ACCOUNTING FOR INCOME TAX (TOPIC OUTLINE)

A. Accounting Income / Pre-Tax Income / Financial Income vs Taxable Income

1.

Accounting/Pre-tax/Financial Income - the net income of the period

2. Taxable Income income for the period determined in accordance with the rules established by the
tax authorities (BIR)
FINANCIAL INCOME
+/- Permanent Differences
Income SUBJECT to tax
+/- Temporary Differences
TAXABLE INCOME
Tax Rate
Current Income Tax Expense

B. Permanent Differences NO FUTURE TAX CONSEQUENCES

1.

Non-taxable Revenue these are DEDUCTED from Accounting Income

1) Interest income on deposits
2) Dividends received

2. Non-deductible Expenses these are ADDED to Accounting Income

1) Life insurance premium
2) Tax penalties, surcharges and fines
C. Temporary Differences
1.

Timing Differences
Deferred Tax Asset

Deferred Tax Liability

ADDED to Income Subject to Tax

DEDUCTED from Income subject to Tax

*causes Taxable Income > Accounting Income

*causes Taxable Income > Accounting Income

*gives rise to DTA (Deferred Tax Asset)

*gives rise to DTL (Deferred Tax Liability)

a. Advance Payments (advance rental, deposits)

a) Installment Sale - *cash basis taxation

b. Litigation Loss

b) Accelerated Depreciation

c. Research Cost

c) Development Cost

d. Impairment Loss

d) Prepaid Expenses

e. Doubtful Accounts (Provisions in AR)

2. Tax Base and Carrying Amount Differences

Deferred Tax Asset

Deferred Tax Liability

ADDED to Income Subject to Tax

DEDUCTED from Income subject to Tax

*causes Taxable Income > Accounting Income

*causes Taxable Income > Accounting Income

*gives rise to DTA (Deferred Tax Asset)

*gives rise to DTL (Deferred Tax Liability)

When Tax Base of ASSET > Carrying Amount

When Tax Base of ASSET < Carrying Amount

When Tax Base of LIABILITY < Carrying Amount

When Tax Base of LIABILITY > Carrying

Amount

3. Other Temporary Differences

Deferred Tax Asset

Deferred Tax Liability

ADDED to Income Subject to Tax

DEDUCTED from Income subject to Tax

*causes Taxable Income > Accounting Income

*causes Taxable Income > Accounting Income

* gives rise to DTA (Deferred Tax Asset)

* future deductible

a) Asset is revalued DOWNWARD

b) Tax Base of Investment in S, A and JV is
HIGHER than Carrying Amount
c) Operating Loss Carry-forward
* an EXCESS of tax deductions over gross income of the
year (resulting to a negative taxable income) maybe carried
forward to reduce the taxable income of the future years

* gives rise to DTL (Deferred Tax Liability)

* future taxable

a) Asset is revalued UPWARD

*DTL is recognized on Revaluation Surplus
*RS x Tax Rate = DTL

b) Tax base of Investment in S, A and JV is

LOWER than Carrying Amount
c) Cost of business combination allocated to the
identifiable asset and liabilities at FAIR VALUE

4. Unrecognizable Temporary Differences

Deferred Tax Asset

Deferred Tax Liability

1) Goodwill resulting from business combination
(goodwill at initial recognition)
2) Initial recognition of asset and liability
3) Undistributed profit
* the parent, investor or venture is able to control the timing
of the reversal of temporary differences
* it is probable that the temporary differences will not be
reversed in the future

D. Accounting Procedures

1) Determine the Taxable Income

Accounting/Pretax/Financial Income
+/- Permanent Differences
Income Subject to Tax
LESS: Taxable Temporary Differences
ADD: Deductible Temporary Differences
TAXABLE INCOME

2) Determine the Taxable Temporary Differences and Deferred Tax Liability

Taxable Temporary Differences X Tax Rate = Deferred Tax Liability

3) Determine the Deductible Temporary Differences and Deferred Tax Asset

Deductible Temporary Differences X Tax Rate = Deferred Tax Asset

4) Determine the Total Income Tax Expense

Income Tax Subject to Tax/*Accounting Tax X Tax Rate = TOTAL INCOME TAX EXPENSE
*(if there is no Permanent Differences)

Current Income Tax Expense

- OR

ADD: Deferred Tax Liability/Expense

LESS: Deferred Tax Asset/Benefit
TOTAL INCOME TAX EXPENSE
* this will appear in Current-Year Income Statement

5) From the Total tax Expense, distinguish which is:

a) Current Income Tax Expense (Current Tax Liability)
Income Tax Subject to Tax X Tax Rate = Income Tax Payable (CURRENT TAX LIABILITY)
* Income tax Benefit reduces the Current Tax Expense
* Income Tax Asset may be credited directly to Income Tax Expense (Valix:2013 p501)

b) Deferred Tax Expense (Non-current Liability) if any:

Deferred Tax Liability Deferred Tax Benefit = DEFERRED TAX LIABILITY
# when offsetting is allowed #when DTL is GREATER than DTA

6) Prepare Income Statement:

Accounting/Pretax/Financial Income
TOTAL Income Tax Expense:
ADD: Deferred Tax Liability / Increase in Deferred Tax Expense
LESS: Decrease in Deferred Tax Liability
LESS: Deferred Tax Benefit
NET INCOME

xxx
xxx
xxx
xxx

(xxx)
xxx

ADDENDUM:

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