IAS 12 - Income Taxes
Two Types of Income
Accounting Income Taxable Income
Pre-tax financial profit, financial income,
financial profit, accounting profit
Computed using PFRS Computed using tax laws (NIRC - Tax Code)
Total income less total expenses, excluding Total taxable income less tax-deductible
income tax expense expense
When multiplied to the prevailing tax rate, When multiplied to the prevailing tax rate,
you get the total income tax expense you get the current tax expense
Income Tax Expense
● Current Tax Expense
● Deferred Tax Expense
Reasons why Accounting Income ≠Taxable Income
● Permanent differences
○ Arise when income and expenses enter in the computation of either
accounting or taxable income but not both
■ Non-taxable revenues and non-deductible expenses
■ Items already subjected to final taxes (excluded in the ITR)
○ Do not give rise to future tax consequences
○ Do not give rise to deferred liability or asset
○ Examples
■ Accounting income but not in Taxable income (because passive already
and subjected to withholding taxes na)
● Interest income on government bonds and treasury bills
● Interest income on bank deposits
● Dividend income
■ Non-deductible expenses (decreases accounting income but not the
taxable income)
● Fines, penalties, and surcharges arising from violation of laws
● Deductions in excess of prescribed limit under the tax laws
○ Charitable contributions
○ Entertainment and representation expense
■ Non-taxable revenue
● Premiums on life insurance paid on behalf of employees (entity
is irrevocable beneficiary)
○ If entity is not the beneficiary, BIR will allow this to be
part of taxable income
, ● Temporary Differences
○ Differences between the carrying amount of an asset or liability in the SFP and
its tax base (amount to be taxed for future periods and based on tax laws)
○ Timing differences
■ Income or expenses recognized in different time periods (financial
reporting and taxation purposes)
○ Reverses in one or more subsequent periods
Kinds of Temporary Differences
● Taxable
○ Accounting Income > Taxable Income (IS Approach)
○ CV of Asset > Tax base (SFP Approach)
○ CV of Liability < Tax Base (SFP Approach)
○ Deferred Tax Liability (nature)
■ Accrued Revenues
● Zero tax base kasi uncollected pero may carrying value
■ Prepaid Expenses
● Piecemeal basis in accounting but deducted in taxable income
in full
■ Accelerated Depreciation Method for Taxation Purposes
● Straight-line for accounting while SYD for taxation
○ Larger taxed depreciation in earlier years
■ Upward Revaluation of Assets without Equivalent Adjustment for Tax
Purposes
● Revaluation surplus
● Unrealized gain on fair value
○ For tax purposes, recognized only when realized (sold or
disposed)
● Deductible
○ Accounting Income < Taxable Income (IS Approach)
○ CV of Asset < Tax Base (SFP Approach)
○ CV of Liability > Tax Base (SFP Approach)
○ Deferred Tax Asset (Nature)
■ Unearned Revenues
● Advanced collection for future periods so unrecognized in
accounting income but cash is received so included in taxable
income
● CV of liability for accounting purposes but zero tax base since in
full
■ Accrued Expenses
● Incurred but not yet paid
Two Types of Income
Accounting Income Taxable Income
Pre-tax financial profit, financial income,
financial profit, accounting profit
Computed using PFRS Computed using tax laws (NIRC - Tax Code)
Total income less total expenses, excluding Total taxable income less tax-deductible
income tax expense expense
When multiplied to the prevailing tax rate, When multiplied to the prevailing tax rate,
you get the total income tax expense you get the current tax expense
Income Tax Expense
● Current Tax Expense
● Deferred Tax Expense
Reasons why Accounting Income ≠Taxable Income
● Permanent differences
○ Arise when income and expenses enter in the computation of either
accounting or taxable income but not both
■ Non-taxable revenues and non-deductible expenses
■ Items already subjected to final taxes (excluded in the ITR)
○ Do not give rise to future tax consequences
○ Do not give rise to deferred liability or asset
○ Examples
■ Accounting income but not in Taxable income (because passive already
and subjected to withholding taxes na)
● Interest income on government bonds and treasury bills
● Interest income on bank deposits
● Dividend income
■ Non-deductible expenses (decreases accounting income but not the
taxable income)
● Fines, penalties, and surcharges arising from violation of laws
● Deductions in excess of prescribed limit under the tax laws
○ Charitable contributions
○ Entertainment and representation expense
■ Non-taxable revenue
● Premiums on life insurance paid on behalf of employees (entity
is irrevocable beneficiary)
○ If entity is not the beneficiary, BIR will allow this to be
part of taxable income
, ● Temporary Differences
○ Differences between the carrying amount of an asset or liability in the SFP and
its tax base (amount to be taxed for future periods and based on tax laws)
○ Timing differences
■ Income or expenses recognized in different time periods (financial
reporting and taxation purposes)
○ Reverses in one or more subsequent periods
Kinds of Temporary Differences
● Taxable
○ Accounting Income > Taxable Income (IS Approach)
○ CV of Asset > Tax base (SFP Approach)
○ CV of Liability < Tax Base (SFP Approach)
○ Deferred Tax Liability (nature)
■ Accrued Revenues
● Zero tax base kasi uncollected pero may carrying value
■ Prepaid Expenses
● Piecemeal basis in accounting but deducted in taxable income
in full
■ Accelerated Depreciation Method for Taxation Purposes
● Straight-line for accounting while SYD for taxation
○ Larger taxed depreciation in earlier years
■ Upward Revaluation of Assets without Equivalent Adjustment for Tax
Purposes
● Revaluation surplus
● Unrealized gain on fair value
○ For tax purposes, recognized only when realized (sold or
disposed)
● Deductible
○ Accounting Income < Taxable Income (IS Approach)
○ CV of Asset < Tax Base (SFP Approach)
○ CV of Liability > Tax Base (SFP Approach)
○ Deferred Tax Asset (Nature)
■ Unearned Revenues
● Advanced collection for future periods so unrecognized in
accounting income but cash is received so included in taxable
income
● CV of liability for accounting purposes but zero tax base since in
full
■ Accrued Expenses
● Incurred but not yet paid
