CHAPTER 27 – INCOME TAXES

Deferred Tax Accounting – Applicable to all entities whether public or private

Accounting Income – or financial income is the net income for the period before deducting income tax
expense. This is the income appearing in the income statement and computed in accordance with
accounting standards.

Taxable Income – income for the period determined in accordance with the rules established by the
taxation authorities upon which income taxes are payable or recoverable. Income appearing on the
income tax return and computed in accordance with the income tax law.

Total income tax expense – based on accounting income

Current tax expenses / income tax actually payable – based on taxable income

DIFFERENCES BETWEEN ACCOUNTING AND TAXABLE INCOME

• Permanent difference
o Items of revenue and expense which are included in either accounting income or taxable
income but will never be included in the other.
o Nontaxable revenue and nondeductible expenses.
o Do not give rise to deferred tax asset and liability because they have no future tax
consequences.
▪ Interest income on deposits
▪ Dividends received
▪ Life insurance premium
▪ Tax penalties, surcharges and fines

• Temporary difference
o Items of income and expenses which are included in both accounting income and taxable
income but at different time periods.
o Give rise either to a deferred tax liability or deferred tax asset.

DEFERRED TAX LIABILITY

• Shall be recognized for all taxable temporary differences
• Amount of income tax payable in future periods with respect to a taxable temporary difference
• Taxable temporary difference is the temporary difference that will result in future taxable
amount in determining taxable income of future periods.
• Arises when accounting income is higher than taxable income
1. Revenues and gains are included in Accounting Income of the current period but are taxable
in future periods.
2. Expenses and loses are deductible for tax purposes in the current period but deductible for
accounting purposes in future periods.
DEFERRED TAX ASSET
• Shall be recognized for all deductible temporary differences and operating loss carryforward
when it is probable that taxable income will be available against which the deferred tax asset can
be used.
• Operating loss carryforward is an excess of tax deductions over gross income in a year that may
be carried forward to reduce taxable income in a future year.
• Arises when taxable income is higher than accounting income
1. Revenue and gains are included in taxable income of current period but are included in the
accounting income of future periods.
2. Expenses and losses are deducted from accounting income of current period but are
deductible for tax purposes in future periods.

CURRENT TAX LIABILITY AND CURRENT TAX ASSET

• Current tax liability – is the current tax expense or the amount of income tax actually payable.
Classified as current liability.
• Current tax asset – prepaid income tax and shall be classified as current asset.
• A current tax liability or current tax asset shall be measured using the tax rate that has been
enacted and effective at the end of the reporting period.

MEASUREMENT OF DEFERRED TAX ASSET OR LIABILITY

• A deferred tax liability or deferred tax asset shall be measured using the tax rate that has been
enacted by the end of the reporting period and expected to apply to the period when the asset is
realized or the liability is settled.
• Deferred tax liability is presented as noncurrent liability
• Deferred tax asset is presented as noncurrent asset
• Deferred tax asset or liability shall not be discounted

Other details
• Temporary differences can also be differences between the carrying amount of an asset or
liability and its tax base.
• For an asset: If carrying amount exceeds tax base, the difference is a taxable temporary
difference (TTD). TTD x tax rate = deferred tax liability
• Interperiod tax allocation pertains to the recognition of deferred tax assets and liabilities.
• Intraperiod tax allocation pertains to the allocation of income taxes during the period to the
various items of related income that gave rise to taxes.
• Deferred tax expenses (benefit) represents the net change in deferred tax liability and deferred
tax asset for the period. If the increase in deferred tax liability exceeds the increase in deferred
tax asset, the difference is a deferred tax expense.
• Offsetting of deferred tax assets and liabilities is permitted only if
o The entity has legally enforceable right of offset
o The taxes are levied by the same taxing authority