PAS 12 INCOME

TAXES
 “
PAS 12 prescribes the
accounting for income taxes.
For the purposes of PAS 12,
refer to taxes that are based on
taxable profit.
 Accounting Book Tax Book

Basis: PFRS Basis: Tax laws

Purpose: To present fair and Purpose: Requirement for

realistic picture of income tax return
performance and position of
entity Recognition: Cash basis

Recognition:Accrual basis Terminology: Taxable profit

Terminology: Accounting Current Tax expense ( Income

Profit tax payable)- Tax amount –
located in balance sheet, it is
Income Tax Expense- Tax an actual amount that is paid in
amount located in income BIR
Income tax expense in the statement of
comprehensive income is computed
using PFRSs while the Current Tax
Expense in income tax return (ITR) is
computed using Philippine tax law

PFRSs and Tax laws have different

accounting treatment for some economic
activities.

PAS 12 addresses the accounting,

presentation and reconcilliation of these
differences
Income Tax Expense and
Current Tax Expense

Income Tax Current Tax Deferred Tax Expense

Expense
Total amount that Expense
The amount of The sum of the
is included in the income taxes net changes in
determination of payable deffered tax
profit or loss for (recoverable) in assets and
the period. respect of taxable deferred tax
profit (tax loss) for a liability during the
period. period.
.
Accounting Profit and Taxable Profit

Accounting profit is “profit or loss for a

period before deducting tax expense”

Taxable profit(loss) is “profit(loss)

determined in accordance with the
rules established by the taxation
authorities, upon which income taxes
are payable(recoverable).”
 Financial Taxation Difference
reporting
Profit before 1000 Profit before 1000
bad debts bed debts
YOUR YOUR
Bad debts (100) TITLEBad debt -
TITLE
Write your Write your
description here description here (100)
Accounting 900 Taxable 1000
profit profit
YOUR YOUR
Tax rate TITLE 30% Tax rateTITLE 30%
Write your Write your
description here (30)
Income Tax 270
description here
Current tax 300
Expense expense
 Accounting Book Tax Book

2020 2021 2020 2021

Revenue 130 130 Revenue 100 150

Expenses 60 60 Expenses 60 60

Accountin 70 70 Taxable 40 90
g profit Profit
Income tax 14 14 Income tax 8 18
expense payable
(20%) (20%)
Income tax expense (PFRSs) 14 14

Income tax payable(tax law) 8 18

Difference 6 (4)

Year Reporting Requirement

2020 Deferred Tax liability account increased

to 6
2021 Deferred Tax liability reduced by 4
If deferred tax liability exceeds
the increase in deferred tax
asset , the difference is
deffered tax expense.

If the increase in deferred tax

asset exceeds the increase in
deferred tax liability , the
difference is deferred tax
income.
Income tax expenses =

Current tax expense

+
Deferred tax espense (- Deferred
tax benefit)
 2011 2012 2011 2012
Revenue 100 100 Revenue 100 100
Cash 50 50 Cash 50 50
Expense Expense
Depreciation 25 25 Depreciation 40 10
Accounting 25 25 Taxable 10 40
profit Income
Income Tax 10 10 Income Tax 4 16
expense(40 Payable(%4
%) 0)

Tax rate is 40%. What the income tax expense

and tax payble for 2011
 Temporary Differences

• Difference between the of an asset or

liability and its.

• Temporary difference may either be

Taxable temporary difference and
Dedutible temporary difference
Temporary Difference
temporary difference may be either:
a. Taxable temporary differences – result to future
taxable amounts when carrying amount of the
asset or liability is recovered or settled. (Deferred
tax liability)

b. Deductible temporary differences- result to future

deductible amounts when the carrying amount of
the asset or liability is recovered or settled
(Deferred tax asset)
TAXABLE TEMPORARY
DIFFERENCE DEDUCTIBLE TEMPORARY
DIFFERENCE

• Arise when: • Arise when:

• a. Financial • a. Financial
income(accounting profit) is income(accounting profit) is
the taxable income (taxable less than the taxable income
profit) (taxable profit)
• b. The carrying amount of an • b. The carrying amount of an
asset is less than its tax base
asset is greater than its tax
base • c. The carrying amount of a
liability is greater than its tax
• c. The carrying amount of base
liability is less than its tax base
TAXABLE TEMPORARY DEDUCTIBLE TEMPORARY
DIFFERENCE DIFFERENCE

• If multiplied by tax rate, • If multiplied by tax rate,

it result to deferred it result to deferred tax
tax liability asset
• When it reverses in a • When it reverses in the
future period, it result to future period it result to
higher tax payment lower tax payment
• Deferred tax liabilities are amount of
income taxes payable in the future periods in
respect of taxable temporary diferrences

• Deferred tax asset amounts of income taxes

recoverable in future periods in respect of (a)
deductible temporary differences; (b) the
carryforward of unused tax losses (c) the
carryforward of unused tax credit
Temporary Difference
• Temporary difference include timing difference
• Timing difference arise when income and
expenses are recognized for financial reporting
purposes in one period but recognized for
taxation purposes in another period.
• Temporary difference include all timing
difference , however not all temporary
differences are timing differences
 Permanent Differences
• when income and expense enter in the computation
of either accounting profit or taxable profit but not
both
• Arise from non deductible expenses and those that
have already been subjected to final taxes. In other
words, these are items excluded from ITR
• (e.g. interest income on deposits, dividends received,
life insurance premium, tax penalties, surcharges and
fines)
• Tax base- is the amount attributed to that asset or
liability for tax purposes
• Tax base of an asset- 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.
• Tax base of a liability- carrying amount less any
amount that will be deductible for tax purposes in
respect of that liability in future periods.
 Accounting for Deferred Taxes

• PAS 12 requires the use of the asset-liability method (also

called balace sheet liability method) in accounting for
deferred taxes. This method is a comprehensive approach

• This method is a comprehensive approach in accounting

for deferred taxes in that it accounts both
a) timing differences
b) difference between carrying amount and tax bases of
asset and liabilities
Recognition

• Under PAS 12 "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 payment larger(smaller) than they would be if
such recovery or settlement where to have no tax
consequences"
Limitation on the recognition of deferred
tax asset
• PAS 12 permits an entity to recognize deferred tax assets
only when it is probable that taxable profit will be available
against which the deductible temporary difference can be
utilized

• Its is not probable that a deferred tax asset will be realized,

it is either:
a) not recognized
b) reduced to its realizable value
MEASUREMENT

• PAS 12 prohibits the discounting of deferred tax assets

and liabilities.
Presentation in the Statement of
Financial position
• Deferred tax assets an deferred tax liability are presented
separately as nod ncurrent assets and non current
liabilities in a classified statement of financial position

• PAS 12 permits offsetting of deferred tax assets and

deferred tax liabilities only if:
• Entity has a legally enforceable right
• Deferred tax assets and deferred tax liabilities relate to
income taxes levied by the same taxation authority
Presentation in Statement of
Comprehensive Income
• Tax consequences are accounted for in the same way
as the related transactions or events
• Current and deferred taxes are usually recognized in
profit or loss.
• Taxes recognized in OCI:
• a. Revaluation of PPE
• b. Exchange differences arising on the translation of
the financial statements of a foreign operation
• Taxes recognized directly in Equity
• a. Adjustment to the opening bal. of retained earnings
resulting in a change of accounting policy or correction
of a prior period
• b. Amounts arising from initial recognition of the equity
component of a compound financial instrument