PAS 12

• Income taxes- refer to taxes that are based on taxable profits.
• Income tax expense- amount included in the determination of profit or loss for the period.
• Formula of income tax expense: Current tax expense + deferred tax expense
• PAS 12 prescribes the accounting for income taxes, which are taxes based on taxable profits
• Income Tax expense may differ from the amount of tax required to be paid to the BIR due to permanent and temporary differences in reporting
• Permanent differences do not have future tax consequences and do not give rise to Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTL)
• Examples of permanent differences include interest income on government bonds, dividend income, fines, surcharges, penalties, and life insurance premiums on employees where the entity is the irrevocable beneficiary
• Temporary differences are differences between the carrying amount of an asset or liability in the financial position statement and its tax base
• Taxable temporary differences give rise to Deferred Tax Liabilities, while deductible temporary differences give rise to Deferred Tax Assets
• Timing differences arise when income and expenses are recognized for financial reporting purposes in one period but are recognized for taxation purposes in another period
• Deferred Tax Liabilities (DTL) result in a higher amount of tax to be paid to the BIR in future periods, while Deferred Tax Assets (DTA) result in a lower amount of tax to be paid
• PAS 12 requires the use of the asset-liability method in accounting for deferred taxes, accounting for both timing differences and temporary differences
• Tax base of an asset is the amount deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the asset's carrying amount
• DTA and DTL are measured at the expected tax rates for the period of their reversal, without discounting
• DTA and DTL are presented separately as non-current assets and liabilities, respectively, in the statement of financial position
• Entities use tax laws to compute current taxes, recognizing unpaid current taxes as current tax liabilities and excess tax payments as current tax assets
• Tax effects related to transactions recognized in profit or loss are presented in profit or loss, while those recognized outside profit or loss are shown outside profit or loss
• Taxes recognized in other comprehensive income include those related to revaluation of property, plant, and equipment, and exchange differences from foreign operation translation
• Taxes recognized directly in equity include adjustments to the opening balance of retained earnings from accounting policy changes and amounts from initial recognition of the equity component of a compound financial instrument
• Current tax expense- the amount of income taxes payable in respect to the taxable profit for a period.
• Deferred tax expense- the sum of the net changes in deferred tax assets and deferred tax liabilities during the period.
• Deferred tax expense- deferred tax liabilities is greater than deferred tax assets.
• Deferred tax benefit- deferred assets greater than deferred tax liabilities.
• Permanent differences

  • Arises when income and expenses enter in the computation of either accounting profit or taxable profit but not both.
  • If an item is included in the computation of one, it will never enter in the computation of the other.
  • 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 hence do not give rise to DTA and DTL.
• Temporary differences- are differences between the carrying amount of assets and liabilities in the statement of financial position and its tax base. Temporary bases may be: Taxable temporary differences and deductible temporary differences.
• Taxable temporary differences- result in future taxable amounts when the carrying amount of the asset is recovered or settled.
• Deductible temporary differences- those that result in future deductible taxable amounts when the carrying amount of the asset or liability is recovered or settled.
• Timing differences- are temporary differences because their effect reverses in one or more subsequent period.
• Taxable temporary differences- financial income is greater than the the taxable income.
• Taxable temporary differences- the carrying amount of an asset is greater than its tax base; or the carrying amount of a liability is less than its tax base.
• Taxable temporary difference examples are:

  1. Revenue is recognized in full under PFRS but is taxable only when collected.
  2. A prepayment is capitalized and amortized to expense under PFRS but is tax deductible in full upon payment.
  3. Asset is revalued upward and no equivalent adjustment is made for tax purposes.
  4. Depreciation per PFRS is lower than depreciation for taxation purposes.
• Taxable temporary differences x tax rate= Deferred tax liability
• Deferred tax liabilities- amounts of income taxes payable in future periods in respect of taxable temporary differences.
• Deductible temporary differences- financial income is less than the taxable income/profit.
• Deductible temporary differences- the carrying amount of an asset is less than its tax base or the carrying amount of a liability is greater than its tax base.
• Deductible temporary differences examples are:

  1. Advance rent
  2. Bad debts expense
  3. Losses and tax credits
• Deductible temporary difference x tax rate= Deferred tax asset
• Deferred tax assets- are the amounts of income taxes recoverable in future periods in respect of (a) deductible temporary differences, and (b) carryforward unused tax losses and tax credits.
• DTA and DTL do not alter the amount of tax to be paid to the BIR in the current period. However, they do affect the amount of tax to be paid when reversed in a future period.
• DTL results in a higher amount of tax to be paid to the BIR, while DTA results to a lower amount of tax to be paid to the BIR.