3/6/2023

Income
Taxes
Philippine Accounting Standards (PAS) 12

Learning Objectives

• Understand the scope and the fundamental principle of PAS 12.

• Interpret the terminology used in the accounting for current and
deferred taxes.
• State the recognition, measurement and presentation of current
and deferred taxes.

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Objective and Scope

PAS 12 is to prescribe the accounting

treatment for income taxes.

Accounting profit vs.

Taxable profit
For purposes of PAS 12, Income Taxes refer to taxes
that are based on taxable profit
Acounting Profit or Loss Taxable Profit (Tax Loss)
 Computed using PFRSs  Computed using tax laws
 Total income less total expenses,  Taxable income less tax-
excluding tax expense deductible expenses
 Other terms: pretax income,  Other term: taxable income
financial income and accounting
income

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Accounting profit vs.

Taxable profit

Source: PLDT INC Audited Financial Statements as at

and for the years ended December 31, 2020 and 2019

Accounting profit vs.

Taxable profit - Illustration
Entity A accrues bad debts expense of P100 under
financial reporting. However, under taxation, this
amount is tax deductible only when it is deemed
worthless. Profit before bad debts is Php1,000.
Requirement: How much is the accounting income and
taxable income? Assuming tax rate is 30%, how much is
the income/current tax expense?

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Accounting profit vs.

Taxable profit - Illustration
Solution:
Financial Reporting Taxation Difference
Profit before bad debts 1,000 1,000 -
Bad Debts (100) -
Accounting/Taxable Profit 900 1,000 (100)
Tax Rate 30% 30%
Income/Current Tax Expense 270 300 (30)

Amount of Income Tax Amount of Current Tax Difference to be reconciled

Expense presented in the Expense to be paid to the in the notes
statement of BIR
comprehensive income
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Accounting profit vs.

Taxable profit - Illustration

Tax Rate
Accounting Profit 900 30% Income Tax Expense 270
Temporary Difference 100 30% Deferred Tax Benefit/Expense 30
Taxable Profit 1,000 30% Current Tax Expense 300

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Income Tax Expense

• is the total amount included in the determination of profit or

loss for the period.
• It comprises current tax expense (current tax income) and
deferred tax expense (deferred tax income).
Tax Rate
Accounting Profit 900 30% Income Tax Expense 270
Temporary Difference 100 30% Deferred Tax Benefit/Expense 30
Taxable Profit 1,000 30% Current Tax Expense 300
Income Tax Expense 270
+ Deferred Tax Benefit 30
- Deferred Tax Expense -
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Current Tax Expense 300

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Current Tax Expense

• Is the amount of income taxes payable (recoverable) in

respect of the taxable profit (tax loss) for a period.
Tax Rate
Accounting Profit 900 30% Income Tax Expense 270
Temporary Difference 100 30% Deferred Tax Benefit/Expense 30
Taxable Profit 1,000 30% Current Tax Expense 300
Income Tax Expense 270
+ Deferred Tax Benefit 30
- Deferred Tax Expense -
Current Tax Expense 300

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Deferred Tax Expense (Income

or benefit)
• Is the sum of the net changes in deferred taxes and
deferred tax liabilities
• If the increase in deferred tax liability exceeds the
increase in deferred tax asset, the difference is deferred tax
expense.
• If the increase in deferred tax asset exceeds the increase
in deferred tax liability, the difference is deferred tax
income or benefit.

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Deferred Tax Expense (Income

or benefit)- Illustration
Financial Reporting Taxation Difference
Profit before bad debts 1,000 1,000 -
Bad Debts (100) -
Accounting/Taxable Profit 900 1,000 (100)
Tax Rate 30% 30%
Income/Current Tax Expense 270 300 (30)

Income Tax Expense 270 Income Tax Expense 270 (squeeze)

+ Deferred Tax Benefit 30 Deferred Tax (expense) benefit 30
- Deferred Tax Expense -
Current Tax Expense 300 (start)
Current Tax Expense 300

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Differences between PFRSs and

Tax Laws
• Permanent Differences
arise when and income and expenses enter in the computation
of either accounting profit or taxable profit but not both.

• Temporary Differences
are differences between the carrying amount of an asset or
liability in the statement of financial position and its tax base

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Permanent Differences

- are those that do not have future tax consequences.

- these are the items excluded from the income tax
return
- Non-taxable income
- Non-Deductible expense
- Income subjected to final taxes

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Permanent Differences
Examples
• Interest income on government bonds and treasury bills
• Interest income on bank deposits
• Dividend income
• Fines, surcharges, and penalties arising from violation
of law
• Life insurance premium on employees where the entity
is the irrevocable beneficiary
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Permanent Differences
Examples

Source: PLDT INC Audited Financial

Statements as at and for the years ended
December 31, 2020 and 2019

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Temporary Differences
Examples
- are those that have future tax consequences. Temporary
differences are either:
a. Taxable temporary differences – arise, for example,
when financial income is greater than taxable income or the
carrying amount of an asset is greater than its tax base.
(result to deferred tax liabilities)
b. Deductible temporary differences arise in case of the
opposites of the foregoing. (result to deferred tax asset)

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Taxable temporary differences

Arises when:
a. Financial income (accounting profit is greater than
the Taxable Income (taxable profit)
b. The carrying amount of an asset is greater than its
tax base; or
c. The carrying amount of a liability is less than its tax
base.

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Taxable temporary differences -

Examples
• Revenue is recognized in full under financial reporting but
is taxable only when collected.
• A prepayment is capitalized and amortized to expense
under financial reporting but is tax deductible in full upon
payment.
• An asset is revalued upward and no equivalent adjustment
is made for tax purposes.
• Depreciation recognized under financial reporting is lower
than the depreciation recognized for taxation purposes
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Deferred Tax Liability

are the amounts of the income taxes payable in the future

periods in respect to taxable temporary differences.

= Taxable Temporary Differences X Tax Rate

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Deductible temporary
differences
Arises when:
a. Financial income (accounting profit is less than the
Taxable Income (taxable profit)
b. The carrying amount of an asset is less than its tax
base; or
c. The carrying amount of a liability is greater than its
tax base.

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Deductible temporary
differences - Examples
• Rent received in advance is treated as unearned income (liability) under
financial reporting but is taxable in full upon receipt of cash.

• Bad debts expense is recognized for financial reporting when the

collectability of accounts receivable of accounts receivable becomes
doubtful while it is tax deductible only when the accounts receivable is
deemed worthless.
• Warranty obligation is recognized as expense when a product is sold under
financial reporting but is tax deductible only when actually paid.
• Depreciation recognized under financial reporting is higher than the
depreciation recognized for taxation purposes.
• Losses and tax credits that can be carried forward and deducted from
future taxable profits. 23

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Deferred Tax Asset

are the amounts of the income taxes recoverable in the

future periods in respect of:
a. Deductible temporary differences
b. The carryforward of unused tax losses
c. The carryforward of unused tax credits

= Deductible Temporary Differences X Tax Rate

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Deferred Taxes

Carrying Amount > Tax Base = Deferred Tax Liability

of Asset (DTL)

Carrying Amount < Tax Base = Deferred Tax Liability

of Liability (DTL)

Carrying Amount < Tax Base = Deferred Tax Asset

of Asset (DTA)

Carrying Amount > Tax Base = Deferred Tax Asset

of Liability (DTA)
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Reversal of Deferred Taxes

The recognition of deferred tax assets and liabilities 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:
a. Deferred tax liability results to a higher amount of
tax to be paid to the BIR.
b. Deferred tax asset results to a lower amount of tax to
be paid to the BIR

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Taxable temporary difference vs

Deductible temporary difference
Taxable temporary difference Deductible temporary difference
• Financial income greater than taxable • Financial income less than taxable
income income

• Carrying amount of asset greater than • Carrying amount of asset less than tax
tax base base

• If multiplied by the tax rate, it results to • If multiplied by the tax rate, it results to
deferred tax liability. deferred tax asset.

• When it reverses in a future period, it • When it reverses in a future period, it

results to higher tax payment. results to lower tax payment.

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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.
This method is a comprehensive approach in accounting
or deferred taxes in that it accounts both
a. Timing differences and
b. Differences between the carrying amounts and tax bases of
assets and liabilities.

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Timing Differences

are differences between accounting profit and taxable

profit that originate in one period and reverse in one or
more subsequent periods.

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Temporary Differences

are differences between carrying amount of an asset or

liability in the statement of financial position and its tax
base.

Note: Temporary differences include all timing

differences; however, not all temporary differences
are timing differences.

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Tax Base
• The tax base of an asset or liability is the amount attributed to that asset
of 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 the 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 the future periods.
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Deferred Tax Liability-

Illustration
An asset has a carrying amount of Php1,000 and a tax
base of Php400
Required: How much is the Deferred tax liability?

Carrying Amount 1,000

Less: Tax Base 400
Difference 600 Taxable temporary
Multiply by: Tax Rate 30%
Deferred Tax Liability 180
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Deferred Tax Liability -

Illustration
Entity A has a dividends receivable with carrying amount
of Php1,000. The dividends are not taxable
Required: How much is the Deferred tax liability?

Carrying Amount 1,000

Less: Tax Base 1,000
Difference 0 Taxable temporary
Multiply by: Tax Rate 30%
Deferred Tax Liability 0
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Deferred Tax Liability -

Illustration
Entity A has accounts receivable with carrying amount of
Php1,000. The receivable is taxable only when collected.
Required: How much is the Deferred tax liability?

Carrying Amount 1,000

Less: Tax Base 0
Difference 1,000 Taxable temporary
Multiply by: Tax Rate 30%
Deferred Tax Liability 300
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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
payments larger (smaller) than they would be if
such recovery or settlement were to have no tax
consequences. (PAS 12.10)

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Deferred Tax Liability

Recognition
Deferred Tax Liability is recognized for all taxable temporary
differences, except those that arise from the following:
a. Initial recognition of goodwill
b. Initial recognition of an asset or liability in a transaction which
is not a business combination and, at the time of the
transaction, affects neither accounting profit nor taxable profit
(tax loss)
c. Investments in subsidiaries, branches, and associates and
interest in joint arrangements to the extent that an entity is able
to control the timing of the reversal of the differences and it is
probable that the reversal will not occur in the foreseeable
future. 36

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Deferred Tax Asset Recognition

Deferred Tax Asset is recognized for all deductible

temporary differences, including unused tax losses
and unused tax credits, to the extent that it is probable
that taxable profit will be available against which the
deductible temporary difference can be utilized, unless
the deferred tax asset arises from the initial recognition
of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction,
affects neither accounting profit not taxable profit (tax
loss)
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Limitation on the Recognition of

Deferred Tax Asset
When it is not probable that a deferred tax asset will be
realized, it is either:
a. Not recognized or
b. Reduced to its realizable value, whichever is appropriate

The reduction in deferred tax asset increases income

tax expense but does not affect current tax expense.

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Measurement

• Deferred Tax Assets and Liabilities are measured at the

tax rates that are expected to apply to the
period of their reversal, based on tax rates that
have been substantively enacted by the end of the
reporting period.
• PAS 12 prohibits the discounting of deferred tax
assets and liabilities.

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Measurement - Illustration
Entity A has a taxable temporary difference of Php2,000 in Year 1. The
difference is expected to reverse as follow: Php1,000 in Year 2 and
Php1,000 in Year 3. The tax rate in Year 1 is 30%. However, by the end
of Year 1, a tax law is enacted which requires tax rates of 32% in Year 2
and 35% in Year 3 and in succeeding years.
Required: How much is the Deferred Tax Liability at the end of Year 1?

Year 2 (Php1,000 x 32%) 320

Year 3 (Php1,000 x 35%) 350
Deferred Tax Liability 670
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Presentation

Deferred Tax Assets and Deferred Tax Liabilities are

presented separately and Non-Current Assets and
Non-Current Liabilities, respectively, in a classified
statement of financial position.

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Offsetting

PAS 12 permits offsetting of deferred tax assets and

deferred tax liabilities only if:
a. The entity has a legally enforceable right to offset
current tax assets against current tax liabilities; and
b. The deferred tax assets and the deferred tax liabilities
relate to income taxes levied by the same taxation
authority.

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Presentation in Statement of
Comprehensive Income
• If a transaction is recognized in profit or loss, its tax
effect is also recognized in profit or loss.
• If a transaction is recognized outside profit or loss, its
tax effect is also recognized outside profit or loss (e.g
in other comprehensive income or directly in equity).

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Presentation in Statement of
Comprehensive Income
Taxes recognized in other comprehensive income:
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 balance of retained earnings resulting
from a change in accounting policy or correction of a prior-period
error.
b. Amounts arising on initial recognition of the equity component of a
compound financial instruments.
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Disclosure
PAS 12.80 requires the following disclosures:
• major components of tax expense (tax income) [PAS 12.79] Examples include:
• current tax expense (income)
• any adjustments of taxes of prior periods
• amount of deferred tax expense (income) relating to the origination and reversal of
temporary differences
• amount of deferred tax expense (income) relating to changes in tax rates or the imposition
of new taxes
• amount of the benefit arising from a previously unrecognized tax loss, tax credit or
temporary difference of a prior period
• write down, or reversal of a previous write down, of a deferred tax asset
• amount of tax expense (income) relating to changes in accounting policies and corrections
of errors.
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Disclosure
 PAS 12.81 requires the following disclosures:
• aggregate current and deferred tax relating to items recognized directly in equity
• tax relating to each component of other comprehensive income
• explanation of the relationship between tax expense (income) and the tax that would be expected by applying the current
tax rate to accounting profit or loss (this can be presented as a reconciliation of amounts of tax or a reconciliation of the
rate of tax)
• changes in tax rates
• amounts and other details of deductible temporary differences, unused tax losses, and unused tax credits
• temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint
arrangements
• for each type of temporary difference and unused tax loss and credit, the amount of deferred tax assets or liabilities
recognized in the statement of financial position and the amount of deferred tax income or expense recognized in profit or
loss
• tax relating to discontinued operations
• tax consequences of dividends declared after the end of the reporting period
• information about the impacts of business combinations on an acquirer's deferred tax assets
• recognition of deferred tax assets of an acquiree after the acquisition date. 46

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Disclosure

Other required disclosures:

• details of deferred tax assets [PAS 12.82]
• tax consequences of future dividend payments. [PAS 12.82A]

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Disclosure

In addition to the disclosures required by PAS 12, some

disclosures relating to income taxes are required by PAS 1
Presentation of Financial Statements, as follows:
• Disclosure on the face of the statement of financial position about
current tax assets, current tax liabilities, deferred tax assets, and
deferred tax liabilities [PAS 1.54(n) and (o)]
• Disclosure of tax expense (tax income) in the profit or loss section of
the statement of profit or loss and other comprehensive income (or
separate statement if presented). [PAS 1.82(d)]

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