Income Tax

ACT 111 - Conceptual
Framework & Accounting

Standards
Dr. Maria Cecilia Lagaras, CPA
Senior Fellow – UK-Higher Education Academy
College of Economics, Business, and Accountancy
Mindanao State University – Iligan Institute of
Technology
PAS 12 Income Taxes
Learning Objectives
• Understand the scope and the fundamental

principle of PAS 12.
• Interpret the terminology used in the
accounting for current and deferred taxes.
• State the recognition, measurement and
presentation of current and deferred taxes.
Conceptual Framework & Acctg. S 2

tandards (by: Zeus Vernon B. Milla
What is PAS 12
•PAS 12 prescribes the accounting treatment

for income taxes.
o It is inherent in the recognition of an asset or
liability that asset or liability will be recovered or
settled, and this recovery or settlement may
give rise to future tax consequences which
should be recognised at the same time as the
asset or liability
o An entity should account for the tax
consequences of transactions and other events
in the same way it accounts for the transactions
or other events themselves.
Definition of terms
• Tax base. The tax base of an asset or liability is the

amount attributed to that asset or liability for tax purposes
• Temporary differences. Differences between the carrying
amount of an asset or liability in the statement of financial
position and its tax bases.
• Taxable temporary differences. Temporary differences
that will result in taxable amounts in determining taxable
profit (tax loss) of future periods when the carrying
amount of the asset or liability is recovered or settled

Definition of terms
• Deductible temporary differences. Temporary differences that will

result in amounts that are deductible in determining taxable profit
(tax loss) of future periods when the carrying amount of the asset or
liability is recovered or settled
• Deferred tax liabilities. The amounts of income taxes payable in
future periods in respect of taxable temporary differences.
• Deferred tax assets. The amounts of income taxes recoverable in
future periods in respect of:
deductible temporary differences
o the carryforward of unused tax losses, and
o the carryforward of unused tax credits

Income tax expense and current tax
expense
• Tax expense or income tax expense (tax income) - total amt
included in the determination of profit or loss for the period. It
comprises current tax expense (current tax income) and deferred
tax expense (deferred tax income)
• Current tax or current tax expense – the amount of income
taxes payable (recoverable) in respect of the taxable profit (tax
loss) for the period.
• Deferred tax expense – sum of the net changes in deferred tax
assets and deferred tax liabilities during the period.

Carrying Asset and Tax Base
• Carrying amount of asset – the amount an asset or

liability reported in accordance with the accounting
standards
• Tax base - the amount attributable to an asset or
liability for tax purposes
 Tax base of an asset : e.g. capitalized cost that are to
“capitalized” as an asset to be deducted one-time in the tax
return. Ex. Software development
 Tax base of a liability: ex. Warranty (liability in the B/S);
deductible only when actual paid.
Accounting profit vs. Taxable profit
• The varying treatments of economic activities between the

PFRSs and tax laws result to permanent and temporary
differences.
Permanent differences
• Permanent differences arises when income and expense enter in the
computation of either acctg profit or taxable profit but not both.
o are those that do not have future tax consequences.
• Examples of non-taxable income or non-deductible expense
a. Interest income, net – (final tax ) on government bonds and
treasury bills – double taxation
b. Interest income (.1% per annual) on bank deposits (20%)
c. Dividend income
d. Fines, surcharges, and penalties arising from violation of law
e. Life insurance premium on employees where the entity is the
irrevocable beneficiary

Temporary differences
• Temporary differences are those that have future tax

consequences. Temporary differences are either:
a. 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.
b. 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.

Deferred Tax
• Deferred tax is the estimated future tax as a result of current and past
period transactions in the financial statements.
• It is an accounting entry and not the actual tax payable to or refundable
from the BIR.
• It exists because of the difference in accounting profits and taxable
profits
• A deferred tax asset is recognized only to the extent that it is realizable.
• Deferred taxes are measured using enacted or substantially enacted tax
rates that are applicable to the periods of their expected reversals.
• Deferred tax assets and liabilities are not discounted.
• Deferred tax asset and liabilities are presented as non-current.

Deferred taxes
• If the increase in deferred tax liability exceeds the

increase in deferred tax asset, the difference is deferred
tax expense.
o DTL > DTA = deferred tax expense
• If it is the opposite, the difference is deferred tax income or

benefit.
o DTA > DTL = deferred tax income

Difference between Accounting Income &
Taxable Income
Financial Taxation Difference
Reporting
Profit before 1,000 1,000 -
bad debts
Bad debts (est.) 100 -
Acctg/Taxable 900 1,000 100
Income
Tax rate 30% 30% 30%
Income/Current 270 300 30
Taxable
expense
As presented in To be paid to Tax difference
OCI BIR

A deferred tax liability (DTL)
• A deferred tax liability (DTL) arises when a company has

temporary differences between the accounting income (reported
in financial statements) and taxable income (used for tax
purposes) that will result in future tax payments.
• This usually occurs when a company has recognized revenue in
its financial statements but has not yet paid taxes on that
revenue due to tax rules.
• It is the amount of income taxes payable in the future periods as
a result of taxable temporary differences.
• Example: Professional fees reported in I/S includes unpaid
professional fees (A/R). Under tax law, only CASH professional
fees will be subject to Conceptual
tax. Framework & Acctg. S
14
Deferred Tax Liability*
REVENUE ACCTG. INCOME

UNPAID PAID INCOME TAX
Not reported under income tax, thus the entity

has a liability in the future.
DEPRECIATION
ACCTG INCOME INCOME TAX

EUL - 10 years EUL = 5 years
10,000 20,000

Example of Deferred Tax Liability:
• Imagine a company purchases a piece of equipment for P100,000 and, under

tax laws, the equipment is depreciated faster than under financial reporting
rules (e.g., 5 years for tax purposes vs. 10 years for financial reporting).
• Financial reporting (book depreciation): The company depreciates the
equipment over 10 years, deducting P10,000 per year in its financial
statements.
• Tax depreciation: For tax purposes, the equipment is depreciated over 5
years, deducting P20,000 per year from taxable income.
• In the first 5 years:
• The company will show a lower expense in its financial statements (P10,000) compared to its tax
return (P20,000).
• This results in a higher accounting profit compared to the taxable profit.
• Therefore, the company pays less tax today (due to the higher tax depreciation) but will pay more
tax in the future when the tax deductions are lower in later years.

Deferred tax expense (income or benefit)
• If the increase in deferred tax liability (DTL) > the

increase in deferred tax assets (DTA) = deferred tax
expense
• If the increase in deferred tax assets (DTA) > the increase
in deferred tax liability (DTL) = deferred tax income or
benefit
• Income tax expense - 270

• Deferred tax (expense) benefit - 30
• Current tax expense - 300
Income tax expense = current tax exp + DT exp or – DT
Taxable temporary difference (Deferred tax liability)
• These are temporary differences that will result in taxable amounts
in determining taxable profit (loss) of future periods when carrying
amount of the asset or liability is recovered
This occurs when:

(1) Carrying amount of an asset > the asset’s tax base
(2) Carrying amount of an liability < the liab’s tax base
On January 1 2024, a machine with a cost of P20,000 was

purchased. The machine is depreciated by 20% annually using STL.
Based on tax regulation, the machine is depreciated at 50%, Tax rate
is 30%.
`
Carrying Amt Tax base Temporary
(FA) difference
Cost 20,000 20,000 -
Depreciation 4,000 (20%) 10,000 (50%) 6,000
Carrying 16,000 10,000 CA > TB =
amount DFL
Taxable temporary difference (Deferred tax liability)
Effect of the difference in the accounting income and tax
income.
Carrying Tax base Temporary

value difference
Cost 20,000 20,000 -
Depreciation 4,000 (20%) 10,000 (50%) 6,000
Carrying 16,000 10,000 (CA > TB =
amount DFL
Accounting Income Tax Temporary
Income difference
Assuming EBITDA – P100,000
Profit
` 100,000 100,000 -
Depreciation 4,000 10,000 6,000
Income subj to 96,000 90,000 6,000
tax
Tax rate 30% 30% 30%
Tax Expense 28,800 27,000 1,800 (DTL)
Taxable temporary difference (Deferred tax asset)
• Temporary differences that will result in deductible amounts in determining taxable profit (tax
loss) of future periods when the carrying amount of an asset or liability is recovered or settled.
• Deferred tax assets (DTAs) is the amount of income taxes recoverable in the future periods as a
result of deductible temporary difference, unused tax losses carried forward, and unused tax
credits carried forward.
This occurs when:

(1) Carrying amount of an asset < the asset’s tax base
(2) Carrying amount of an liability > the liab’s tax base
On January 1 2024, a machine with a cost of P20,000 was purchase.

The machine is depreciated by 50% annually using STL. Based on
tax regulation, the machine is depreciated at 20%, Tax rate is 30%.
Calculated the deferred tax expense.
`
value difference
Cost 20,000 20,000 -
Depreciation 10,000 (50%) 4,000 (20%) (6,000)
Carrying 10,000 16,000 CA < TB =
amount DTA
Taxable temporary difference (Deferred tax asset)
Effect of the difference in the accounting income and tax
income.

value difference
Cost 20,000 20,000 -
Depreciation 10,000 (50%) 4,000 (20%) (6,000)
Carrying 10,000 16,000 CA < TB =
amount DTA
Accounting Income Tax Temporary
Income difference
Assuming EBITDA – P100,000
Profit
` 100,000 100,000 -
Depreciation 10,000 4,000 (6,000)
Income subj to 90,000 96,000 (6,000)
tax
Tax rate 30% 30% 30%
Tax Expense 27,000 28,800 1,800 (DTA)
Taxable Income and TaxTaxable
Expense
Income
Accounting Income xx
xx x Tax rate
+/- Permanent Differences xx
xx Current income tax expense
Income subject to tax xx
xx Temporary difference (+/-) xx
+/- Temporary Differences x Tax rate
xx
Income subj. to tax xx
Taxable
xx Income Deferred income tax expense
xx rate
x tax xx
xx Total income tax expense
Total income tax expense xx
xx

Azure Company reported a pretax income of P200,000 in the income statement
for the current period.
Accounting Tax Difference Type of
record Return difference
Professional Fee 10,000 8,000 2,000 Temporary
Depreciation 5,000 6,000 (1,000) Temporary
Payment of Penalty 1,000 1,000 Permanent
Premiums of Officer’s 2,000 2,000 Permanent

Insurance
Tax rate 30% 30%
1. What is the current provision for income tax for the current year?
2. What is the total tax expense?

DTL
DFA

Insurance
Tax rate 30% 30%
What is the current provision for income tax for the current year?
etax accounting income 200,000
d/(deduct) Permanent Differences
Penalty 2,000
Insurance premium 2,000 4,000
ome subject to tax 204,000
d/Less: temporary differences
Professional fee (2,000)
Depreciation (1,000) 3,000
xable Income 201,000
x rate 30%
urrent tax expense 60,300
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B-. 24
Millan)
1. What is the total tax expense?

Insurance
Tax rate 30% 30%
temporary differences: Pretax accounting income

Professional fee (2,000) x .30 = 60 200,000
Depreciation (1,000) x .30 = 30Add/(deduct) Permanent Differences
Penalty 2,000
Deferred tax liability = Insurance premium 2,000
90 4,000
Current tax expense Income subject to tax
60,300 204,000
Total Tax Expense Tax rate
61,200 30%
Total tax expense
61,200

Measurement
Deferred tax assets and liabilities are measured at the tax

rates that are expected to apply to the period when the asset
is realised or the liability is settled, based on tax rates/laws
that have been enacted or substantively enacted by the end
of the reporting period. [PAS 12.47] The measurement
reflects the entity's expectations, at the end of the reporting
period, as to the manner in which the carrying amount of its
assets and liabilities will be recovered or settled. [PAS 12.51]

Presentation
• Current tax assets and current tax liabilities can only be offset in the statement of
financial position if the entity has the legal right and the intention to settle on a net
basis. [IAS 12.71]
• Deferred tax assets and deferred tax liabilities can only be offset in the statement
of financial position if the entity has the legal right to settle current tax amounts on
a net basis and the deferred tax amounts are levied by the same taxing authority on
the same entity or different entities that intend to realise the asset and settle the
liability at the same time. [IAS 12.74]
• The amount of tax expense (or income) related to profit or loss is required to be
presented in the statement(s) of profit or loss and other comprehensive income.
[IAS 12.77]
• The tax effects of items included in other comprehensive income can either be
shown net for each item, or the items can be shown before tax effects with an
aggregate amount of income tax for groups of items (allocated between items that
will and will not be reclassified to profit or loss in subsequent periods). [IAS 1.91]
Disclosure
• PAS 12.80 requires the following disclosures:
• major components of tax expense (tax income) [IAS 12.79] Examples include:
• current tax expense (income)
• any adjustments of taxes of prior periods
• amount of deferred tax expense (income) relating to the origination and reversal
of temporary differences
• amount of deferred tax expense (income) relating to changes in tax rates or the
imposition of new taxes
• amount of the benefit arising from a previously unrecognised tax loss, tax credit
or temporary difference of a prior period
• write down, or reversal of a previous write down, of a deferred tax asset
• amount of tax expense (income) relating to changes in accounting policies and
corrections of errors.

Reference
• https://www.iasplus.com/en/standards/ias/ias12


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ACT 111 - Conceptual

Framework & Accounting

• Understand the scope and the fundamental

Conceptual Framework & Acctg. S 2

•PAS 12 prescribes the accounting treatment

• Tax base. The tax base of an asset or liability is the

Conceptual Framework & Acctg. S 4

• Deductible temporary differences. Temporary differences that will

Conceptual Framework & Acctg. S 5

Conceptual Framework & Acctg. S 6

• Carrying amount of asset – the amount an asset or

• The varying treatments of economic activities between the

Conceptual Framework & Acctg. S 9

• Temporary differences are those that have future tax

Conceptual Framework & Acctg. S 10

Conceptual Framework & Acctg. S 11

• If the increase in deferred tax liability exceeds the

• If it is the opposite, the difference is deferred tax income or

Conceptual Framework & Acctg. S 12

Conceptual Framework & Acctg. S 13

• A deferred tax liability (DTL) arises when a company has

REVENUE ACCTG. INCOME

Not reported under income tax, thus the entity

ACCTG INCOME INCOME TAX

Conceptual Framework & Acctg. S 15

• Imagine a company purchases a piece of equipment for P100,000 and, under

Conceptual Framework & Acctg. S 16

• If the increase in deferred tax liability (DTL) > the

• Income tax expense - 270

This occurs when:

On January 1 2024, a machine with a cost of P20,000 was

Carrying Tax base Temporary

This occurs when:

On January 1 2024, a machine with a cost of P20,000 was purchase.

Carrying Tax base Temporary

Conceptual Framework & Acctg. S 22

Depreciation 5,000 6,000 (1,000) Temporary

Payment of Penalty 1,000 1,000 Permanent

Premiums of Officer’s 2,000 2,000 Permanent

Conceptual Framework & Acctg. S 23

Premiums of Officer’s 2,000 2,000 Permanent

Depreciation 5,000 6,000 (1,000) Temporary

Payment of Penalty 1,000 1,000 Permanent

Premiums of Officer’s 2,000 2,000 Permanent

temporary differences: Pretax accounting income

Conceptual Framework & Acctg. S 25

Deferred tax assets and liabilities are measured at the tax

Conceptual Framework & Acctg. S 26

Conceptual Framework & Acctg. S 28

Conceptual Framework & Acctg. S 29

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