CONCEPTUAL FRAMEWORK &
ACCOUNTING STANDARDS
Income
Taxes
PAS 12
GROUP 4
PAS 12
Focus only on one kind of tax, the tax on
income / INCOME TAX.
All other taxes are not within the scope of the
PAS 12.
OBJECTIVE OF PAS 12
• To prescribe the accounting treatment for income taxes.
INCOME TAX CURRENT TAX
EXPENSE EXPENSE
• Accounting profit (loss) • Taxable profit (loss)
• Presented in the statement of • Presented in the income tax return (ITR)
comprehensive income
• Computed using PFRSs • Computed using Tax Laws
INCOME TAX EXPENSE
• The total amount included in the determination of profit and loss for the
period.
• It comprises :
CURRENT TAX EXPENSE and DEFERRED TAX EXPENSE
DEFERRED TAX EXPENSE
CURRENT TAX EXPENSE (INCOME or BENEFIT)
• The amount of income taxes
payable (recoverable) in respect of • The sum of the net changes in
the taxable profit (loss) for a period. deferred tax assets and deferred tax
liabilities.
DEFERRED
TAX
+ DEFERRED
TAX
ASSET LIABILITY
ACCOUNTING TAXABLE
PROFIT PROFIT
• Profit (loss) for a period before • Profit (loss) for a period,
deducting taxPage
Title expense. determined Body
in accordance with
taxation rules.
INCOME
- EXPENSES
________________
NET INCOME BEFORE TAX
-
________________
INCOME TAX
NET INCOME AFTER TAX
The varying treatments of economic activities between the PFRSs
and Tax laws results to following differences:
a. PERMANENT
DIFFERENCES
• Income and expenses
External Report
are included in the computation of either
Accounting profit or Taxable profit but notReport
Long both.
b. TEMPORARY DIFFERENCES
• Income and expenses are included in both but there is a timing
difference of recognition.
PERMANENT DIFFERENCES
NON-TAXABLE NON-DEDUCTIBLE
EXPENSES EXPENSES
• Those that have already been subjected to final taxes.
• They do not have future consequences, and hence do not give rise
deferred tax assets and liabilities.
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.
TEMPORARY DIFFERENCES
TAXABLE DEDUCTIBLE
TEMPORARY TEMPORARY
DIFFENCES DIFFENCES
• Those that result to future • Those that result to
taxable amounts. future deductible amounts.
- DEFERRED TAX LIABILITIES - DEFERRED TAX ASSETS -
-
Examples:
• Revenue is already earned but is taxable only when collected.
• A prepayment is amortized to expense but is tax deductible in full payment.
• Asset is revalued upward and no equivalent adjustment is made for tax
purposes.
ACCOUNTING FOR DEFERRED TAXES
PAS 12 requires the use of the asset-liability method (a.k.a “balance
sheet liability method”).
• This method accounts both the timing differences and differences between
the carrying amounts and tax base of assets and liabilities.
TAX BASE
• The amount attributed to that asset or liability for tax purposes.
TAX BASE OF AN ASSET TAX BASE OF A LIABILITY
• The amount that will be • Its carrying amount, less any amount
deductible against any taxable that will be deductible for tax purposes.
economic benefits
• If the economic benefit will not be • In case of revenue is received in advance, the
taxable, the tax base is equal to its tax base of resulting liability is its carrying
carrying amount. amount.
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 which is not a business combination.
c. investment in subsidiaries, branches, and associates.
• DEFERRED TAX ASSET is recognized for all deductible temporary differences, including
unused tax losses and unused tax credits.
- A deferred tax asset reduces the tax payment when it reverses in a future
period. However, an entity can be benefit from this reduction only if it earns
sufficient taxable profit against which the reduction can be applied.
MEASUREMENT
DEFERRED TAX ASSETS AND LIABILITIES are measured at the tax rates that are
expected to apply to the period of their reversal.
• PAS 12 prohibits the discounting of deferred tax assets and liabilities.
PRESENTATION
• Deferred tax assets and Deferred tax liabilities are presented as non-current
assets and non-current liabilities respectively, in a classified STATEMENT OF
FINANCIAL POSITION.
• Current and Deferred taxes are usually recognized in PROFIT or LOSS.
• A tax effect that is recognized directly in equity is accounted for as a
direct adjustment to related EQUITY.
Thank You
For Your Attention
