PAS 12 Income Taxes PDF

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Summary of PAS 12 Income Taxes...

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PAS 12 INCOME TAXES I.

NATURE

PAS 12 prescribes the accounting for the income tax The varying treatments of economic activities between the PFRSs and tax laws result to permanent and temporary differences. Permanent differences are those that do not have future tax consequences. Temporary differences are either taxable temporary differences or deductible temporary differences. Taxable temporary differences arise, for example, when financial income is greater than taxable income or the carrying amount of an asset is greater than its tax base. Deductible temporary differences arise in case of the opposites of the foregoing. Taxable temporary differences result to deferred tax liabilities while deductible temporary differences result to deferred tax assets. If the increase in deferred tax liability exceeds the increase in deferred tax assets, difference is deferred tax expense. If it is the opposite, the difference is deferred tax income or benefit. Income tax expense (benefit) is computed using PFRSs. It comprises current tax expense and deferred tax expense (income or benefit). Current tax expense is computed using tax laws. II.

RECOGNITION

And entity shall, with certain limited exceptions, recognize a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences. 

Deferred tax liability is recognized for all taxable temporary differences, except those that arise from the following: o Initial recognition of goodwill o Initial recognition of an asset or liability in a transaction which is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). o Investment in subsidiaries, branches, and associates, and interests in joint arrangements to the extent that the entity is able to control the timing of



III.

the reversal of the differences and it is probable that the reversal will not occur in the foreseeable future. Deferred tax asset is recognized for allp deductible temporary differences, including unused tax losses and unused tax credits, to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in transaction that is not a business combination and, at the time of the transaction affects either accounting profit nor taxable profit (tax loss).

MEASUREMENT

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period of their reversal, based on tax rates that have been substantively enacted by the end of the reporting period. PAS 12 prohibits the discounting of deferred tax assets and liabilities. IV.

TRANSACTION

Permanent Differences a. b. c. d. e.

Interest income on government bonds and treasury bills Interest income on bank deposits Dividend income Fines, surcharges, and penalties arising from violation of the law Life insurance premium on employees where the entity is the irrevocable beneficiary.

Taxable Temporary Differences a. Revenue is recognized in full under financial reporting but is taxable only when collected. b. A prepayment is capitalized and amortized to expense under financial reporting but is tax deductible in full upon payment. c. An asset is revalued upward and no equivalent adjustment is made for tax purposes. d. Depreciation recognized under financial reporting is lower than the depreciation recognized for taxation purposes. Deductible temporary differences a. Rent received in advance is treated as unearned income (liability) under financial reporting but is taxable in full upon receipt of cash.

b. Bad debts expense is recognized for financial reporting when the collectability of accounts receivable becomes doubtful while it is tax deductible only when the accounts receivable is deemed worthless. c. Warranty obligation is recognized as expense when a product is sold under financial reporting but is tax deductible only when actually paid. d. Depreciation recognized under financial reporting is higher than the depreciation recognized for taxation purposes. e. Losses and tax credits that can be carried forward and deducted from future taxable profits. V. PRESENTATION a. Presentation in the Statement of Financial Position Deferred tax assets and deferred tax liabilities are presented separately as noncurrent assets and noncurrent liabilities, respectively. b. Presentation in Statement of Comprehensive Income Tax consequences are accounted for in the same way as related transactions or events. Current and deferred taxes are usually recognized in profit or loss....