PAS 12 – ACCOUNTING FOR INCOME
TAXES
Accounting Income – is the net income
before deducting income tax expense.
Taxable Income – 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
• give rise to either deferred tax asset
or liability
Timing Differences
• 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
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 (AI > TI)
• the carrying amount of an asset is
higher than its tax base (CAA > TBA)
• the carrying amount of a liability is
lower than its tax base (CAL < TBA)
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
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
Deferred Tax Asset is the amount of income
tax recoverable in future periods with
respect to deductible temporary difference
and operating loss carry forward.
Deferred tax asset arises from the
following:
• the taxable income is higher than the
accounting income because of timing
differences (TI > AI)
• the tax base of an asset is higher than
its carrying amount (TBA > CAA)
• the tax base of a liability is lower than
its carrying amount (TBA < CAL)
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
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
Measurement of Income Tax Expense
Current Tax Liability And Current Tax Asset
• measured using the tax rate that has
been enacted and effective at the end
of the reporting
Deferred Tax Liability And Deferred Tax
Asset
• 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
Presentation of Deferred Tax Liability and
Deferred Tax Asset
Presentation in the Statement of Financial
Position
• Deferred tax assets and deferred tax
liabilities are presented separately as
noncurrent assets and noncurrent
liabilities, respectively.
Presentation in the Statement of
Comprehensive Income
• Current and deferred taxes are
usually recognized in profit or loss.
Tax consequences are accounted for in the
same way as the related transactions or
events. Thus, if a transaction is recognized
in profit or loss, its tax effect is also
recognized in profit or loss. If a transaction
is recognized outside profit or loss, the tax
effect is also recognized outside profit or
loss (e.g., in other comprehensive income
or directly in equity).
Taxes recognized in other comprehensive
income:
• Revaluation of property, plant and
equipment.
• Exchange differences arising on the
translation of the financial
statements of a foreign corporation.
Taxes recognized directly in equity:
• Adjustment to the opening balance of
retained earnings resulting from a
change in accounting policy or
correction of a prior-period error.
• Amounts arising on initial recognition
of the equity component of a
compound financial instrument.
Accounting for Current Taxes
An entity uses relevant tax laws in
computing for its current taxes. Unpaid
current taxes are recognized as current tax
liability, e.g., income tax payable. Excess
tax payments over the current tax due are
recognized as current tax asset, e.g.,
prepaid income tax.