University of Santo Tomas

AMV College of Accountancy

IAC 11 – Integrated Review in Financial Accounting and Reporting

INCOME TAXES (IAS 12)

 Uses the “Statement of Financial Position (Balance Sheet) Approach” to measure DTA & DTL
 Current Tax Liability = Taxable Income x Tax Rate
 Taxable Income = Taxable Revenues – Deductible Expenses
Journal Entry: Income Tax Expense – Current xx
Income Tax Payable (Current Liability) xx
 Differences between the Accounting Income and Taxable Income:
A. Permanent Differences – included in the accounting income but never included in the
taxable income.
1. Non-taxable Revenues (Tax-exempt Revenues)
 Example: Gain from settlement of life insurance of officers and employees where the
corporation is the named beneficiary
2. Non-deductible Expenses
 Examples: Fines and penalties for violation of law; Charitable contributions in excess of
tax limit; Premiums paid on life insurance where the corporation is the named
beneficiary
B. Temporary Differences
1. Taxable Temporary Differences (Future Taxable Amount)
 Assets’ Carrying Value > Assets’ Tax Base
 Liabilities’ Carrying Value < Liabilities’ Tax Base
 Accounting Income > Taxable Income
 Results to a non-current liability, “Deferred Tax Liability” = Cumulative taxable
temporary differences x Tax base
 Example: Installment Sales (recorded as revenue when sold for accounting purposes
and when installment payments are received for tax purposes)
Journal Entry: Income Tax Expense – Deferred xx
Deferred Tax Liability xx
2. Deductible Temporary Differences (Future Deductible Amount)
 Assets’ Carrying Value < Assets’ Tax Base
 Liabilities’ Carrying Value > Liabilities’ Tax Base
 Accounting Income < Taxable Income
 Results to a non-current asset, “Deferred Tax Asset” = Cumulative deductible
temporary difference x Tax base
 Example: Good Impairment Loss
Journal Entry: Deferred Tax Asset xx
Income Tax Expense (Benefit) xx
 Sources of Deferred Tax Asset
1. Deductible Temporary Differences
2. Unused Tax Losses and Tax Credits Carryforward
 Taxable Amount Computation
Pre-tax Financial Income xx
Permanent Differences:
Non-deductible Expenses xx
Non-taxable Revenues (xx)
Accounting Profit Subject to Tax xx
 Temporary Differences:
Deductible Temporary Differences xx
Taxable Temporary Differences (xx)
Taxable Income xx
 Income Tax Expense = Current Tax Expense + Deferred Tax Expense
 Deferred Tax Expense = Accounting profit subject to tax x Tax base (Note: This can only be used
of the tax rate remains the same)
 IAS 12 requires that the carrying amount of a DTA be reviewed at the end of each reporting
date. An enterprise should reduce the carrying amount of a DTA to the extent that it is no longer
probable that sufficient taxable profit will be available. Any such reduction should be reversed
to the extent that it becomes probable that sufficient taxable profit will be available.
 Tax rates other than the current rate shall be used only when the future tax rates have been
enacted or substantially enacted into law.
 Operating Loss Carryforward – excess of tax reductions over gross income in a year that may be
carried forward to reduce taxable income in a future year.
 IAS 12 par. 35 – Existence of unused tax losses is a strong evidence that future taxable profit may
not be available.
 Minimum Corporate Income Tax (MCIT)
- 2% of Gross Income
- For Domestic Corporation and Resident Foreign Corporation
- Imposed starting the fourth year from the year of corporate registration
- Income Tax Payable = (Taxable Income x Tax Rate) or (Gross Income x 2%), whichever is
higher
- Any excess of MCIT over the computed normal tax due based on the taxable profit is
recognized as DTA if the corporation expects that its operations in the future years will result
to a normal tax due higher than the MCIT.
- Has a three-year carryover
Journal Entry: Income Tax Expense – Current xx
Deferred Tax Asset xx
Income Tax Payable xx
 The resulting current and deferred tax effects of those items that are recognized directly in
equity and other comprehensive income are also taken directly to equity and other
comprehensive income.
 An enterprise should offset current tax assets and liabilities if, and only if, the enterprise:
A. Has a legally enforceable right to offset; and
B. Intends either to settle on a net basis or to realize the asset and settle the liability
simultaneously.
 An enterprise should offset DTA and DTL if, and only if:
A. The enterprise has a legally enforceable right to offset current tax assets and liabilities;
and
B. The DTA and DTL relate to income taxes levied by the same tax authority on either:
a. The same taxable entity; or
b. Different taxable entities which intends either to settle current tax assets and
liabilities on a net basis or to realize the asset and settle the liability simultaneously.

End of Handout.