PAS 12

Accounting for Income Tax

Coverage
• Accounting Income vs Taxable Income
• Current tax
• Deferred tax and Temporary difference
Income Statement approach
concept of timing difference
Statement of Financial Position approach
concept of tax base
• Illustrations
• Measurement
• Presentation
Accounting Income vs Taxable Income
 Accounting income is the income following accounting rules and
standards.
 Taxable income is the income following tax rules.

Differences arise from:

Permanent Differences
- interest income from deposits
- dividends received
- life insurance premiums (when the beneficiary is the
entity)
- non deductible taxes, penalties and surcharges

Temporary Differences
- difference between carrying amount of an asset or
liability and its tax base
- includes timing differences
Current Tax
a) Regular corporate income tax (30%)

b) Tax on income of Ecozone registrants (e.g., PEZA, Bases Conversion and

Development Authority, Zamboanga City Special Economic Zone and the
Cagayan Special Economic Zone – 5%)

c) Tax on income of propriety educational institutions and hospitals (10%)

d) Minimum corporate income tax (MCIT) (2%)

e) Tax on passive income:

• Interest income from deposits and trust funds denominated in
Philippine pesos
• Interest income from foreign currency-denominated account
• Royalty income
• Capital gains from sale of shares of stock not traded in the stock
exchange
• Capital gains from sales or disposal of capital assets
Deferred Tax
Arise as a result of temporary differences.

Temporary Tax Deferred

Difference x Rate
=
Tax

Carrying _ Tax
Amount Base

Accounting _ Taxable
Income Income
Deferred Tax

Taxable Deferred
TD Tax Liability
Temporary
Difference
(CA – TB)
Deductible Deferred
TD Tax Asset
Income Statement Approach
Considers timing difference.
Arises due to differences in accounting standards vs tax
laws in terms of revenue and expense recognition
- accounting- accrual/modified accrual basis
- tax- cash basis

Accounting Income > Taxable Income- Liability (LAITI)

Taxable Income > Accounting Income -Asset (ATIAI)
Statement of Financial Position Approach
Considers difference in carrying amount vs tax base of an asset or
liability.

Tax Base of an asset or liability is the amount attributed to an

asset or liability for tax purposes

Carrying Amount > Tax Base of an Asset - Liability

Tax Base > Carrying Amount of an Asset - Asset
Carrying Amount > Tax Base of a Liability - Asset
Tax Base > Carrying Amount of a Liability - Liability
Recognition - Deferred Tax Assets

Deferred Tax
Assets

All Unused Tax Deductible TD - Deductible TD –

Deductible
Losses and Assets Carried Investments in
TD
Tax Credits At Fair Value Subsidiaries, JVs

Exceptions – Deferred Tax Asset

1. Negative goodwill
2. Initial recognition of asset or liability in a transaction which
- Is Not a business combination, and
- Does not affect accounting or taxable profit (loss)
Recognition - Deferred Tax Liabilities

Deferred Tax
Liabilities

All
Taxable TD – Taxable TD –
Taxable
Assets Carried at Investments in
TD
Fair Value Subsidiaries/JVs

Exceptions – Deferred Tax Liability

1. Goodwill, if amortization is not deductible for tax purposes
2. Initial recognition of asset or liability in a transaction which
- Is Not a business combination, and
- Does not affect accounting or taxable profit (loss)
Illustrations:

Bank A’s pre-tax accounting income is P1,000,000. Other data that may have been
considered for purposes of accounting or taxable income computation are:
• the Bank follows straight line method of depreciation in its accounting
books, amount of which is P50,000 for the year. For taxation purposes, the
Bank adopted SYD and computed tax depreciation amounting to P80,000.
• P10,000 of its revenue is in the form of interest on deposits with other
banks.
• Gross receipts tax (GRT) paid for the year is P100,000
• Allowance for probable losses increased by P200,000 as a result of
additional provision for bad debts amounting to P350,000 offset by the
100% allowance on written of accounts.
• The Bank also realized P70,000 loss on the disposal of its ROPA/foreclosed
assets.
Assume 30% tax rate.

Required:
1. Identify the effects of the foregoing to the computation of taxable income, then
compute for the taxable income.
2. Compute for regular income tax expense, current income tax and deferred tax
expense (benefit)
3. Compute for current tax payable and deferred tax asset (liability).
Illustrations:

Required:
1. Identify the effects of the foregoing to the computation of taxable income, then
compute for the taxable income..
Effect on taxable Amount to Include in
Item Type
income Computation
Depreciation Taxable TD Decrease 30,000
Interest on Deposits Permanent Diff Decrease 10,000
GRT Normal None 0
Additional provision Deductible TD Increase 350,000
Write off Taxable TD Decrease 150,000
Realized loss on ROPA Taxable TD Decrease 70,000

Accounting Income 1,000,000

Adjustments for:
Permanent Differences
Interest on Deposits (10,000)
Taxable Temporary Differences
Difference in Depreciation (30,000)
Written off accounts (150,000)
Realized loss on ROPA (70,000)
Deductible Temporary Differences
Additional Provision for Losses 350,000
Taxable Income 1,090,000
 Illustrations:

2. Compute for regular income tax expense, current income tax and deferred tax expense
(benefit)

Regular Income Tax = 297,000 (990,000 x 30%)

Current Income Tax = 327,000 (1,090,000 x 30%)
Deferred Tax Expense (Benefit) = 30,000 (327,000-297,000 or 100,000 x 30%

3. Compute for current tax payable and deferred tax asset (liability).

Current Tax Payable = 327,000

Deferred Tax Asset (Liability) = 30,000 DTA
 Illustrations:
Identify the tax base for the following:

1. A machine costs 100. For tax purposes, depreciation of P30 has already been deducted in
the current and prior periods and the remaining cost will be deductible in future periods,
either as depreciation or through deduction on disposal. Revenue generated by using this
machine is taxable, any gain on disposal is taxable and any loss on disposal will be deducted
for tax purposes.
The tax base of the machine is P70.

2. Interest receivable has a carrying amount of P100. The related interest revenue will be
taxed on a cash basis.
The tax base of the interest receivable is nil.

3. A loan receivable has a carrying amount of P100. The repayment of the loan will have no
tax consequences.
The tax base of the loan is P100.

4. Acquisition Cost of Fixed Assets - P100,000

Accumulated Depreciation for tax purposes - P 30,000
Accumulated Impairment Loss - P 20,000
TB= 70,000
 Illustrations:

Identify the tax base for the following:

1. Current liabilities include accrued expenses with a carrying amount of P100. The related
expense will be deducted for tax purposes on a cash basis.
The tax base of the accrued expenses is nil.

2. Current liabilities include interest revenue received in advance with a carrying amount of
P100. The related interest revenue was taxed on a cash basis.
The tax base of the interest received in advance is nil.

3. A loan payable has a carrying amount of P100. The repayment of the loan will not be
taxable.
The tax base of the loan is P100.

4. A loan receivable has a carrying amount of P100. The repayment of the loan will have no
tax consequences.
The tax base of the loan is P100.
 Measurement

Current tax
Current tax
liabilities
rates
(assets)
Enacted and
Substantially
Enacted
Deferred tax
Expected tax
assets and
liabilities rates

- Follows manner of recovery or

settlement
- No discounting
 Presentation
Current and Deferred Tax

Balance Sheet

Current Deferred

Tax Asset Tax Liability Tax Asset Tax Liability

Classified B/S
Offset

Non-current

Offset