Income Tax
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Accounting Income
o Income appearing in the income
statement
o Computed in an accrual basis
Taxable Income
o Income appearing on the income tax
return
o Computed in a cash basis
Permanent Differences
o Non-taxable revenues
 Revenue
recognized
in
accounting
cannot
be
recognized as revenue in BIR
 Income subject to Final taxes
o Non-deductible expenses
 Expenses
deducted
for
accounting purposes but BIR
prohibits as deduction
 Life insurance premium (only
when entity is the beneficiary
of the life insurance policy)
 Tax penalties, surcharges,
and fines
Temporary Differences
o Taxable temporary differences
 Future taxable amounts
 Deferred tax liability
o AI > TI
o CV of asset >
Asset tax base
o CV of Liability
< Liability tax
base
o Deductible temporary differences
 Future deductible amounts
 Deferred tax assets
o AI < TI
o CV Of asset <
Asset tax base
o CV of Liability
> Liability tax
base
Recognition Principles
o Deferred Tax liability
 Recognized for all taxable
temporary differences
 Not recognized if
 Goodwill arising from
business combination
 Asset/Liability
does
not affect income
 Undistributed profit of
subsidiary, associate,
or joint venture
o Deferred Tax Asset
 Recognized for all deductible
temporary differences and
operating loss carryforward
when it is probable that
taxable income will be
available against the Deferred
Tax Asset
Measurement of Taxes
o Current Taxes
Using tax rate that has been
enacted and effective at the
end of reporting period.
o Deferred taxes
 Using tax rate that has been
enacted by the end of
reporting period and expected
to apply to the period when
the asset is realized or the
liability is settled.
Presentation
o Current taxes
 Current tax liability – current
liability
 Current tax benefit – current
tax asset
o Deferred taxes
 Deferred tax liability – NC
Liability
 Deferred tax asset – NC
Asset
Offset of deferred Taxes
o General rule – no offsetting
o Exceptions
 The DTA and DTL relate to
income taxes levied by the
same tax authority
 The entity has a legal right to
set off a current tax asset
against a current tax liability
Conversion from accounting income to
taxable income
Accounting
XX
Income
Permanent
Differences
Non-taxable
(XX)
revenues
NonXX
XX
deductible
expenses
Income subject
XX
to tax
Temporary
Differences
Future
(XX)
taxable amounts
Future
XX
XX
deductible
amounts
Taxable Income
XX
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Total Income Tax Expense
o If Current tax rate and Enacted tax
rate are the same
 Income subject to tax X Tax
rate
o If different
 Income subject to tax x
current tax rate + (Future
taxable amount X Enacted
rate) – (Future deductible
amount X enacted rate)
Current Income Tax Expense
o Taxable Income X Tax rate
o DR. Income Tax Expense CR.
Income tax payable
Deferred Tax Liability
Future taxable amounts X Tax rate
enacted
o DR. Income Tax Expense CR.
Deferred tax liability
Deferred Tax Asset
o Future deductible amounts X Tax
rate enacted
o DR. Deferred Tax Asset CR. Income
Tax Expense
Creation and reversal of deferred taxes
o Creation
 Future
taxable
amount
increases
deferred
tax
liability and increases the
income tax expense
 Future deductible amount
increases
deferred
tax
assets
and
decreases
income tax expense
o Reversal
 Future
taxable
amount
decreases deferred tax
liability and decreases the
income tax expense
 Future deductible amount
decreases deferred tax
assets
and
increases
income tax expense
o
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