differences
a. Revenue is recognized in full under financial reporting but is taxable only when collected. b. A
prepayment is capitalized and amortized to expense under financial reporting but is tax deductible in
full upon payment. c. An asset is revalued upward and no equivalent adjustment is made for tax
purposes. d. Depreciation recognized under financial reporting is lower than the depreciation
recognized for taxation purposes.
Deductible temporary differences
a. Rent received in advance is treated as unearned income (liability) under financial reporting but is
taxable in full upon receipt of cash.
 PAS 10 EVENTS AFTER THE REPORTING PERIOD
I. NATURE
PAS 10 prescribes the accounting for, and disclosures of, events after the reporting period, including disclosures
regarding the date when the financial statements were authorized for issue.
The date of authorization of the financial statements is the date when management authorizes the financial
statements for issue regardless of whether such authorization is final or subject to further approval.
There are two types of events after the reporting period, the adjusting events and non- adjusting events.
 Adjusting events after the reporting period are events that provide evidence of conditions that existed at the
end of the reporting period.  Non-adjusting events after the reporting period are events that are indicative of
conditions that arose after the reporting period.
Examples of adjusting events include:
 Events that indicate that the going concern assumption in relation to the whole or part of the entity is
not appropriate;
 Settlements after reporting date of court cases that confirm the entity had a present obligation at
reporting date;
 Receipt of information after reporting date indicating that an asset was impaired at reporting date;
 Bankruptcy of a customer that occurs after reporting date that confirms a loss existed at reporting date
on trade receivables;
 Sales of inventory after reporting date that give evidence about their net realisable value at reporting
date;
 Discovery of fraud or errors that show the financial statements are incorrect.
Examples of non-adjusting events that would generally result in disclosure include:
 Major business combinations or disposal of a major subsidiary;
 Major purchase or disposal of assets, classification of assets as held for sale or expropriation of major
assets by government;
 Destruction of a major production plant by fire after reporting date;
 announcing a plan to discontinue operations;
Dividends declared after the reporting period are not recognized as liability at the end of reporting period
because no present obligation exists at the end of reporting period.

Going concern
PAS 10 prohibits the preparation of financial statements on a going concern basis if management determines
after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no
realistic alternative but to do so.

PAS 16 Property, Plant and Equipment

outlines the accounting treatment for most types of property, plant and equipment.  Property, plant
and equipment is
INITIALLY MEASURED at its cost ,
SUB- SEQUENTLY MEASURED either using a cost or revaluation model , and depreciated so that its
depreciable amount is allocated on a systematic basis over its useful life.

SUMMARY OF PAS 16
OBJECTIVE OF PAS 16
The objective of PAS 16 is  to prescribe the accounting treatment for property, plant,
and equipment.  The principal issues are the recognition of assets, the determination of their carrying
amounts, and the depreciation charges and impairment losses to be recognised in relation to them.

SCOPE PAS 16 applies to the accounting for property, plant and equipment, except where another
standard requires or permits differing accounting treatments,
for example :
- assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Opera- tions
- biological assets related to agricultural activity accounted for under IAS 41 Agriculture
- exploration and evaluation assets recognised in accordance with IFRS 6 Exploration for and
Evaluation of Mineral Resources
- mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

[PAS 16] The standard does apply to property, plant, and equipment used to develop or maintain the
last three categories of assets.

[PAS 16] The COST MODEL in PAS 16 also applies to investment property accounted for using the cost
model under IAS 40 Investment Property. [PAS 16] The standard does apply to bearer plants but
it does not apply to the produce on bearer plants.

RECOGNITION [PAS 16] Items of property, plant, and equipment should be recognised as assets when
it is probable that : - it is probable that the future economic benefits associated with the asset will
flow to the entity (future benefits) , and - the cost of the asset can be measured reliably
(measurement reliability).
 This RECOGNITION PRINCIPLE is applied to all property, plant, and equipment costs at the time
they are incurred.
 These costs include costs incurred initially to acquire or construct an item of property, plant
and equipment and costs incurred subsequently to add to, replace part of, or service it.
 PAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of
property, plant, and equipment.

[PAS 16] Note, however, that if the cost model is used (see below) each part of an item of property,
plant, and equipment with a cost that is significant in relation to the total cost of the item MUST BE
DEPRECIATED SEPARATELY.
 [PAS 16] PAS 16 recognises that parts of some items of property, plant, and equipment may require
REPLACEMENT at regular intervals. The carrying amount of an item of property, plant, and equipment
will include the cost of replacing the part of such an item when that cost is incurred if the recognition
criteria (future benefits and measurement reliability) are met.

[PAS 16] The carrying amount of those parts that are replaced is dere-cognised in accordance with
the derecognition provisions of PAS 16-.

[PAS 16] Also, continued operation of an item of property, plant, and equipment (for example, an
aircraft) may require

REGULAR MAJOR INSPEC- TIONS for faults regardless of whether parts of the item are replaced. When
each major inspection is performed, its cost is recognised in the carrying amount of the item of
property, plant, and equipment as a replacement if the recognition criteria are satisfied.

[PAS 16] Under the revaluation model, revaluations should be carried out REGULARLY , so that the
carrying amount of an asset does not differ materially from its fair value at the balance sheet date.

[PAS 16] If an item is revalued, the entire class of assets to which that asset belongs should be
revalued. Revalued assets are depreciated in the same way as under the cost model (see below).

[PAS 16] If a revaluation results in an INCREASE in value , it should be credited to other

comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it
represents the reversal of a revaluation decrease of the same asset previously recognised as an
expense, in which case it should be recognised in profit or loss.

[PAS 16] A DECREASE arising as a result of a revaluation should be recognised as an expense to the
extent that it exceeds any amount previously credited to the revaluation surplus relating to the same
asset.

[PAS 16] When a revalued asset is disposed of , any revaluation surplus may be transferred directly
to retained earnings , or it may be left in equity under the heading revaluation surplus. The transfer
to retained earnings should not be made through profit or loss.

DEPRECIATION (COST AND REVALUATION MODELS)

For all depreciable assets: [PAS 16] The depreciable amount (cost less residual value) should be
allocated on a SYSTEMATIC BASIS over the asset's useful life

[PAS 16] The residual value and the useful life of an asset should be reviewed AT LEAST AT EACH

FINANCIAL YEAR-END and, if expectations differ from previous estimates, any change is accounted
for PROSPECTIVELY as a change in estimate under IAS 8.
[PAS 16] The depreciation method used should reflect the pattern in which the asset's economic
benefits are consumed by the entity;
[PAS 16] a depreciation method that is based on revenue that is generated by an activity that includes
the use of an asset is not appropriate.
[PAS 16] The depreciation method should be reviewed at least annually and, if the pattern of
consumption of benefits has changed, the depreciation method should be changed prospectively as a
change in estimate under IAS 8.
[PAS 16] Expected future reductions in selling prices could be indicative of a higher rate of
consumption of the future economic benefits embodied in an asset.
[PAS 16] Depreciation should be charged to profit or loss, unless it is included in the carrying amount
of another asset [PAS 16] Depreciation begins when the asset is available for use and continues until
the asset is derecognised , even if it is idle.

RECOVERABILITY OF THE CARRYING AMOUNT

PAS 16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for
property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more
than recoverable amount.
RECOVERABLE AMOUNT is the higher of an asset's fair value less costs to sell and its value in use.
[PAS 16] Any claim for compensation from third parties for impairment is included in profit or loss
when the claim becomes receivable.

DERECOGNITION (RETIREMENTS AND DISPOSALS)

An asset should be removed from the statement of financial position on disposal or when it
is withdrawn from use and no future economic benefits are expected from its disposal.

[PAS 16-71] The gain or loss on disposal is the difference between the proceeds and the carrying
amount and should be recognised in profit and loss.
[PAS 16] If an entity rents some assets and then ceases to rent them, the assets should be transferred
to inventories at their carrying amounts as they become held for sale in the ordinary course of
business.

Disclosure Information about each class of property, plant and equipment For each class of property,
plant, and equipment, disclose: [PAS 16] o basis for measuring carrying amount
o depreciation method(s) used
o useful lives or depreciation rates
o gross carrying amount and accumulated depreciation and impairment losses
Entities with property, plant and equipment stated at revalued amounts are also required to make
disclosures under IFRS 13 Fair Value Measurement.

PAS 19 EMPLOYEE BENEFITS

I. NATURE
Types of employee benefits under PAS 19: (a) Short-term, (b) Post-employment, (c) Other long-term
and (d) Termination.
Entitlement to compensated absences is either:
a) Accumulating – can be carried to future period if not used.
I. Vesting – monetized; Non-vesting – not monetized.
b) Non-accumulating – forfeited if not used.
Accumulating and vesting – all unused absences are accrued; accumulating and non- vesting – only the
unused absences expected to be used are accrued; Non- accumulating – not accrued; absences are
recognized as expense when they occur.
Post-employment benefit plans are either (a) Defined contribution plan or (b) Defined benefit plan.
II. RECOGNITION
Employee Benefits are recognized as expense when employees have rendered service, except to the
extent that the employee benefits form part of the cost of another asset.
III. MEASUREMENT
The accounting for defined contribution plans is straight forward – the employer recognizes the agreed
fixed amount of contribution as retirement benefit cost after the end of each period that the
employees have rendered service.
The accounting for defined benefit plans is complex – it requires actuarial valuations using the
projected unit credit method.
Steps in the accounting for defined benefit plans:
1. Determine the deficit or surplus  If FVPA < PV of DBO, difference is deficit  If FVPA > PV of
DBO, difference is surplus
2. Determine the net defined benefit liability (asset)  Net defined benefit liability = deficit  Net
defined benefit asset = lower of surplus and ‘asset ceiling’
3. Determine components of the defined benefit cost to be recognized in Profit or Loss and Other
Comprehensive Income.
Other long term employee benefits are accounted for like defined benefit plans except that all the
components of the defined benefit cost are recognized in profit or loss.
The obligation to pay termination benefits arises from the employer’s act of terminating an employee
rather than from employee service.

PAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE

I. NATURE
PAS 20 prescribes the accounting and disclosure of government grants and disclosure of other forms of
government assistance.
Government grants (Sometimes called subsidies, subventions, or premiums) are assistance received
from the government in the form of transfers of resources in exchange for compliance with certain
conditions.
Examples of government grants:
a) Receipt of cash, land, or other non-cash assets from the government subject to compliance with
certain conditions.
b) Receipt of financial aid in case of loss from a calamity.
c) Forgiveness of an existing loan from the government.
d) Benefit of a government loan with below-market rate of interest.
II. RECOGNITION
Government grants are recognized if there is reasonable assurance that:
a) The attached conditions will be complied with; and
b) The grants will be received
Government grants are recognized in profit or loss on a systematic basis over the periods in which the
entity recognizes as expenses the related costs for which the grants are intended to compensate.
III. MEASUREMENT
Monetary grants
a) Amount of cash received; or
b) Fair value of amount receivable
Non-monetary grants (e., land and other resources)
a) Fair value of the non-monetary asset received; or
b) Alternatively, at nominal amount
Approaches to the accounting for government grants
a) Capital approach
 Grant is recognized outside profit or loss or in equity b) Income Approach
 Grant is recognized in profit or loss over one or more periods

IV. TRANSACTION
Accounting for government grant uses a ‘matching’ concept such that, if the related expense is not yet
recognized, income from government grant is also not yet recognized. Accordingly:
 1. Grants related to depreciable assets are recognized in profit of loss over the periods and in the
proportions in which depreciation expense on those assets is recognized.
2. Grants related to non-depreciable assets are recognized in profit or loss when the costs of
fulfilling the attached condition are incurred. For example, a grant of land conditioned on the
construction of a building on it is recognized over the periods that the constructed building is
depreciated.
3. Grants received as financial aid for expenses or losses already incurred are recognized
immediately in profit or loss when the grant becomes receivable (because the related costs
have already been expensed).

V. PRESENTATION
Grants related to asset
Financial Statements
Statement of financial position
Statement of comprehensive
income (Profit or Loss Section)
Gross Presentation
The grant is presented as a
deferred income (liability)
The income from the grant is
reported separately or included
in ‘Other income’
Net Presentation
The grant is deducted from the
carrying amount of the related
asset.
The income from the grant is
deducted from the depreciation
charge

Grants related to income

Financial Statements Gross Presentation Net Presentation
Statement of comprehensive The income from the grant is The income from the grant is
income (profit or loss section) reported separately or included deducted from the related
in ‘Other income’ expense.

VI. DISCLOSURE
a. Accounting policy and method of presentation
b. Nature and extent of government grants and other forms of government assistance from which the
entity has directly benefited
c. Unfulfilled conditions and contingencies attached to the government grants