Income Tax and IAS 12 Overview

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Questions and Answers

What happens to non-taxable revenues when reconciling accounting profit to taxable income?

They are added to accounting income.

They are ignored in the reconciliation process.

They are deducted from accounting income. (correct)

They become part of deferred tax assets.

Which of the following best defines a deferred tax liability?

Amounts that do not affect current tax assets.

Amounts recoverable in future periods from tax credits.

Amounts from unused tax losses carried forward.

Amounts of income taxes payable in future periods due to taxable temporary differences. (correct)

From an income statement perspective, a temporary difference arises when:

Taxable profits exceed accounting profits.

The carrying amount of an asset is equal to its tax base.

A revenue or expense is recognized in one period, but reported differently for tax purposes in another. (correct)

An expense is taxed higher than the accounting profit.

What characterizes a taxable temporary difference from a financial position perspective?

The carrying value of the asset exceeds its tax base. Signup and view all the answers

Which of the following is NOT an example of a deferred tax asset?

Non-deductible expenses from the previous tax year. Signup and view all the answers

How is taxable income determined for the purpose of income tax calculation?

By accounting for allowed deductions from taxable revenues Signup and view all the answers

What does the recognition of deferred tax liabilities or assets primarily depend on?

Differences between the tax base and carrying amounts of assets and liabilities Signup and view all the answers

Which of the following represents how current tax liabilities should be accounted for?

They must be recognized as a liability if unpaid. Signup and view all the answers

What defines current tax assets under income tax accounting?

Excess payments made over the prior periods' dues Signup and view all the answers

What distinguishes the term 'current tax liabilities' from 'deferred tax liabilities'?

Current tax liabilities relate to taxes that are due, while deferred tax liabilities pertain to future tax effects. Signup and view all the answers

Under financial reporting principles, what are considered allowed deductions?

Expenses approved by taxation authorities that can be subtracted from taxable revenues Signup and view all the answers

What role does the income tax rate play in calculating current income taxes?

It is applied to the resultant taxable income to compute taxes payable. Signup and view all the answers

Which statement best describes income tax in relation to business operations?

Income tax represents an expense related to the cost of conducting business. Signup and view all the answers

What is the correct entry to recognize the current income tax for a taxable income of P1,200,000 and an income tax rate of 30%?

Income Tax Payable – Current 360,000 / Income Tax Expense 360,000 Signup and view all the answers

Which of the following is an example of a non-deductible expense?

Fines and penalties for violation of law Signup and view all the answers

What is the main difference between accounting profit and taxable income?

Temporary differences and permanent differences Signup and view all the answers

Which of these is classified as non-taxable revenue?

Gain from settlement of life insurance where the corporation is the beneficiary Signup and view all the answers

What presentation does income tax payable have on the statement of financial position?

Current liability Signup and view all the answers

Which of the following is NOT considered a permanent difference?

Depreciation expense for fixed assets Signup and view all the answers

Which of the following statements is false regarding tax-exempt revenues?

Gains subject to final withholding tax are not tax-exempt. Signup and view all the answers

Which of the following correctly categorizes temporary differences?

Timing differences that will eventually reverse Signup and view all the answers

Study Notes

Income Tax

Income tax can be viewed as an expense, or as a distribution of income, like dividends.
The government's role in providing rules and regulations for business is a strong argument for treating income tax as an expense.
Income tax impacts the orderly conduct of business and facilitates smooth operation.
Two types of income/profit are reported: taxable income for tax authorities and profit for financial reporting.
Taxable income is calculated per tax law, profit is according to financial reporting standards.
Cost of doing business (such as income tax), is recognized in the same period as the related income.

IAS 12, Income Taxes

IAS 12 details accounting for current and future tax consequences of asset/liability settlements and financial transactions.
Deferred tax liability (or asset) is recognized by companies due to differences between tax base and carrying amounts.
Current tax effects (assets or liabilities) in the financial statement are either current tax (assets or liabilities) or deferred tax (assets or liabilities).

Current Tax Liabilities and Assets

Unpaid current and prior periods income tax is recognized as a liability.
Excess payments for current and prior periods are recognized as an asset.
Current tax liabilities (or assets) are based on taxable profit (or loss) according to relevant tax authority rules.

PH (Philippine)

National Internal Revenue Code (NIRC) and other Bureau of Internal Revenue (BIR) regulations are applicable.
Taxable revenues are recognized income for tax.
Deductible expenses are those allowed for reductions in tax.
Taxable income/loss is resulted.
The applicable income tax rate is applied to determine the tax.

Example

ABC Company's total taxable revenue in 2022 was P5,000,000 and deductions were P3,800,000, resulting in taxable income of P1,200,000.
A 30% income tax rate resulted in a current tax of P360,000.
The income tax payable is reported as a current liability.

Accounting Profit and Taxable Profit

Accounting profit is calculated before tax using accounting standards.
It's sometimes called pre-tax financial income.
Taxable profit is calculated per tax laws.
There are differences between accounting vs. taxable income: permanent and temporary.

Permanent Differences

Permanent differences are non-taxable revenues or non-deductible expenses.
These items meet criteria to be included in accounting profit but not in taxable profit calculation.

Non-Taxable/Tax-Exempt Revenues

Examples include gains from life insurance settlements where the corporation is the beneficiary, dividends from domestic corporations to other domestic corporations or non-resident corporations, and gains that are already subject to withholding tax.

Non-Deductible Expenses

Examples include fines and penalties, charitable contributions that exceed tax limitations, and life insurance premiums on officers where the corporation is the beneficiary.

Reconciliation

Non-taxable revenue is deducted from accounting profit, non-deductible expenses are added back to get taxable income.

Deferred Tax Liabilities and Assets

Enterprises record deferred tax liability (or asset) in their financial statements, this is in addition to current tax liabilities or assets.
Deferred tax liabilities represent income taxes payable in future periods due to taxable temporary differences.
Deferred tax assets reflect amounts of income taxes recoverable in future periods due to deductible temporary differences, unused tax losses or tax credits.

Temporary Differences

Temporary differences exist between accounting and taxable income.
This occurs when revenue or expenses are included in accounting profit but reported for tax purposes in another period.
Temporary differences can be either taxable (accounting profit > taxable profit) or deductible (accounting profit < taxable profit).

Taxable Temporary Difference

Taxable temporary difference occurs if the carrying value of an asset is more than its tax base, or the carrying value of a liability is less than its tax base.
When accounting profit exceeds taxable profit it is a taxable temporary difference.

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Description

This quiz explores the fundamental concepts of income tax, including its categorization as an expense and its impact on business operations. Additionally, it delves into IAS 12, which covers the accounting treatment of current and deferred tax consequences. Learn about the distinction between taxable income and profit as per financial reporting standards.