Accounting For Income Taxes: June 6, 2020

ACCOUNTING FOR
INCOME TAXES
June 6, 2020
LEARNING OBJECTIVES
At the end of the session, you should be able to:

• Distinguish between accounting income and taxable income;
• Distinguish between temporary differences and permanent differences;
• Reconcile accounting income to taxable income;
• Recognize and measure current income tax, deferred tax benefit/expense, deferred tax assets
and liabilities;
• Account for the reversal of temporary differences; and
• Present properly the related accounts under this topic in the financial statements.
Difference between Accounting Income
and Taxable Income
ACCOUNTING INCOME VS
TAXABLE INCOME
Accounting Income Taxable Income

• Also known as Accounting Profit, Financial • Derived based on regulations of the National
Income, Pre-tax Financial Income or Income Internal Revenue Code (NIRC) (or simply the
before Income Tax Tax Code) and Taxing Authorities
• Computed based on the requirements of the • Type of tax: INCOME TAX
accounting standards
• Compliant with the definition, recognition and
measurement criteria in the Conceptual
Framework
ACCOUNTING INCOME VS
TAXABLE INCOME (cont.)
Accounting Income Taxable Income

• To be reported in Income Statement (or • To be reported in Income Tax Return
Statement of Income and Statement of
Comprehensive Income)
Permanent Differences and
Temporary Differences
TYPES:
Non-taxable revenues
• Revenues that have been included in financial income but will never
be included in taxable income
• Excluded because the revenue is either tax-exempt or already
subjected to final withholding taxes
PERMANENT o Dividends revenue from a domestic corporation received by
domestic corporation (tax-exempt) or non-resident corporation
DIFFERENCES (already subjected to final withholding tax)
Those revenues and expenses recorded o Gains already subjected to final withholding tax, such as capital
for accounting purposes but will never gains and taxes withheld from interest income on bank deposits
be included in the computation of
taxable income because the revenue Non-deductible expenses
items are non-taxable and the expense • Expenses that have are deducted from accounting revenues (to arrive
items are non-deductible. at accounting income) but will never be allowed as deduction from
taxable revenues (to arrive at taxable income)
• Excluded because the expense is excluded in the list of deductions
allowed against gross income or beyond the limit
o Fines and penalties for the violation of law
o Charitable contributions in excess of tax limitation
o Premiums on life insurance for officers and employees, where
the enterprise is the designated beneficiary
TAXABLE TEMPORARY DIFFERENCES
(FUTURE TAXABLE AMOUNTS)
Income statement approach:
• Accounting Income (AI) > Taxable Income (TI)
o Interest revenue is recognized in AI on a time proportion basis but
reported only in TI when collected (1)
TEMPORARY o Depreciation expense for tax is more than depreciation expense

for accounting (2)
DIFFERENCES o Expense is deducted upon accrual in computing AI but reported
only in TI when paid (3)
Balance sheet approach :
Balance sheet approach:
Difference between the carrying
amount of an asset or liability in the • Carrying amount (CA) of asset > its tax base
Statement of Financial Position and its o CA of interest receivable is more than its tax base, which is zero
Tax Base (1)
Income statement approach: o CA of PPE is more than its tax base (2)
Difference occurs when a revenue or o CA of prepaid expense is more than its tax base, which is zero (3)
expense is included in financial income • CA of liability < its tax base
in one period but reported for tax Creates DEFERRED TAX LIABILITY (DTL) – computed by multiplying the
purposes in another period temporary difference with the tax rate:
Deferred Tax Expense xx
Deferred Tax Liability xx
DEDUCTIBLE TEMPORARY DIFFERENCES
(FUTURE DEDUCTIBLE AMOUNTS)
Income statement approach:
• Accounting Income (AI) < Taxable Income (TI)
o Uncollectible accounts expense is recognized using the allowance
method for accounting, but for tax using the direct write-off method (1)
o Rent collected applicable to future period/s is not yet recorded as revenue
for accounting, but is already taxable during period of collection (2)
TEMPORARY
o Estimated cost of warranty is reported as expense during period of
DIFFERENCES (cont.) related sale, but deductible in future period for tax when repair is actually
made (3)
Balance sheet approach :
Balance sheet approach:
Difference between the carrying
amount of an asset or liability in the • Carrying amount (CA) of asset < its tax base
Statement of Financial Position and its o CA of receivables is less than its tax base, which is due to the balance of
Tax Base allowance for uncollectible accounts (1)
Income statement approach: • CA of liability > its tax base
Difference occurs when a revenue or o CA of unearned rent is more than its tax base, which is zero (2)
expense is included in financial income o CA of warranty liability is more than its tax base, which is zero (3)
in one period but reported for tax
purposes in another period Creates DEFERRED TAX ASSET (DTA) – computed by multiplying the temporary
difference with the tax rate:
Deferred Tax Asset xx
Deferred Tax Expense (Benefit) xx
Reconciling Accounting Income to
Taxable Income
RECONCILIATION OF ACCOUNTING
INCOME AND TAXABLE INCOME
Financial income before any differences (income before income tax) XX
Add: Permanent difference, nondeductible expenses XX
Deduct: Permanent difference, nontaxable revenues (XX)
FINANCIAL INCOME BEFORE TEMPORARY DIFFERENCES XX
Add: Future Deductible Amounts creating Deferred Tax Asset and Benefit (FDAAB) XX
Deduct: Future Taxable Amounts creating Deferred Tax Liability and Expense (FTALE) (XX)
TAXABLE INCOME XX
Computation and Recording of
Balance Sheet and
Income Statement-related accounts
COMPUTATION AND RECORDING OF
BALANCE SHEET AND
INCOME STATEMENT-RELATED ACCOUNTS
ACCOUNT To be reported in/to COMPUTATION RECORDING
Total Tax Expense IS/SCI Financial Income before temporary N/A
differences * Current Tax Rate*
or
Current Tax Expense (CTE) -
Deferred Tax Benefit (DTB) +
Deferred Tax Expense (DTE)
CTE BIR CTE xx
Taxable Income * Current Tax Rate ITP xx
Income Tax Payable (ITP) BS/SFP
Deferred Tax Asset (DTA) BS/SFP Future Deductible Amounts * DTA xx
DTB IS/SCI Future Tax Rate DTB xx
Deferred Tax Liability (DTL) BS/SFP Future Taxable Amounts * Future DTE xx
DTE IS/SCI Tax Rate DTL xx
*Not applicable if tax rates are expected to change in the future years
Reversal of Temporary Differences
Financial Statement Presentation
FINANCIAL STATEMENT PRESENTATION
Total tax expense is a minimum line item required under PAS 1 to be presented
on the face of the Statement of Comprehensive Income and is presented as a
reduction from net income before taxes in the statement of comprehensive income.
Income tax payable (current tax payable) is presented is a minimum line item
required under PAS 1 to be presented on the face of the Statement of Financial
Position and is always presented as current liability.
FINANCIAL STATEMENT PRESENTATION
(cont.)
Deferred tax asset and deferred tax liability are presented in the face of the
Statement of Financial Position.
Deferred taxes are not presented as offsetting amounts (unless there is right of
offset). Thus, deferred tax asset is presented separately from deferred tax liability.
Deferred taxes are presented as non-current asset or liability.

THANK YOU!
Reference Books:
Intermediate Accounting Volume 2 by Nenita S. Robles, Patricia M. Empleo
Advanced Auditing by Christopher Espenilla
Intermediate Accounting Volume 2 by Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix

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What are the differences between accounting income and taxable income?

What are permanent differences and temporary differences?

ACCOUNTING FOR

At the end of the session, you should be able to:

Accounting Income Taxable Income

Accounting Income Taxable Income

TEMPORARY o Depreciation expense for tax is more than depreciation expense

Deferred taxes are presented as non-current asset or liability.

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