PAS 12 INCOME TAXES
 Fines, penalties and/or surcharges
OBJECTIVE
 To prescribe the accounting treatment
for income taxes.
**In meeting this objective, PAS 12 notes the
following:
 It is inherent in the recognition of an
asset or liability that the asset or liability
will be recovered or settled. This
recovery or settlement may give rise to
future tax consequences which should be
recognized at the same time as the asset
or liability.
 An entity should account for the tax
consequences of transactions and other
events in the same way it accounts for
the transactions or other events
themselves.
DEFINITION OF TERMS
 Accounting/Financial income –net
income for the period before deducting
income tax expense (Revenue –
Expenses = Accounting Income)
 Taxable income – income determined
in accordance with rules established by
taxation authorities (Taxable Revenue
– Deductible Expenses = Taxable
Income)
 Tax base – the amount attributed to the
asset or liability for tax purposes
 Permanent differences – items or
revenue and expense which are included
in either accounting income or taxable
income but will never be included in the
other
Classification
Non-taxable Revenues
 Income already subjected to final tax
(e.g. interest income on time/savings
deposit, government bonds, treasury
bills and gains subject to capital gains
tax)
 Income exempted from income
taxation (intercompany dividends from
a domestic corporation and proceeds
from life insurance)
Non-deductible expenses
 Premiums paid on life insurance for officers
and employees (company is the beneficiary)
 Loss on expropriation of property
 Impairment of loss on goodwill
 Charitable contribution in excess of tax
liabilities
 Temporary differences – differences
between the carrying amount of an asset
or liability in the statement of financial
position and its tax bases
 Timing differences – items of income
and expenses which are included in both
accounting and taxable income but at
different time periods
 Taxable temporary differences –
these will result in taxable amounts in
determining taxable profit (tax loss) of
future periods when the carrying amount
of the asset or liability is recovered or
settled
 Cases where an item give rise to a future
taxable amount/taxable temporary
differences
 Accounting/Financial Income > Taxable
Income
1. Revenues and gains included in
accounting income for the current
period but are taxable in the future
periods
2. Expenses and losses that are
deductible for tax purposes in the
current period but are deductible for
accounting purposes in future periods
NOTE!
ASSET: Carrying amount > Tax Base
LIABILITY: Carrying amount < Tax Base
 Deductible temporary differences –
these will result in amounts that are
deductible in determining taxable profit
(tax loss) of future periods when the
carrying amount of the asset or liability
is recovered or settled
 Cases where an item give rise to a future
deductible amount/deductible temporary
differences
 Financial Income < Taxable Income
1. Revenues and gains are included in taxable
income of the current period but are
 included in accounting income of future
periods.
2. Expenses and losses are deducted from
accounting income of current period but are
deductible for tax purposes in future periods
NOTE!
ASSET: Carrying amount < Tax Base
LIABILITY: Carrying amount > Tax Base
 Deferred tax liabilities (DTL) –
amounts of income taxes payable in
future periods in respect to taxable
temporary differences
 Deferred tax assets (DTA) – amounts
of income taxes recoverable in the future
periods in respect of:
 Deductible temporary differences
 Carryforward of unused tax
losses
 Carryforward of unused tax
credits
 Current Tax Liability – the current tax
expense or the amount of income tax
actually payable; classified as current
liability
 Current Tax Asset – the excess of the
amount of tax already paid for the
current period over the amount actually
payable for the period
ACCOUNTING METHODS FOR INCOME TAXES
INCOME STATMENT APPROACH- Focuses on
timing differences only in the computation of
deferred tax asset or deferred tax liability,
timing differences will affect the current period
income statement and will be reverse on one or
more subsequent period
FINANCIAL STATEMENT APPROACH- This
method considers all temporary differences
including timing differences. There are
differences which might affect only the financial
position which are technically not timing
differences.
IFRS requires the use of the statement of
financial position approach
GUIDANCE IN DETERMINING TAX BASES
 Assets – the tax base is the amount
that will be deductible against taxable
economic benefits from recovering the
carrying amount. (If recovery has NO
TAX CONSEQUENCES, tax base is equal
to CARRYING AMOUNT)
 Revenue received in advance – the
tax base is the carrying amount less
revenue that will not be taxable in future
periods
 Other liabilities – the tax base is the
carrying amount less any amount that
will be deductible for tax purposes
 Unrecognised items – if items have
tax base but are not recognized in SFP,
carrying amount is nil
 Tax bases not immediately apparent
– tax base should be determined in such
a manner to ensure the future tax
consequences of recovery or settlement
of the item is recognized as a deferred
tax amount
 Consolidated financial statement –
tax bases are determined by reference
to any consolidated tax return
MEASUREMENT OF CURRENT TAX
 Current tax liability/asset – measured
using the tax rate that has been enacted
and effective at the end of the reporting
period
RECOGNITION OF TAX AMOUNTS FOR THE
PERIOD
Formula:
Current tax for the period
Add: Movement in deferred tax balances
for the period
Tax recognized for the period
RECOGNITION OF DEFERRED TAX LIABILITIES
Deferred tax liabilities – recognized for all
TAXABLE temporary differences
EXCEPTIONS:
 Goodwill arising from business
combination and which is non-deductible
for tax purposes
 Asset or liability, other than those in a
business combination, that does NOT
affect either accounting or taxable
income
 Undistributed profit from subsidiary,
associate or joint venture when:
  the 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
Formula:
Carrying amount
Less: Tax Base
Taxable Temporary Difference
Multiplied by: Tax Rate
Deferred Tax Liability
RECOGNITION OF DEFERRED TAX ASSETS
Deferred Tax Assets – recognized for:
 deductible temporary differences
 unused tax losses and unused tax credits
(only if it is PROBABLE that there will be
sufficient future taxable profit against
which the loss or credit carryforward can
be utilized)
**The carrying amount of the DTA is reviewed
at the end of each reporting period and reduced
if appropriate.
EXCEPTIONS:
 Asset or liability, other than those in a
business combination, that does NOT
affect either the accounting or taxable
income
Formula:
Carrying amount
Less: Tax Base
Deductible Temporary Difference
Multiplied by: Tax Rate
Deferred Tax Asset
Unused Tax Loss/Credits
Multiplied by: Tax Rate
Deferred Tax Asset
MEASUREMENT OF DEFERRED TAXES
 DTA and DTL - measured at tax rates
that are expected to apply to the period
when the asset is realized or the liability
is settled
 The measurement reflects the entity’s
expectations at the end of the reporting
period
GUIDANCE IN MEASURING DEFERRED TAXES
 Tax rate/base is impacted by the
manner it recovers its assets or
settles its liabilities – measurement is
consistent in which asset is recovered or
liability is settled
 Revalued non-depreciable assets –
measurement reflects the tax
consequences of selling the asset
 Investment property measured at
fair value – measurement reflect the
rebuttable presumption that the
investment property will be recovered
through sale
 Deferred tax assets and liabilities
CANNOT be discounted
RECOGNITION OF TAX AMOUNTS FOR THE
PERIOD:
FORMULA:
Current tax for the period
+ Movement in deferred tax balance for
the period
Tax to recognize for the period
Current tax and deferred taxes is recognize as
income or expense and included in the profit or
loss for the period except to the tax arising
from:
 Transactions or events outside the profit or
loss
 A business combination in which case the
tax amounts are recognized as identifiable
asset or liabilities at the acquisition date,
and accordingly effectively taken into
account in the determination of goodwill
under IFRS 3.
ADDITIONAL GUIDANCE IN DETERMINING THE
INCOME TAX FOR THE PERIOD:
 When there’s a difficulty in measuring the
tax attributable to a transaction outside of
profit or loss it is thereby determine using
pro-rata allocation or another appropriate
method
 Where payment of dividends impacts tax
rates or resulted in taxable amount or
refunds, this is more directly linked to past
transaction or event and so are recognize in
profit or loss unless this events arise from
outside profit or loss
 The impact of business combination or the
recognition on pre-combination deferred tax
assets are not included in the determination
of goodwill.
 The recognition of acquired deferred tax
benefit subsequent to a business
combination as period adjustment if they
qualify for that treatment, or otherwise
recognized in profit of loss,
 Tax benefits of equity settled share based
payment transaction that exceed the tax
affected cumulative remuneration expense
are considered to relate to an equity item
and are recognized directly in equity.
PRESENTATION
Current tax asset and current tax
liabilities can only be offset int the statement of
financial position if the entity has the legal right
and the intention to settle on a net basis.
Deferred tax asset and Deferred tax
liabilities can only be offset in the financial
position if the entity has the legal right to settle
current tax amounts on a net net basis and the
deferred tax amounts are levied by the same
taxing authority on the same entity or different
entities that intend to realize the asset and
settle the liability at the same time
The amount of tax expense (income)
related to profit or loss is required to be
presented in the statement of comprehensive
income.
The tax effects of items included in other
comprehensive income can either be shown net
for each item, or the items can be shown before
tax effects with an aggregate amount of income
tax for group of items.
 Temporary differences associated with
investments in subsidiaries, branches
and associates, and interests in joint
arrangements
 Tax relating to discontinued operations
 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.
 Details of deferred tax asset
 Tax consequence of future dividend
payment
LET’S SOLVE SOME PROBLEMS!
PROBLEM 1: (SELF-CONSTRUCTED
PROBLEM)
AkoLangTo Co. produces toy dump
trucks. Historically, it has experienced a
warranty cost of 1% of revenues, and so records
a warranty expense based on that information.
Based on the accountant's analysis regarding
income taxes, the taxable income is not
inconformity with the income as per book. What
could be the possible explanation for this? (IAS
12)
ANSWER: In the AkoLangTo's accounting
income, estimated warranty cost have been
expensed but the company can’t deduct
estimates as an expense on its tax return until it
actually incurs the cost. Therefore, this is where
the difference lies.

DISCLOSURE
IAS 12 REUIRES THE FOLLOWING
DISCLOSURE (not all are indicated others can be
seen in IAS 12.80, IAS 12.81 and IAS 12.82)
 Current tax expense
 Any adjustment of taxes of prior period
 Amount of deferred taxes (income)
relating to the origination and reversal
of temporary differences.
 Write down, or reversal of a previous
write down, of a deferred tax asset.
 Aggregate current and deferred tax
relating to items recognized directly on
equity
 Changes in tax rates
 NET DEFERRED TAX EXPENSE(1.2M-.9M) .3M

PROBLEM 3 (SELF CONSTRUCTED PROBLEM

PROBLEM 2 (PRACTICAL FINANCIAL BY MR. FRED NATIVIDAD)
ACCOUNTING PART 2, BY CONRADO VALIX) An entity reported the following for the year
ended December 31,2016.
Somewhereonlyweknow Company reported the Accounting Income per book 6,000,000
following carrying amounts of assets and Payments for fines, surcharges, and penalties
liabilities at year-end: arising from
Property 10M violation of law 500,000
Plant and Equipment 5M Interest revenue on
Inventory 4M government bonds 150,000
Trade Receivables 3M Interest income on time deposits 150,000
Trade Payables 6M Doubtful accounts 500,000
Cash 2M Estimated warranty cost that had been
The value for tax purposes for property and for recognized
plant and equipment animal was 7M and 4M, as expense in 2016 when the product sales were
respectively. The entity has made a provision for made but is deductible
inventory obsolescence of 2M which is not for tax purposes when paid 400,000
allowable for tax purposes. Further, an Accounting depreciation 600,000
impairment loss against trade receivables of 1M Tax depreciation 800,000
gas veen made. This charge will not be allowed Unrealized losses of recognized during the year
in the current year for tax purposes. The tax in profit or loss on
rate is 30%. an investment in held for trading equity
securities. 40,000
What amount should be recognized as deferred Gross Income on instalment sale included in
tax expense? accounting income
but taxable only in 2017 100,000
Suggested Answer:300,00 Income tax rate 2016 30%
Suggested Solution: Compute for the current tax
ASSET CARRYING TAX BASE FUTURE expense, deferred tax asset, deferred
AMOUNT TAXABLE tax liability and total income tax
AMOUNT expense.
Solution:
PROPERTY 10M 7M 3M
Compute first the Taxable income to get the current tax expense
PLANT 5M 4M 1M note: current tax expense = taxable income * income tax rate
AND Accounting income per book 6,000,000
Non taxable revenue
EQUIPMEN Interest Income on government bonds (150,000)
T Interest Income on time deposits (150,000)
Non deductible expenses
Deferred Tax Liability (30% x 4M) 1.2M Payments for fines, surcharges, and penalties arising from
violation of law 500,000
ASSET CARRYING TAX BASE FUTURE Taxable Temporary Difference
Excess Tax depreciation (200,000)
AMOUNT DEDUCTIB Gross Income on instalment sale included in
LE accounting income but taxable only in 2017 (100,000)
AMOUNT Deductible Temporary Differences
Doubtful accounts 500,000
INVENTOR 2M 4M 2M Estimated warranty cost that had been recognized
as expense in 2016 when the product sales were made
Y but is deductible for tax purposes when paid 400,000
Unrealized losses of recognized during the year in profit or loss on
TRADE 2M 3M 1M an investment in held for trading equity securities. 40,000
RECEIVAB Taxable Income 6,840,000
LES therefore, CURRENT TAX EXPENSE = 205,200 (6,840,000*30%)

Deferred Tax Asset (30% x 3M) .9M


Get first all the taxable temporary differences to get the
deferred tax liability
note: deferred tax liability arises from a taxable temporary
difference. See different situation that makes a taxable
temporary difference :) the proceeding solutions is same is
through with the computation of deferred tax asset which
arises form deductible temporary difference see also
situations that makes a deductible temporary difference.
Taxable Temporary Difference
Deferred Tax Liability
Excess Tax depreciation 200,000×30%=
70,000
Gross Income on instalment sale included in
accounting income but taxable only in 2017
100,000 × 30%= 35,000
Total deferred tax liability 105,000
Deductible Temporary Differences
Doubtful accounts 500,000×30%= 150,000
Estimated warranty cost that had been
recognized as expense in 2016 when the product
sales were made but is deductible for tax
purposes when paid
400,000×30%=120,000
Unrealized losses of recognized during the year
in profit or loss on an investment in held for
trading equity securities.
40,000×30%=12,000
Total deferred tax asset 282,000
 Cumulative Taxable Temporary Difference
Dec. 31, 2018 – 700,000
 Cumulative Deductible Temporary Difference
Dec. 31, 2018- 200,000
Req: Provide the Journal Entries to record the
current and deferred portion of income tax.
Solution:
 To Adjust the current balance of DTA
and DTL:
Deferred Tax Liability 40,000***
Income Tax Expense 50,000***
Deferred Tax Asset 90,000*
Computed as:
DTA end =700,000(CTTD) x .30 (tax rate applicable 2018) = 210,000
*Adjustment = 210,000(DTA end) - 300,000 (DTA Beg.)= 90,000 cr.
DTL end= 200,000 (CDTD) x .30 (tax rate applicable 2018) = 60,000
**Adjustment= 60,000 (DTL end) – 100,000 (DTL Beg.)= 40,000 dr.
***Income Tax expense adjustment is the net adjustment arising from the
reversal of DTA and DTL. Basically it is the difference of both and is recognized
either an additional expense due to a higher accounting income arising from a
reversal of a DTA or as a deduction of the current year’s expense due to a
lower accounting income arising from a reversal of a DTL. Thus this is a
compound entry
 To record the current tax liability of the
company:
Income Tax Expense 750,000
Income Tax Payable 750,000
Income Tax payable= 2,500,000 (Taxable inc.) x 30% = 750,000

Lastly, we are now ready to compute for the total  To Adjust the current income tax
income tax expense for the period expense by exercising the
note: Total income tax expense= current tax expense
right to claim tax credit arising from
+ deferred tax liability - deferred tax asset
foreign taxes paid:
Current tax expense 205,200 Income Tax Payable 120,000
Deferred tax liability 105,000 Income Tax Expense 120,000
Deferred tax asset This adjustment is optional because usually to compute for the total income
(282,000) tax due/payable, tax credits and prior payments from the same taxable year
Total income tax expense 28,200 should be deducted to arrive at the correct income tax payable balance.
Consequently, if it is computed that way the previous entry should only
PROBLEM 4 show an amount of 630,000 arising
(SELF-CONSTRUCTED PROBLEM)
PROBLEM 5
The following information are taken from the
On December 31, 2018, Cactus Co. (a domestic
records of ABC Company for the year:
Corporation that grows and sells succulents
Gain from settlement of insurance 70, 000
online) had the following items relating to its
(company is the beneficiary)
income tax liability:
Intercompany dividends from a 80, 000
 Deferred Tax Asset Jan. 1 ,2018 – 300,000 domestic corporation
 Deferred Tax Liability Jan. 1, 2018 – 100,000
Interest income on time deposits 55, 000
 Taxable Profit - 2,500,000
 Gross Receipts- 8,000,000 Interest revenue on government 30, 000
 Total COGS and Expenses- 6,000,000 bonds
 Tax credit arising from a foreign tax paid- Interest income on treasury bills 28, 000
120,000
 Fines and penalties for violations of 23, 000
laws
Charitable contribution in excess of 32, 000
Suggested Solution:
tax liabilities
Premiums on life insurance for officers 35, 000 Pretax income
and employees 270, 000
Less: Nontaxable
Details regarding temporary differences are
revenues (263, 000)
shown below:
 Tax depreciation exceeds financial Add:
depreciation by 32, 000. Nondeductible 90, 000
 Sales for the year is 1, 300, 000. ABC expenses
Company applies 2% as percentage of Taxable financial × = 29, 100
sales in estimating its doubtful accounts income 97, 000 30
under allowance method. The sales %
includes gross income from instalment Add: Future × = 26, 790 (a)
sales of 30, 000, which is the only deductible 89, 300 30
balance not yet collected as of year-end. amounts %
 ABC Company leased office premises for
a 4-year term of operating lease at the Less: Future × = 18, 600 (c)
beginning of the year. Rent for the first taxable amounts (62, 000) 30
year is 180, 000 and rent for years 2 %
through 4 is 120, 000 per annum. First Taaxable income × = 37, 290 (d)
three months is considered rent –free as (b)124, 30
inducement to enter the lease. 300 %
ABC Company appropriately recorded total
income tax expenses of 29, 100. Future
deductible amounts totalled 89, 300. If the 29,100
pretax income is 270, 000 determine the *Tax rate (SQUEEZED): = 30%
97,000
amount of:
(a) deferred tax assets *Nontaxable revenues:
(b) taxable income. Gain from settlement of insurance (company is 70,000
(c) deferred tax liabilities the beneficiary)
(d) income tax – current Intercompany dividends from a domestic 80, 000
corporation
Interest income on time deposits 55, 000
Interest revenue on government bonds 30, 000
Interest income on treasury bills 28, 000
Total 263, 000

* Nondeductible expenses:
Charitable contribution in excess of tax 32, 000
liabilities

Premiums on life insurance for officers and 35, 000

employees

Total 90, 000