Csfas Pas12

Conceptual
Framework and
Accounting
Standards
ATTY. ROWEL T. DE LEON, CPA
08
PAS 12
PAS 12 – INCOME TAXES
 Prescribes the accounting for income taxes. Income taxes refer to taxes that are based on taxable
profits.
 Income Tax expense may be different from the amount of tax required to be paid to BIR
 Differences in reporting are due to varying treatments that result in permanent and temporary
differences.
PAS 12– ACCOUNTABLE PROFIT VS TAXABLE PROFIT
Income Tax Expense and Current Tax Expense
1. Tax expense or Income Tax Expense (Tax

Income) – is the amount included in the
determination of profit or loss for the period.
Formula: Current tax expense + deferred tax

expense (deferred tax benefit)
2. Current tax or Current tax Expense – is the

amount of income taxes payable (recoverable) in
respect to the taxable profit (loss) for a period.
Deferred Tax Expense
(Benefit/Income)
 Is the sum of the net changes in
deferred tax assets and deferred tax
liabilities during the period
Income Tax Expense and Current Tax Expense
1. Tax expense or Income Tax Expense (Tax

Income) – is the amount included in the
determination of profit or loss for the period.
Formula: Current tax expense + deferred tax

expense (deferred tax benefit)
2. Current tax or Current tax Expense – is the

amount of income taxes payable (recoverable) in
respect to the taxable profit (loss) for a period.
Sample Illustration:
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
PERMANENT DIFFERENCES
 Examples are:
1. Interest Income on government bonds and

treasury bills. (FWT)
2. Interest Income on bank deposits (FWT)
3. Dividend Income (FWT)
4. Fines, surcharges, and penalties arising from

violation of law (non-deductible)
5. Life insurance premium on employees where the

entity is the irrevocable beneficiary (non-
deductible)
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:
1. Taxable temporary differences – those that

result in future taxable amounts when the carrying
amount of the asset is recovered or settled; or
2. Deductible temporary differences – those that

result in future deductible taxable amounts when
the carrying amount of the asset or liability is
recovered or settled.
Temporary Differences
1. Taxable temporary differences – give rise to

deferred tax liabilities.
2. Deductible temporary differences – give rise to

deferred tax assets.
 Include timing differences. 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 (or vice versa)
 Timing differences are temporary differences

because their effect reverses in one or more
subsequent period.
Taxable Temporary
Differences
 Financial income is greater than the taxable

income.
 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
Differences
 Examples are:
1. Revenue 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 the

depreciation for taxation purposes.
(Taxable temporary difference x tax rate =

Deferred Tax Liability)
Deferred Tax Liaibilites
Are the 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.
 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 recognized as unearned

income (liability) per PFRS is taxable in full
upon receipt of cash.
2. Bad Debts expense recognized per PFRS

when the collectability of AR is doubtful
but is only deductible for tax purposes
when the AR is deemed worthless.
3. Losses and tax credits can be carried

forward and deducted from future taxable
profits.
(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.
Effect of recognition of DTA and DTL
 Does not alter the amount of tax to be paid to the

BIR in the current period. However, when they
reverse in a future period:
1. DTL results in a higher amount of tax to be paid

to the BIR
2. DTA results to a lower amount of tax to be paid

to the BIR
ACCOUNTING FOR DEFERRED TAXES
 PAS 12 requires the use of the asset-liability method (also called balance sheet liability method) in
accounting for deferred taxes.
 It accounts both (a) timing differences and (b) temporary differences.
 Timing differences are differences between accounting profit and taxable profit that originate in
one period and reverse in on or more subsequent periods.
 Temporary differences are differences between the carrying amount of an asset or liability in the
statement of financial position and its tax base.
 Tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
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.
Tax base of a liability
 Is its carrying amount, less any amount

that will be deductible for tax purposes in
respect of the liability in future periods.
 In case of revenue received in advance, the

tax base of the resulting liability is its
carrying amount, less any amount of
revenue that will not be taxable in future
periods.
Important Notes:
 If a monetary asset or liability becomes taxable or

deductible only when cash is collected or paid,
the tax base of the asset or liability is equal to
zero.
 If an asset or liability has no future tax

consequence, the tax base of the asset or liability
is equal to its carrying amount.
Recognition of DTL and DTA
 Recognized whenever recovery or settlement of

the carrying amount of an asset or liability would
make future tax payments larger (smaller) than
they would if such recovery or settlement were to
have not tax consqeuences.
 DTL is recognized for all taxable temporary

differences. Subject to exception under PAS
12.15; and PAS 12.39
 DTA is recognized for all deductible temporary

differences.
Limitation on the Recognition of DTA
 PAS 12 permits an entity to recognize DTA only

when it is probable that taxable profits will be
available against which the deductible temporary
differences can be utilized or there is sufficient
taxable temporary differences that are expected to
reverse in the same period that the deductible
temporary differences are expected to reverse.
 When it is not probable, DTA is either (1) not

recognized or (b) reduced to its realizable value,
whichever is appropriate.
 The reduction in DTA increases income tax

expense but does not affect the current tax
expense.
MEASUREMENT
 DTA and DTL are measured at the tax rates

that are expected to apply to the period of
their reversal, based on tax rates that
have been substantially enacted by the
end of the reporting period.
 PAS 12 prohibits discounting of DTA and

DTL
PRESENTATION IN SOFP
 DTA and DTL are presented separately as non-current assets and non-current liabilities, respectively.
 PAS 12 permits offsetting of DTA and DTL only if:
1. The entity has a legally enforceable right to offset current tax assets against current tax liabilities.
2. The DTA and DTL relate income taxes levied by the same taxing authority.
ACCOUNTING FOR CURRENT TAXES
 Entities use tax laws in computing for current taxes.
 Unpaid current taxes are recognized as current tax liabilities (e.g. income tax payable)
 Excess tax payments over the current tax due are recognized as current tax asset (prepaid income
tax)
PRESENTATION IN SOCI
 Tax effect related to transaction recognized in Profit or loss is recognized in profit or loss
 Tax effect related transactions recognized in outside profit or loss is recognized outside profit or loss
(i.e other comprehensive income or directly in equity).
 Current and deferred taxes are usually recognized in profit or loss.

Taxes recognized in OCI
 Taxes that were recognized for:
1. Revaluation of PPE
2. Exchange differences arising from translation of
the FS of a foreign operation
Taxes recognized directly in equity
 Taxes that were recognized for:
1. Adjustment to the opening balance of Retained

Earnings resulting from a change in accounting
policy or correction of a prior-period error.
`
2. Amount arising on initial recognition of the
equity component of a compound financial
instrument.

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Conceptual

1. Tax expense or Income Tax Expense (Tax

Formula: Current tax expense + deferred tax

2. Current tax or Current tax Expense – is the

1. Tax expense or Income Tax Expense (Tax

Formula: Current tax expense + deferred tax

2. Current tax or Current tax Expense – is the

 Arises when income and expenses enter in the

 If an item is included in the computation of one,

 Usually arises from non-taxable and non-

 Permanent differences do not have future tax

1. Interest Income on government bonds and

2. Interest Income on bank deposits (FWT)

3. Dividend Income (FWT)

4. Fines, surcharges, and penalties arising from

5. Life insurance premium on employees where the

 Are differences between the carrying amount of an

1. Taxable temporary differences – those that

2. Deductible temporary differences – those that

1. Taxable temporary differences – give rise to

2. Deductible temporary differences – give rise to

 Include timing differences. Timing differences

 Timing differences are temporary differences

 Financial income is greater than the taxable

 The carrying amount of an asset is greater than its

 The carrying amount of a liability is less than its

1. Revenue recognized in full under PFRS but is

2. A prepayment is capitalized and amortized to

3. Asset is revalued upward and no equivalent

4. Depreciation per PFRS is lower than the

(Taxable temporary difference x tax rate =

Are the amounts of income taxes payable in future

 The carrying amount of an asset is less

 The carrying amount of a liability is

1. Advance Rent recognized as unearned

2. Bad Debts expense recognized per PFRS

3. Losses and tax credits can be carried

(Deductible temporary difference x tax

Are the amounts of income taxes recoverable in

 Does not alter the amount of tax to be paid to the

1. DTL results in a higher amount of tax to be paid

2. DTA results to a lower amount of tax to be paid

 It accounts both (a) timing differences and (b) temporary differences.

 Is the amount that will be deductible for

 If those economic benefits will not be

 Is its carrying amount, less any amount

 In case of revenue received in advance, the

 If a monetary asset or liability becomes taxable or

 If an asset or liability has no future tax

 Recognized whenever recovery or settlement of

 DTL is recognized for all taxable temporary

 DTA is recognized for all deductible temporary

 PAS 12 permits an entity to recognize DTA only

 When it is not probable, DTA is either (1) not

 The reduction in DTA increases income tax

 DTA and DTL are measured at the tax rates

 PAS 12 prohibits discounting of DTA and

 PAS 12 permits offsetting of DTA and DTL only if:

 Current and deferred taxes are usually recognized in profit or loss.