Introduction

Deferred tax accounting is applicable to all entities, whether public or nonpublic entities.

What is meant by deferred tax?

IAS 12 defines a deferred tax liability as being the amount of income tax payable in future
periods in respect of taxable temporary differences. So, in simple terms, deferred tax is tax that
is payable in the future.
Non-Public Entity means any entity or group of related entities (or assets purchased from such
an entity or group of related entities that constitute a line of business) that is not a Public
Entity; A Successor Entity whose outstanding common stock is not registered under the
Exchange Act and listed on a registered national securities exchange.
A public entity is an entity:

1. Whose equity and debt securities market are traded in a stock exchange or over-the-counter.
2. Whose equity or debt securities are registered with Securities and Exchange Commission in
preparation for sale of the securities.

Furthermore, a public entity is an organisation or body providing services to the public on
behalf of the government or another public entity. The public service and its employees are
examples of public entities. Another examples include public libraries, city police departments,
community colleges, public schools, county social services, and state vocational rehabilitation
agencies.
Accounting income

Accounting income or financial income is the net income for the period before deducting
income tax expense.
In other words, accounting income is profitability that has been compiled using the accrual
basis of accounting. It is also calculated as revenues minus all expenses.
This is the income appearing on the traditional income statement and computed in accordance with
accounting standards.

As part of the income statement, accounting income is calculated starting with sales revenue. This is the
amount of revenue earned through the sale of goods or services. From that amount, direct costs for
producing the goods or providing the services are deducted to find gross profit.

Taxable income

Taxable income is the income for the period determined in accordance with the rules established by the
taxation authorities upon which income taxes are payable or recoverable.
Taxable income is the income appearing on the income tax return and computed in accordance with the
income tax law.

Taxable income may be defined also as the excess of taxable revenue over tax deductible expense and
exemptions for the period as defined by the Bureau of Internal Revenue.

Reported in several forms, examples of taxable income include wages, salaries, and any bonuses you
receive from your work which are documented.

Differences between accounting and taxable income

Accounting income is the difference between the revenue earned and expenses incurred by an
entity, as computed from its books of accounts. Taxable income is the resultant income
computed after making allowances and disallowances to accounting income in line with tax
laws.
Why differences arise from both ?
Is it because they are reported in different ways.
The standards of accounting and tax differs from each other. For the reason taht as what I’ve
said earlier, in accounting accruals ang basis while ang tax the basis is cash.
For example in accounting, if nag cash advance e record man jaon ang all even if waya pa na
render ang service. Tapos mag anam2 man pag expense while kang tax dba kay magbayad
man kaw ng kwarta so the time na pag received sa money amo sab time sap ag record. Thus,
deferred asset arises.
Deferred tax liability, nakarender ng service sa acc mag record na as part ng incoe but sa tax
ma record ra as long as nadawat

Differences between accounting income and taxable income may be classified into two, namely:

1. Temporary differences
2. Permanent differences

Permanent differences are items of revenue and expense which are included in either accounting
income or taxable income but will never be included in the other.

Actually, permanent differences pertain to nontaxable revenue and nondeductible expenses.

Permanent differences do not give rise to deferred tax asset and liability because they have no future
tax consequences.

Examples of the items which give rise to permanent differences include:

income or expense items that are not allowed by tax legislation; and
tax credits for some expenditures directly reduce taxes.

All permanent differences result in a difference between a company’s effective tax rate and statutory tax
rate.

sige sugod ta sa permanent bb hahaha ang permanent dba items na jaon sa imo revenue or expenses
na imo gi report sa acctg income or tax income. Dapat or dili kung and ky dili nmo sija pwde ireport
sa both income. either ways ra. Nag laong sab na wayay DTL or DTA na mhtbo ky wayay future tax
na mo arise. example sa book dba interest income on deposits. ang interest income on deposits
taxable sija automatically ng 10% final tax na jaon so wayay na future tax mo arise pa
Dividends receivable: dividends receivable are usually not taxable, and therefore, the carrying amount
will equal the tax base. This gives rise to a permanent difference and will not result in the recognition of
any deferred tax asset or liability. Unlike a temporary difference, a permanent difference will never be
reversed. Taxable income and accounting profit will permanently  be different from the amount of
dividends receivable, even on future financial statements as an effect on the retained earnings reflected
on the balance sheet.

Examples include the following:

1. Interest income on deposits

2. Dividends received
3. Life insurance premium
When the entity is the beneficiary of a life insurance policy on an officer or employee, the
premium paid by the entity is not deductible as expense for tax purposes but said premium is an
expense for financial reporting purposes.

4. Tax penalties, surcharges and fines are nondeductible.

Temporary differences
Temporary differences are differences between the carrying amount of an asset or liability and
the tax base.

Temporary differences include timing differences.

Timing differences are differences between accounting income and taxable income that
originate in one period and reverse in one or more subsequent periods.

Timing differences are items of income and expenses which are included in both accounting
income and taxable income but at different time periods. For every temporary difference,
eventually that item's treatment will be the same in accounting and taxable income.
If mulaong sab ta temporary differences ni arise ky temporarily ra adto na mga panghitaboa.
example jaon pwde mutaas ang valUe ng imo asset kuman pwde mo ubos tungod ky my nga
market value sila. Same sa liability pwde taas imo bayran pwde ubos tungod sa quoted price.
diri si temporary differences ang pag report nmo jaon na pag kalainan sa tax and sa acctg
income. tungod ky duha man imo gi reportan babe amo na mo arise sija ng either mag ka
utang (DTL) pkaw sa future or my dawatonon(DTA) pkaw sa future.
The formation of deferred tax assets or liabilities from temporary differences can only occur if the
differences will reverse themselves at some future date and to such an extent that the balance sheet
items are expected to create future economic benefits for the company.

Accordingly, temporary differences give rise either to:

a) Deferred tax liability

b) Deferred tax asset

Temporary differences are divided into: (i) taxable temporary differences, and (ii) deductible
temporary differences.

Taxable temporary differences are temporary differences that result in a taxable amount in future when
determining the taxable profit as the relevant balance sheet item is recovered or settled.

Taxable temporary differences result in a deferred tax liability when the carrying amount of an asset
exceeds its tax base, or when the tax base of liability exceeds its carrying amount.

Deductible temporary differences are temporary differences that result in a reduction or deduction of
taxable income in future when the relevant balance sheet item is recovered or settled. They result in a
deferred tax asset when the tax base of an asset exceeds its carrying amount, or the carrying amount of
liability exceeds its tax base.

A. Taxable temporary difference is the temporary difference that will result in future taxable
amount in determining taxable income of future periods when the carrying amount of the asset
or liability is recovered or settled.
B. Deductible temporary difference is the temporary difference that will result in future deductible
amount in determining taxable income of future periods when the carrying amount of the asset
or liability is recovered or settled.

Taxbase

The tax base of an asset or a liability is the amount attributable to the asset or liability for tax purposes.

Worded in another way, the tax base of an asset or a liability is the amount of the asset or liability that is
recognized or allowed for tax purposes.

The tax base is the total amount of income, property, assets, consumption, transactions, or other
economic activity subject to taxation by a tax authority.

Tax base of an asset

What is the tax base of an asset?

The tax base of an asset is the amount that will be deductible against taxable economic benefits from
recovering the carrying amount of the asset. Where recovery of an asset will have no tax consequences,
the tax base is equal to the carrying amount.

The tax base of an asset is the amount that will be deductible for tax purposes against future income.
For example, if an entity has appropriately capitalized P1,000,000 as software development cost, the
carrying amount is P1,000,000 for accounting purposes.

However, if this amount is allowed as a one-time deduction for tax purposes, the tax base is zero
because the entire amount is expensed in the current year.

Tax base of a liability

How to calculate tax liability from taxable income. Your taxable income minus your tax
deductions equals your gross tax liability. Gross tax liability minus any tax credits you're
eligible for equals your total income tax liability.
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

The tax base of a liability is normally the carrying amount less the amount that will be deductible for tax
purposes in the future.

A tax base is defined as the total value of assets, properties, or income in a certain area or
jurisdiction. To calculate the total tax liability, you must multiply the tax base by the tax rate: Tax
Liability = Tax Base x Tax Rate.

For example, if an entity has recognized an estimated warranty liability of P500,000, the carrying
amount is P500,000 for accounting purposes.

However, an estimated warranty cost is deductible only when actually paid. Thus, the tax base is zero
because the estimated warranty cost is a future deductible amount.