ACCOUNTING FOR INCOME TAX

IAS 12 Income Taxes

Overview
 Sets out the accounting for current and deferred tax.
Objective
 The objective of this Standard is to prescribe the accounting treatment for income
taxes. The principal issue in accounting for income taxes is how to account for
the current and future tax consequences of:
(a) the future recovery (settlement) of the carrying amount of assets
(liabilities) that are recognized in an entity’s statement of financial position; and
(b) transactions and other events of the current period that are recognized
in an entity’s financial statements.

BASIC FORMULA:
ACCOUNTING INCOME BEFORE TAX XX ( INCOME BEFORE TAX)
ADD: PERMANENTLY
NON- DEDUCTIBLE EXPENSES XX
LESS: PERMANENTLY
NON-TAXABLE INCOME (XX)
INCOME SUBJECT TO TAX XX - INCOME TAX EXPENSE
ADD: TEMPORARY
TAXABLE INCOME XX
TEMPORARY - DEFERRED TAX ASSET
NON-DEDUCTIBLE EXPENSES XX

LESS: TEMPORARY NON-TAXABLE INCOME (XX)

TEMPORARY DEDUCTIBLE - DEFERRED TAX LIABILITY
EXPENSES (XX)
TAXABLE INCOME XX - INCOME TAX PAYABLE
(CURRENT TAX EXPENSE)

Income Tax Expense xx

Deferred Tax Asset xx
Deferred Tax Liability xx
Income Tax Payable xx

Definition
  Accounting profit is profit or loss for a period before deducting tax expense.
 Taxable profit (tax loss) is the profit (loss) for a period, determined in
accordance with the rules established by the taxation authorities, upon which
income taxes are payable (recoverable).
 Tax expense (tax income) is the aggregate amount included in the
determination of profit or loss for the period in respect of current tax and deferred
tax.
 Current tax is the amount of income taxes payable (recoverable) in respect of
the taxable profit (tax loss) for a period.
 Deferred tax liabilities are the amounts of income taxes payable in future
periods in respect of taxable temporary differences.
 Deferred tax assets are the amounts of income taxes recoverable in future
periods in respect of:
(a) deductible temporary differences;
(b) the carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.
 Temporary differences are differences between the carrying amount of an
asset or liability in the statement of financial position and its tax base. Temporary
differences may be either:
(a) taxable temporary differences, which are 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; or

(b) deductible temporary differences, which are 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.

 The tax base of an asset or liability is the amount attributed to that asset or
liability for tax purposes.

PERMANENT NON TAXABLE INCOME:

1. NON TAXABLE LIFE INSURANCE PROCEEDS
2. INTEREST INCOME FROM GOVERNMENT BONDS/ T-BILLS
3. INTEREST INCOME FROM TIME DEPOSIT / BANK
PERMANENT NON-DEDUCTIBLE EXPENSES
1. LIFE INSURANCE PREMIUM FOR OFFICERS
2. PENALTY
3. DONATION (POLITICAL PARTIES)
 Reported In Income Per Book Taxable
Revenue When it is earned When It is Received
Expenses When it is incurred When it is Paid
Bad Debts When it is estimated to be doubtful When it is written off
Depreciation Systematic and Rational Manner Depreciation per Tax

Current and deferred tax

 Current tax liabilities and assets are recognized for current and prior period
taxes, measured at the rates that have been enacted or substantively enacted by
the end of the reporting period.
 Deferred tax assets and liabilities are the income taxes recoverable or payable in
future periods as a result of differences between the amounts attributed to assets
and liabilities from applying IFRS Standards and the amounts those assets and
liabilities are attributed for tax purposes (called temporary differences).

Deferred tax liabilities

 Deferred tax liabilities are recognized for the future tax consequences of all
taxable temporary differences with three exceptions:
1. A deferred tax liability is not recognized when the temporary difference arises
from the initial recognition of goodwill;
2. when, at the time of the transaction, the initial recognition of an asset or
liability does not affect either the accounting or the taxable profit (unless it is a
business combination);
3. and for differences arising from investments in subsidiaries, branches,
associates and joint arrangements (e.g. due to undistributed profits) when the
entity is able to control the timing of the reversal of the difference and it is
probable that the reversal will not occur in the foreseeable future.

Deferred tax assets

 A deferred tax asset is recognized for deductible temporary differences, unused
tax losses and unused tax credits, but only to the extent that it is probable that
taxable profit will be available against which the deductible temporary differences
can be utilized.
 There are two exceptions:
1. a deferred tax asset is not recognized for temporary differences related to the
initial recognition of an asset or liability, other than in a business combination,
which, at the time of the transaction, does not affect the accounting or the
taxable profit;
2. and deferred tax assets arising from deductible temporary differences
associated with investments in subsidiaries, branches and associates, and
interests in joint arrangements are recognized only to the extent that it is
probable that the temporary difference will reverse in the foreseeable future
and taxable profit will be available to utilize the difference. A reassessment of
unrecognized deferred tax assets must be made at the end of each reporting
period.
Measurement of deferred tax
 Deferred tax liabilities and assets are measured at the tax rates expected to
apply when the liability is settled or the asset is realized, based on tax rates
or laws that have been enacted or substantively enacted by the end of the
reporting period.
 Deferred tax assets and liabilities are not discounted.
 The measurement must reflect the tax consequences that would follow from the
manner in which the entity expects to recover or settle the carrying amount of its
assets and liabilities. There is a rebuttable presumption that recovery of the
carrying amount of an investment property measured at fair value will be through
sale.

Presentation of current and deferred tax

 Current and deferred tax is recognised as income or expense in profit or loss
unless it relates to a transaction or event that is recognized outside profit or loss
or to a business combination.
 Deferred tax assets and liabilities are classified as non-current items.

Interpretations SIC 25 Income Taxes

 Changes in the Tax Status of an Entity or its Shareholders clarifies that the
current and deferred tax consequences of changes in tax status are included in
profit or loss even when they relate to transactions or events that were
previously recognized outside profit or loss.

Changes effective this year

 IFRIC 23 Uncertainty over Income Tax Treatments clarifies that entities must
assess whether it is probable that a tax authority (with full knowledge of all
relevant information) will accept an uncertain tax treatment used in tax filings. If
so, tax accounting should be consistent with that treatment. If not, the effect of
uncertainty should be reflected in the tax accounting applied (using whichever of
a ‘most likely amount’ or ‘expected value’ approach is expected to better predict
the resolution of the uncertainty). IFRIC 23 is effective for annual reporting
periods beginning on or after 1 January 2019.
 An amendment included in the Annual Improvements Cycle 2015–2017 clarifies
that all income tax consequences of dividends are classified in the same way,
regardless of how the tax arises, is effective for annual reporting periods
beginning on or after 1 January 2019.
Pending changes
 The IASB is planning to issue an ED that proposes a narrow-scope amendment
to IAS 12. The amendment would narrow the initial recognition exemption in IAS
12 so that it would not apply to transactions that give rise to both taxable and
deductible temporary differences, to the extent the amounts recognized for the
temporary differences are the same.
History
 Originally issued for periods beginning on or after 1 January 1998, it was adopted
by the IASB and included in the original set of Standards effective for annual
periods beginning on or after 1 January 2005. It was amended to change how to
measure temporary differences when investment properties are measured at fair
value. The amendments came into effect for annual periods beginning on or after
1 January 2012 and replaced SIC-21 Income Taxes – Recovery of Revalued
Non-depreciable Assets.

 Some items have a tax base but are not recognized as assets and liabilities in
the statement of financial position. For example, research costs are recognised
as an expense in determining accounting profit in the period in which they are
incurred but may not be permitted as a deduction in determining taxable profit
(tax loss) until a later period. The difference between the tax base of the research
costs, being the amount the taxation authorities will permit as a deduction in
future periods, and the carrying amount of nil is a deductible temporary difference
that results in a deferred tax asset.

 Where the tax base of an asset or liability is not immediately apparent, it is

helpful to consider the fundamental principle upon which this Standard is based:
that an 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. Example C
following paragraph 52 illustrates circumstances when it may be helpful to
consider this fundamental principle, for example, when the tax base of an asset
or liability depends on the expected manner of recovery or settlement.

 In consolidated financial statements, temporary differences are determined by

comparing the carrying amounts of assets and liabilities in the consolidated
financial statements with the appropriate tax base. The tax base is determined by
reference to a consolidated tax return in those jurisdictions in which such a return
is filed. In other jurisdictions, the tax base is determined by reference to the tax
returns of each entity in the group. EN – IAS 12 4 Recognition of current

Recognition of current tax liabilities and current tax assets

 Current tax for current and prior periods shall, to the extent unpaid, be
recognized as a liability. If the amount already paid in respect of current and prior
periods exceeds the amount due for those periods, the excess shall be
recognized as an asset.

 The benefit relating to a tax loss that can be carried back to recover current tax
of a previous period shall be recognized as an asset.
  When a tax loss is used to recover current tax of a previous period, an entity
recognizes the benefit as an asset in the period in which the tax loss occurs
because it is probable that the benefit will flow to the entity and the benefit can be
reliably measured.

Recognition of deferred tax liabilities and deferred tax assets

A. Taxable temporary differences
 A deferred tax liability shall be recognized for all taxable temporary
differences, except to the extent that the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit
nor taxable profit (tax loss). However, for taxable temporary
differences associated with investments in subsidiaries, branches
and associates, and interests in joint ventures, a deferred tax
liability shall be recognized in accordance with paragraph 39.

 It is inherent in the recognition of an asset that its carrying amount will be

recovered in the form of economic benefits that flow to the entity in future
periods. When the carrying amount of the asset exceeds its tax base, the
amount of taxable economic benefits will exceed the amount that will be
allowed as a deduction for tax purposes. This difference is a taxable
temporary difference and the obligation to pay the resulting income taxes
in future periods is a deferred tax liability. As the entity recovers the
carrying amount of the asset, the taxable temporary difference will reverse
and the entity will have taxable profit. This makes it probable that
economic benefits will flow from the entity in the form of tax payments.
Therefore, this Standard requires the recognition of all deferred tax
liabilities, except in certain circumstances described in paragraphs 15 and
39.

Example
An asset which cost 150 has a carrying amount of 100. Cumulative
depreciation for tax purposes is 90 and the tax rate is 25%. The tax base
of the asset is 60 (cost of 150 less cumulative tax depreciation of 90). To
recover the carrying amount of 100, the entity must earn taxable income of
100, but will only be able to deduct tax depreciation of 60. Consequently,
the entity will pay income taxes of 10 (40 at 25%) when it recovers the
carrying amount of the asset. The difference between the carrying amount
of 100 and the tax base of 60 is a taxable temporary difference of 40.
Therefore, the entity recognises a deferred tax liability of 10 (40 at 25%)
representing the income taxes that it will pay when it recovers the carrying
amount of the asset.
SAMPLE PROBLEMS ON DEFERRED AND CURRENT TAX
Pre-tax Financial Income P 3,200,000
Bank Interest Income Received 100,000
Life Insurance Premium for Officers 200,000
Advances on Rent Income Received 300,000
Warranty Expense over than what is paid 400,000
Warranty Expense 700,000
Warranty Paid 300,000
Installment Receivable 500,000
Prepaid Expense 600,000
Income Tax rate = 30%
SOLUTIONS:

Pre-tax Financial Income P 3,200,000

Bank Interest Income Received (100,000)
Life Insurance Premium for Officers 200,000
Income Subject to Tax 3,300,000 x .30 = 990,000
(Income Tax
Expense)
Advances on Rent Income Received 300,000
Warranty Expense over than what is paid 400,000 x .30 =210,000
(Deferred Tax
Asset)

Installment Receivable (500,000)

Prepaid Expense (600,000) x .30 = 330,000
(Deferred Tax
Liability)
Taxable Income 2,900,000 x .30 = 870,000
(Income Tax
Payable)

Journal Entries:
Income Tax Expense ( 3,300,000 x .30) 990,000
Deferred Tax Assets (700,000 x .30) 210,000
Deferred Tax Liability (1,100,000 x .30) 330,000
Income Tax Payable ( 2,900,000 x .30) 870,000

 The Net Income per book = 3,200,000 – 990,000 = 2,210,000

 Deferred Tax Asset is reported as Long Term Asset
 Deferred Tax Liability is reported as Long Term Liability
 Income Tax Payable is a Current Liability and the amount to be paid to BIR
in the period.
 Income Tax Expense = 990,000 1. Current 870,000 2. Long Term 120,000
(330,000 – 210,000)

ILLUSTRATION NO. 2

Short Answer Questions

1. North Dakota Corporation began operations in January 2027 and purchased a
machine for P20,000. North Dakota uses straight-line depreciation over a four-
year period for financial reporting purposes. For tax purposes, the deduction is
50% of cost in 2027, 30% in 2028, and 20% in 2029. Pretax accounting income
for 2027 to 2030 were P150,000, P 180,000, P 230,000 and P 170,000,
respectively. These figures include interest revenue from municipal bonds of
P20,000 in 2027 and P 15,000 from 2029. Accounts Receivable at the end of the
years were P 25,000, P 27,000, P 22,000 and P 17,000 for 2027 through 2030,
respectively. The enacted tax rate is 30% for all years. There are no other
differences between accounting and taxable income.
Required:
Prepare a journal entry to record income taxes for the year 2027-2030. Show
well-labeled computations for the amount of income tax payable and the change
in the deferred tax account. 
 
2027 2028 2029 2030
Pre Tax Financial Income 150,000 180,000 230,000 170,000
Permanent Difference:
Interest on Municipal (20,000) (15,000)
Bonds
Income subject to Tax 130,000 180,000 215,000 170,000
Temporary Difference
Accounts Receivable (25,000) 25,000
(27,000) 27,000
(22,000) 22,000
(17,000)

Depreciation (5,000) (1,000) 1,000 5,000

Taxable Income 100,000 177,000 221,000 180,000

Depreciation for Financial 5,000 5,000 5,000 5,000

Reporting
Depreciation for Taxation 10,000 6,000 4,000 0
Book Depreciation Over (5,000) (1,000) 1,000 5,000
(Under)

Income Tax Expense

2027 (130,000 x .30) 39,000 9,000
30,000
Deferred Tax
 Liability (30,000 x .30)
Income Tax
Payable (100,000
x .30)
Income Tax Expense
2028 (180,000 x .30) 54,000 900
53,100
Deferred Tax
Liability (3,000 x .30)
Income Tax
Payable (177,000
x .30)
Income Tax Expense
2029 (215,000 x .30) 64,500
Deferred Tax Liability 66,300
1,800
(6,000 x .30)
Income Tax
Payable (221,000
x .30)
Income Tax Expense
2030 (170,000 x .30) 51,000
Deferred Tax Liability 54,000
3,000
(10,000 x .30)
Income Tax
Payable (180,000
x .30)

YEAR Income Tax Income Tax Deferred Tax Deferred Tax

Expense Payable Asset Liability

2027 39,000 30,000 9,000

2.
2028 54,000 53,100 9,900

2029 54,500 66,300 8,100

2030 51,000 54,000 5,100 (17,000

x .30)
North Dakota Corporation began operations in January 2027 and purchased a
machine for P20,000. North Dakota uses straight-line depreciation over a four-
year period for financial reporting purposes. For tax purposes, the deduction is
50% of cost in 2027, 30% in 2028, and 20% in 2029. Pretax accounting income
for 2027 was P150,000, which includes interest revenue of P20,000 from
municipal bonds. The enacted tax rate is 30% for all years. There are no other
differences between accounting and taxable income.

Required:
Prepare a journal entry to record income taxes for the year 2027. Show well-
labeled computations for the amount of income tax payable and the change in the
deferred tax account. 

Income tax expense (to balance) (130,000 39,000  

x .30)
 Deferred tax liability (change in deferred tax   1,500
balance per below) (5,000 x .30)
 Income tax payable (125,000 x .30)   37,500
  2027 Future taxable
amount
Accounting income P150,000  
Permanent diff—municipal bond interest (20,000)  
Income Subject to tax 130,000
Depreciation diff (20K × 50%)—(20K × 25%) (5,000) P5,000
Taxable income 125,000  
Enacted tax rate 30% 30%
Tax payable currently P37,500  
Deferred tax liability (5K × 30%)   P1,500
Less: Beginning balance   0
Change in balance   P1,500
 

3. Gore Company, organized on January 2, 2028, had a pretax accounting income

of P7,000,000 and taxable income of P10,000,000 for the year ended December
31, 2028. The 2028 tax rate was 40%. The only difference between book and
taxable income is estimated warranty costs. Expected payments and scheduled
enacted tax rates are as follows:
Financial Income Taxable Income
Income before 10,000,000 10,000,000
Temporary Difference
Temporary Difference- (3,000,000) 0
Warranty Expense
Taxable Income 7,000,000 10,000,000

Per book Income 7,000,000 x . 40 = 2,800,000

( Income Tax Expense)
Temporary Difference 3,000,000 x .40 = 1,200,000
( Deferred Tax Asset)
Taxable Income 10,000,000 x .40 = 4,000,000
( Income Tax Payable)
If the tax rate is consistent at 40%
Income Tax Expense 2,800,000
Deferred Tax Asset 1,200,000
Income Tax Payable 4,000,000

 
2029 P1,000,000 35% 350,000
2030 500,000 35% 175,000
2031 500,000 35% 175,000
2032 1,000,000 30% 300,000
TOTAL DEFERRED 1,000,000
TAX ASSET

Required:
Prepare one compound journal entry to record Gore's provision for taxes for the
year 2028. 

Income tax expense (to balance) 3,000,000

Deferred tax asset (change in deferred
tax balance) 1,000,000
Income tax payable (tax currently 4,000,000
payable) (10M x .40)
 
Future Deductible Amount
  2028 2029 2030 2031 2032  
Accounting income P7,000,000          
Temp. diff— 3,000,000 P1M P.5M P.5M P1M  
estimated warranty
expense
Taxable income 10,000,000          
Enacted tax rate 40% 35% 35% 35% 30%  
Tax payable P4,000,000          
currently
Deferred tax asset   P350K P175K P175K P300K = P1M
Less: Beginning           0
balance
Change in balance           P1M
 

2029 Income Tax Payable 350,000

Deferred tax Asset 350,000
2030 Income Tax Payable 175,000
Deferred tax Asset 175,000
2031 Income Tax Payable 175,000
Deferred tax Asset 17
5,000
2032 Income Tax Payable 300,000
Deferred tax Asset 300,000
4. The information below pertains to Mondavi Corporation:

(a). For the current year, temporary differences existed between the financial
statement carrying amounts and the tax basis of the following:
 
  Carrying Tax Basis Future Taxable or
Amount (Deductible) Amount
Buildings and equipment P60,000,000 P45,000,000 P15,000,000
Prepaid insurance 1,000,000 0 1,000,000
Liability-loss contingency 10,000,000 0 (10,000,000)

(b). No temporary differences existed at the beginning of the year.

(c). Pretax accounting income was P300,000,000 and taxable income was
P120,000,000 for the year and the tax rate is 40%.

Required:
Prepare one journal entry to record the tax provision for the current year. Provide
supporting computations. 
 
Pre Tax Income 300,000,000

50,400,000 Income Tax

Expense
Liability Loss 10,000,000 4,000,000 Deferred Tax Asset
Prepaid Insurance (1,000,000) (400,000) Deferred Tax
Liability
Depreciation (15,000,000) (6,000,000 Deferred Tax
Liability
Taxable Income 120,000,000 (48,000,000) Current Income Tax
Liability

Income tax expense (to balance) 50,400,000

Deferred tax asset (P10M × 40%) 4,000,000
  Deferred tax liability (P16M × 40%) 6,400,000
  Income tax payable (P120M × 40%) 48,000,000
 

5. Two independent situations are described below. Each involves future deductible
amounts and/or future taxable amounts produced by temporary differences:
 
Situation 1 2
Taxable income P100,000 P130,000
Amounts at year-end:    
 Future deductible amounts 0 10,000
 Future taxable amounts 10,000 15,000
Balances at beginning of year:    
 Deferred tax asset 0 P2,000
 Deferred tax liability 2,000 0

The enacted tax rate is 40% for both situations.

Required:
For each situation determine the:

(a). Income tax payable currently.

(b). Deferred tax asset—balance at year-end.
(c). Deferred tax asset change dr or (cr) for the year.
(d). Deferred tax liability—balance at year-end.
(e). Deferred tax liability change dr or (cr) for the year.
(f). Income tax expense for the year. 

  Situation 1   2 
  Taxable income P100,000   P130,000
  Tax rate 40%   40%
(a) Income tax payable currently P40,000   P52,000
         
         
  Future deductible amounts P0   P10,000
  Tax rate 40%   40%
(b) Deferred tax asset ending balance 0   4,000
  Deferred tax asset beginning balance 0   2,000
(c) Change in deferred tax asset dr (cr) No change   2,000
         
         
  Future taxable amounts P10,000   P15,000
  Tax rate 40%   40%
(d) Deferred tax liability ending balance (4,000)   (6,000)
  Deferred tax liability beginning balance (2,000)   0
(e) Change in deferred tax liability dr (cr) P(2,000)   P(6,000)
         
  Income tax payable P(40,000)   P(52,000)
  Change in deferred tax asset dr (cr) No change   2,000
  Change in deferred tax liability dr (cr) (2,000)   (6,000)
(f) Income tax expense P42,000   P56,000
 

6. Cabot Company reported a pretax operating loss of P50,000 for financial

reporting and tax purposes in 2028. The enacted tax rate is 40% for 2028 and
subsequent years. Assume that Cabot requests a refund of taxes already paid by
electing a loss carryback. Taxable income, tax rates, and income taxes paid in
Cabot's first four years of operations were as follows:
 
  Taxable Income Tax Rates Taxes Paid
2024 P30,000 30% P9,000
2025 35,000 30% 10,500
2026 42,000 35% 14,700
2027 40,000 40% 16,000

Required:
1. Prepare the journal entry to record Cabot's income taxes for the year 2028.
Show well-labeled computations.
2. Compute Cabot's net loss for 2028. 

(1) Receivable income tax refund (P14,700 + 3,200) 17,900  

  Income tax benefit operating loss (to balance)   17,900
 
  Prior Years Current Year
  2026 2027 2028
Operating loss     (P50,000)
Loss carryback P(42,000) P(8,000) 50,000
Tax rates 35% 40%  
Tax refund P(14,700) P(3,200)  

(2) Net loss for 2028 is P32,100 (P50,000 − 17,900 tax benefit of NOL)
 

7. What is the justification for a corporation determining income for financial

reporting purposes differently than the way it is determined for tax purposes? 
 

In some instances, tax laws and financial accounting standards differ because
they are guided by different goals. Corporations must follow GAAP for financial
reporting and tax laws for tax reporting. The starting point for computing taxable
income is net income as determined by GAAP. The only differences between
taxable income and net income are permanent and temporary differences for
those items in the tax law that are handled differently than under GAAP.

GAAP = fair presentation for decision-making. Taxes = revenue source for

government, way to spur economic activity.
 

8. Sometimes a temporary difference will produce future deductible amounts.

Explain what is meant by future deductible amounts. Describe at least one
situation that has this effect. How are future deductible amounts recognized in the
financial statements? 
 

Future deductible amounts mean that taxable income will be decreased relative to
accounting income in one or more future years. An example is estimated
expenses that are recognized on the income statement but deducted on the tax
return in later years when actually paid. Future deductible amounts have
favorable tax consequences and are recognized as deferred tax assets.

9. What events create permanent differences between accounting income and

taxable income? What effect do these events have on the determination of
income taxes payable and deferred income taxes? 
 

Permanent differences between accounting income and taxable income are

caused by transactions and events that, under existing tax law, will never affect
taxable income or taxes payable. Some provisions of the tax law exempt certain
revenues from taxation and prohibit the deduction of certain expenses.
Permanent differences are disregarded when determining both the tax payable
currently and deferred income taxes.

SAMPLE PROBLEMS ON TAX BASES

 The tax base of an asset is the amount that will be deductible for tax purposes
against any taxable economic benefits that will flow to an entity when it recovers
the carrying amount of the asset. If those economic benefits will not be taxable,
the tax base of the asset is equal to its carrying amount.

Example 1
A machine cost 100. For tax purposes, depreciation of 30 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 a deduction on
disposal. Revenue generated by using the machine is taxable, any gain on
 disposal of the machine will be taxable and any loss on disposal will be
deductible for tax purposes. The tax base of the machine is 70.

Example 2
Interest receivable has a carrying amount of 100. The related interest revenue
will be taxed on a cash basis (final tax). The tax base of the interest receivable is
nil.

Example 3
Trade receivables have a carrying amount of 100. The related revenue has
already been included in taxable profit (tax loss). The tax base of the trade
receivables is 100.

Example 4
Dividends receivable from a subsidiary have a carrying amount of 100. The
dividends are not taxable. In substance, the entire carrying amount of the asset is
deductible against the economic benefits. Consequently, the tax base of the
dividends receivable is 100. Under this analysis, there is no taxable temporary
difference. An alternative analysis is that the accrued dividends receivable have
a tax base of nil and that a tax rate of nil is applied to the resulting taxable
temporary difference of 100. Under both analyses, there is no deferred tax
liability. This is permanently not taxable

Example 5
A loan receivable has a carrying amount of 100. The repayment of the loan will
have no tax consequences. The tax base of the loan is 100.

 The tax base of a liability is its carrying amount, less any amount that will be
deductible for tax purposes in respect of that liability in future periods. In the case
of revenue which is received in advance, the tax base of the resulting liability is
its carrying amount, less any amount of the revenue that will not be taxable in
future periods.
Example 1
Current liabilities include accrued expenses with a carrying amount of 100. The
related expense will be deducted for tax purposes on a cash basis. The tax base
of the accrued expenses is nil.

Example 2
Current liabilities include interest revenue received in advance, with a carrying
amount of 100. The related interest revenue was taxed on a cash basis. The tax
base of the interest received in advance is nil.

Example 3
Current liabilities include accrued expenses with a carrying amount of 100. The
related expense has already been deducted for tax purposes. The tax base of
the accrued expenses is 100.
 Example 4
Current liabilities include accrued fines and penalties with a carrying amount of
100. Fines and penalties are not deductible for tax purposes. The tax base of the
accrued fines and penalties is 100. Under this analysis, there is no deductible
temporary difference. An alternative analysis is that the accrued fines and
penalties payable have a tax base of nil and that a tax rate of nil is applied to the
resulting deductible temporary difference of 100. Under both analyses, there is
no deferred tax asset.

Example 5
A loan payable has a carrying amount of 100. The repayment of the loan will
have no tax consequences. The tax base of the loan is 100.

SAMPLE PROBLEMS ON LOSS CARRYFORWARD / LOSS CARRYBACKWARD

1. In 2028, Bodily Corporation reported P300,000 pretax accounting income. The
income tax rate for that year was 30%. Bodily had an unused P120,000 net
operating loss carryforward from 2026 when the tax rate was 40%. Bodily's
income tax payable for 2028 would be ______. 
 

(P300,000 − 120,000) × 30% = P54,000.

The change in tax rate does not affect the calculation of the current tax payable.
 

2. Puritan Corp. reported the following pretax accounting income and taxable
income for its first three years of operations:
 
2027 P350,000
2028 (600,000)
2029 700,000

Puritan's tax rate is 40% for all years. Puritan elected a loss carryback.
As of December 31, 2028, Puritan was certain that it would recover the full tax
benefit of the NOL that remained after the operating loss carryback.

What would Puritan report as net income for 2029? 

 

Accounting income P700,000

Tax expense* 280,000
Net income P420,000

*The tax benefit of the loss carryforward (40% × P250,000) was recognized in
2028 and is reversed in 2029. The journal entry to record the tax expense in 2029
is ______.
 
Income tax expense (to balance) 280,000
Deferred tax asset (P250,000 × 40%) 100,000
Income tax payable ([P700,000 − 250,000] × 40%) 180,000
 

2028 Receivable from BIR 140,000

(350,000 x .40)
Deferred tax Asset ( 250,000 100,000
x .40)
Tax Benefits NOL 240,000
3. Puritan Corp. reported the following pretax accounting income and taxable
income for its first three years of operations:
 
2027 P350,000
2028 (600,000)
2029 700,000

Puritan's tax rate is 40% for all years. Puritan elected a loss carryback.
As of December 31, 2028, Puritan was certain that it would recover the full tax
benefit of the NOL that remained after the operating loss carryback.

What did Puritan report on December 31, 2028 as the deferred tax asset for the
NOL carryforward? 
 
(P600,000 − 350,000) × 40% = P100,000.

4. Puritan Corp. reported the following pretax accounting income and taxable
income for its first three years of operations:
 
2027 P350,000
2028 (600,000)
2029 700,000

Puritan's tax rate is 40% for all years. Puritan elected a loss carryback.
As of December 31, 2028, Puritan was certain that it would recover the full tax
benefit of the NOL that remained after the operating loss carryback.

What would be the net loss in 2028 reported in Puritan's income statement? 
 

Operating loss P(600,000)

Tax benefit from loss carryback P350,000 × 40% 140,000
Tax benefit from loss carryforward (P600,000 − P350,000) × 40% 100,000
Net loss P(360,000)
 

5. Reliable Corp. had a pretax accounting income of P30 million this year. This
included the collection of P40 million of life insurance proceeds when several key
executives died in a plane crash. Temporary differences for the current year
netted out to zero. Reliable has had a 40% tax rate and taxable income of P120
million over the previous two years and plans to elect a net operating loss
carryback for tax purposes. In the current year financial statements, Reliable
would report ______. 
 

Accounting income P30

Permanent difference: Life insurance  (40)
Taxable income (NOL) P(10) 
Enacted rate for carryback years 40% 
Income tax refundable P4
Accounting income P30 
Tax benefit from NOL 4 
Net income P34 
 

6. Theodore Enterprises had the following pretax income (loss) over its first three
years of operations:
 
2026 P500,000
2027 (900,000)
2028 1,500,000

For each year, there were no deferred income taxes and the tax rate was 30%. In
its 2027 tax return, Theodore elected a net operating loss carryback. No valuation
account was deemed necessary for the deferred tax asset as of December 31,
2027. What was Theodore's income tax expense for 2028? 
 

P1,500,000 × 30% = P450,000

The tax benefit from the carryforward was recognized in 2027 and is reversed in
2028.
 
Income tax expense (to balance)
450,000 
Deferred tax asset (P400,000 × 30%) 120,000
Income tax payable ([P1,500,000 − 400,000] × 30%) 330,000
 

7. Clinton Corp. had the following pretax income (loss) over its first three years of
operations:
 
2026 P1,200,000
2027 (900,000)
2028 1,500,000

For each year, there were no deferred income taxes and the tax rate was 40%.
For its 2027 tax return, Clinton did not elect a net operating loss carryback. No
valuation account was deemed necessary for the deferred tax asset as of
December 31, 2027. What was Clinton's income tax expense in 2028? 
 

P1,500,000 × 40% = P600,000

The tax benefit from the carryforward was recognized in 2027 and reversed in
2028.
 
Income tax expense (to balance)
600,000 
Deferred tax asset (P900,000 × 40%) 360,000
Income tax payable ([P1,500,000 − 900,000] × 40%) 240,000