CHAPTER 17

ACCOUNTING FOR INCOME TAX

TECHNICAL KNOWLEDGE

To know the distinction between accounting income and taxable income.

To distinguish permanent differences and temporary differences between accounting

income and taxable income.

To identify temporary differences that result to a deferred tax liability.

To identify temporary differences that result to a deferred tax asset.

To know the recognition and measurement of deferred tax asset and deferred tax
liability.

To know the recognition and measurement of current tax asset and current tax
liability.

To distinguish interperiod tax allocation and intraperiod tax allocation.

Introduction
Deferred tax accounting is applicable to all entities, whether public or nonpublic
entities.
A public entity is an entity:
a. Whose equity and debt securities are traded in a stock exchange or over-the-
counter market
b. Whose equity or debt securities are registered with Securities and Exchange
Commission in preparation for sale of the securities.

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

Taxable Income
Taxable Income is the income for the period determined in accordance with the rules
established by the taxation authorities upon which income taxes are payable or
recoverable.
Taxable income is the income appearing on the income tax return and computed in
accordance with the income tax law.
Taxable income may be defined also as the excess of taxable revenue over tax
deductible expense and exemptions for the period as defined by the Bureau of
Internal Revenue.

Differences between accounting and taxable income

Differences between accounting and taxable income arise. Such differences may be
classified into two, namely:
a. Permanent differences
b. Temporary differences
Permanent differences
Permanent differences are items of revenue and expense which are included in either
accounting income or taxable income but will never be included in the other.
Actually, permanent differences pertain to nontaxable revenue and nondeductible
expenses.
Permanent differences do not give rise to deferred tax asset and liability because they
have no future tax consequences.
Examples include the following:
a. Interest income on deposits
b. Dividends received
c. Life insurance premium
When the entity is the beneficiary of a life insurance policy on an officer or
employee, the premium paid by the entity is not deductible as expense for tax
purposes but said premium is an expense for financial reporting purposes.
d. Tax penalties, surcharges and fines are nondeductible.

Temporary differences
Temporary differences are differences between the carrying amount of an asset or
liability and the tax base.
Temporary differences include timing differences.
Timing differences are differences between the accounting income and taxable income
that originate in one period and reverse in one or more subsequent periods.
Timing differences are items of income and expenses which are included in both
accounting income and taxable income but at different time periods.
For every temporary differences, eventually that item’s treatment will be the same
in accounting and taxable income.
Accordingly, temporary diff. give rise either to:
a. Deferred tax liability
b. Deferred tax asset
Kinds of Temporary Differences
a. Taxable temporary difference is the temporary difference that will result
in future taxable amount in determining taxable income of future periods when
the carrying amount of the asset or liability is recovered or settled.
b. Deductible temporary difference is the temporary difference that will
result in future deductible amount in determining taxable income of future
periods when the carrying amount of the asset or liability is recovered or
settled.

Tax base
The tax base of an asset or liability is the amount attributable to the asset or liability
for tax purposes.
Worded in another way, the tax base of an asset or a liability is the amount of the
asset or liability that is recognized or allowed for tax purposes.

Tax base of an asset

The tax base of an asset is the amount that will be deductible for tax purposes against
future income.
For example, if an entity has appropriately capitalized P1,000,000 as software
development cost, the carrying amount is P1,000,000 for accounting purposes.
However, if this amount is allowed as a one-time deduction for tax purposes, the tax
base is zero because the entire amount is expensed in the current year.

Tax base of a liability

The tax base of a liability is normally the carrying amount less the amount that will
be deductible for tax purposes in the future.
For example, if an entity has recognized an estimated warranty liability of P500,000,
the carrying amount is P500,000 for accounting purposes.
However, an estimated warranty cost is deductible only when actually paid.
Thus, the tax base is zero because the estimated warranty cost is a future deductible
amount.
Deferred tax liability
Deferred tax liability is the amount of income tax payable in future periods with
respect to a taxable temporary difference.
A deferred tax liability is the deferred tax consequence attributable to a taxable
temporary difference or future taxable amount.
Actually, a deferred tax liability arises from the following:
a. When the accounting income is higher than taxable income because of timing
differences.
b. When the carrying amount of an asset is higher than the tax base.
c. When the carrying amount of a liability is lower than the tax base.

Accounting income higher than taxable income

Temporary differences that result in accounting income higher than taxable income
include the following:
1. Revenues and gains are included in accounting income of the current period but
are taxable in future periods.
2. Expenses and losses are deductible for tax purposes in the current period but
deductible for accounting purposes in future periods.
a. Accelerated depreciation for tax purposes and straight line depreciation for
accounting purposes.
b. Development cost may be capitalized and amortized over future periods in
determining accounting income but deducted in determining taxable income in
the period in which it is paid.
c. Prepaid expense has already been deducted on a cash basis in determining
taxable income of the current period.

Other taxable temporary differences

Most taxable temporary differences arise because of differences in the timing of the
recognition of the transaction for accounting and tax purposes.
However, there are other taxable temporary differences that technically are not
timing differences but nevertheless give rise to deferred tax liability.
Such other taxable temporary differences include:
 a. Asset is revalued upward and no equivalent adjustment is made for tax
purposes.
b. The carrying amount of investment in subsidiary, associate or joint venture is
higher than the tax base because the subsidiary, associate or joint venture has
not disturbed its entire income to the parent or investor.
c. The cost of a business combination that is accounted for as an acquisition is
allocated to the identifiable assets and liabilities acquired at fair value.

Recognition of a deferred tax liability

PAS 12, paragraph 15, provides that a deferred tax liability shall be recognized for
all taxable temporary differences.
However, a deferred tax liability is not recognized when the taxable temporary
difference arises from:
a. Goodwill resulting from a business combination and which is nondeductible
for tax purposes.
b. Initial recognition of an asset or liability in a transaction that is not a
business combination and affects neither accounting income nor taxable
income.
c. Undistributed profit of subsidiary, associate or joint venture when the
parent, investor or venture is able to control the timing of the reversal of the
temporary difference.

Deferred tax asset

A deferred tax asset is the amount of income tax recoverable in future periods with
respect to deductible temporary difference and operating loss carryforward.
In other words, a deferred tax asset is the deferred tax consequence attributable to a
future deductible amount and operating loss carryforward.
A deferred tax asset arises from the following:
a. When the taxable income is higher than accounting income because of timing
differences.
b. When the tax base of asset is higher than the carrying amount.
c. When the tax base of a liability is lower than the carrying amount.
Taxable income higher than accounting income
Temporary differences that will result to taxable income higher than accounting
income because of timing differences include the following:
1. Revenues and gains are included in taxable income of current period but are
included in accounting income of future periods.
For example, rent received in advance is taxable at the time of receipt but
deferred in future periods for accounting purposes.
2. Expenses and losses are deducted from accounting income of current period
but are deductible for tax purposes in future periods.

Future deductible temporary differences

Future deductible temporary differences include the following:
a. A probable and measurable litigation loss is recognized for accounting
purposes but deducted in determining taxable income when actually incurred
or paid.
b. Estimated product warranty cost is recognized for accounting purposes in the
current period but deducted in determining taxable income when actually
incurred or paid.
c. Research cost is recognized as expense in determining accounting income but
not permitted as a deduction in determining taxable income until a later
period.
d. An impairment loss is recognized for accounting purposes but ignored for tax
purposes until the asset is sold.
e. Doubtful accounts are recognized as expense for accounting purposes but
deductible for tax purposes only when written off as worthless.

Other deductible temporary differences

Temporary differences that technically are not timing differences but nevertheless
give rise to deferred tax asset include the following:
a. Asset is revalued downward and no equivalent adjustment is made for tax
purposes.
b. The tax base of investment in subsidiary, associate or joint venture is higher
than the carrying amount because the subsidiary, associate or joint venture
has suffered continuing losses in current prior years.
Recognition of deferred tax asset
PAS 12, paragraph 24, provides that a 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

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.
Certain entities registered with the Board of Investments are permitted to carry over
net operating loss for tax purposes subject to limitations of the relevant law and
implementing regulations of the Board of Investments.

Method of accounting
a. Income statement approach

This method focuses in timing differences only in the computation of

deferred tax asset or deferred tax liability.

As the method suggests, timing differences affect the income statement of one
period and will reverse in the income statement of one or more subsequent
periods.

b. Statement of financial position approach

This method considers all temporary differences including timing
differences.
There are temporary differences that affect the statement of financial position
only and therefore technically are not timing differences but nonetheless are
recognized in computing deferred tax asset or liability.

Accounting procedures
The recognition of a deferred tax asset or deferred tax liability is known as interperiod
tax allocation.
1. Determine the “taxable income”
The taxable income multiplied by the tax rate equals the current tax expense.
 Income tax expense xx
Income tax payable xx

Current tax expense is the amount of income tax paid or payable for a year as
determined by applying the provisions of the enacted tax law to the taxable
income.

2. Determine the “taxable temporary differences”

The amounts of taxable temporary differences multiplied by the tax rate equals
the deferred tax liability.
Income tax expense xx
Deferred tax liability xx

3. Determine the “deductible temporary differences”

The amount of deductible temporary differences multiplied by the tax rate equals
the deferred tax asset.
Deferred tax asset xx
Income tax benefit xx

The “income tax benefit account” reduces the current tax expense for the year and
is a deduction from current tax expense.
The deferred tax asset may be credited directly to “income tax expense”.

4. The total income tax expense for the year is the current tax expense plus the
deferred tax expense arising from taxable temporary differences minus the
income tax benefit arising from deductible temporary differences.
The total income tax expense for the year is equal to the accounting income subject
to tax multiplied by the tax rate, assuming there is no future enacted income tax
rate.

Illustration 1 – Deferred tax liability

In 2019, an entity reported in accounting income a gross profit on installment sale of
P1,000,000 but not in taxable income. This temporary difference is expected to be
reported in taxable income equally in 2020 and 2021. The income tax rate is 30%.
 2019 2020 2021
Accounting
4,000,000 5,000,000 7,000,000
income
Taxable income 3,000,000 5,500,000 7,500,000

Since the temporary difference results to a higher accounting income in 2019, there
is a deferred tax liability.

Journal entries in 2019

1. To record the current tax expense:
Income tax expense 900,000
Income tax payable (30% x 3,000,000) 900,000

2. To record the deferred tax liability:

Income tax expense (30% x 1,000,000) 300,000
Deferred tax liability 300,000

The income tax payable is classified as a current liability.

The deferred tax liability is classified as noncurrent liability.

Income statement presentation for 2019

Income before income tax 4,000,000
Income tax expense:
Current tax expense 900,000
Deferred tax expense 300,000 1,200,000

Net Income 2,800,000

Observe that the accounting income subject to tax of P4,000,000 multiplied by 30%
equals P1,200,000, which is the total income tax expense for the year.

Journal entries in 2020

1. To record the current tax expense:
 Income tax expense 1,650,000
Income tax payable (30% x 5,500,000) 1,650,000

2. To decrease the deferred tax liability:

Deferred tax liability 150,000
Income tax expense (30% x 500,000) 150,000

Income statement presentation for 2020

Income before income tax 5,000,000
Income tax expense:
Current tax expense 1,650,000
Decrease in deferred tax liability ( 150,000) 1,500,000

Net Income 3,500,000

Journal entries in 2021

3. To record the current tax expense:
Income tax expense 2,250,000
Income tax payable (30% x 7,500,000) 2,250,000

4. To decrease the deferred tax liability:

Deferred tax liability 150,000
Income tax expense 150,000

The deferred tax liability on December 31, 2021 has a zero balance because the
taxable temporary difference is now fully reversed.

Income statement presentation for 2021

Income before income tax 7,000,000
Income tax expense:
Current tax expense 2,250,000
Deferred tax expense ( 150,000) 2,100,000

Net Income 4,900,000

Illustration 2 – Deferred tax asset
In 2019, an entity received an advance rental payment of P600,000 which was subject
to tax but not reported in accounting income until 2020. The income tax rate is 30%.

The income statement and tax return showed the following:

2019 2020
Accounting income subject to tax 5,000,000 7,000,000
Taxable Income 5,600,000 6,400,000

Since the temporary difference results to a higher taxable income in 2019, there is a
deferred tax asset.

Journal entries in 2019

1. To record the current tax expense:
Income tax expense 1,680,000
Income tax payable (30% x 5,600,000) 1,680,000

2. To record the deferred tax asset:

Deferred tax asset 180,000
Income tax benefit (30% x 600,000) 180,000

The deferred tax asset is classified as noncurrent asset.

Income statement presentation for 2019

Income before income tax 5,000,000
Income tax expense:
Current tax expense 1,680,000
Income tax benefit ( 180,000) 1,500,000

Net Income 3,500,000

Journal entries in 2019

1. To record the current tax expense:
 Income tax expense 1,920,000
Income tax payable (30% x
1,920,000
6,400,000)

2. To decrease the deferred tax asset:

Income tax expense 180,000
Deferred tax asset 180,000

Income statement presentation for 2020

Income before income tax 7,000,000
Income tax expense:
Current tax expense 1,920,000
Decrease in deferred tax asset ( 180,000) 2,100,000

Net Income 4,900,000

Illustration 3 – Deferred tax asset and liability

An entity reported the following for the year ended December 31, 2019.
Accounting income per book 6,000,000
Nondeductible expenses 500,000
Nontaxable revenue 300,000
Doubtful accounts 200,000
Estimated warranty cost that had been recognized
as expense
in 2019 when the product sales were made but
is
deductible for tax purposes when paid 400,000
Accounting depreciation 600,000
Tax depreciation 800,000
Gross income on installment sale included in
accounting income
but taxable only in 2020 100,000
Income tax rate 30%

Computation
Accounting income per book 6,000,000
Permanent differences:
 Nondeductible expenses 500,000
Nontaxable revenue ( 300,000)

Accounting income subject to tax 6,200,000

Deductible temporary differences:
Doubtful accounts 200,000
Estimated warranty cost 400,000
Taxable temporary differences:
Excess tax depreciation ( 200,000)
Gross income on installment sale ( 100,000)

Taxable income 6,500,000

The permanent differences do not give rise to deferred tax asset or deferred tax liability
and thus eliminated from the reported accounting income.
In other words, the accounting income subject to tax must exclude permanent
differences.

Journal entries in 2019

1. To record the current tax expense:
Income tax expense 1,950,000
Income tax payable (30% x
1,950,000
6,500,000)

2. To record the deferred tax asset:

Deferred tax asset 180,000
Income tax benefit 180,000

Doubtful accounts 200,000

Estimated warranty cost 400,000

Total deductible temporary differences 600,000

Multiply by 30%

Deferred tax asset 180,000

3. To record the deferred tax liability:

 Income tax expense 90,000
Deferred tax liability 90,000

Excess tax depreciation 200,000

Gross income on installment sale 100,000

Total taxable temporary differences 300,000

Multiply by 30%

Deferred tax liability 90,000

Income statement presentation for 2019

Income before income tax 6,000,000
Income tax expense:
Current tax expense 1,950,000
Income tax benefit ( 180,000)
Deferred tax expense 90,000 1,860,000

Net Income 4,140,000

Observe that the accounting income subject to tax of P6,200,000 multiplied by 30%
equals P1,860,000 which is the total income tax expense for the year.

Net deferred tax expense or benefit

The difference between the change in deferred tax asset and the change in deferred
tax liability is the net deferred tax expense or benefit.

Observe the following using the preceding illustration:

Tax benefit from increase in deferred tax asset ( 180,000)
Tax expense from increase in deferred tax
90,000
liability

Net deferred tax benefit ( 90,000)

Needless to say, if the tax expense from the increase in deferred tax liability is more
than the tax benefit from the increase in deferred tax asset, there is a net deferred
tax expense.

Current tax liability and current tax asset

A current tax liability is the current tax expense or the amount of income tax
actually payable. This is classified as current liability.
Under our income tax law, income tax for corporations is payable every quarter.
If the amount of tax already paid for the current period exceeds the amount actually
payable for the period, the excess is recognized as a current tax asset.
Actually, a current tax asset is a 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.

Presentation of deferred tax asset or liability

PAS 12, paragraph 70, provides that when an entity makes a distinction between
current and noncurrent assets and liabilities, it shall not classify deferred tax assets
as current assets and deferred tax liabilities as current liabilities.
Accordingly, a deferred tax asset shall be classified as noncurrent asset and a
deferred tax liability shall be classified as noncurrent liability regardless of
reversal period.
Moreover, a deferred tax asset or deferred tax liability shall not be discounted.

Offset of deferred tax asset and liability

Under PAS 1, assets and liabilities shall not be offset unless required or permitted
by another standard.
PAS 12, paragraph 74, provides that an entity shall offset a deferred tax asset against
a deferred tax liability when:
a. The deferred tax asset and deferred tax liability relate to income taxes levied
by the same tax authority.
b. The entity has a legal enforceable right to set off a current tax asset against a
current tax liability.
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.
For example, the tax rate of 30%is applicable to the taxable year 2019. By December
31, 2019, a new tax law has been enacted imposing a 25% tax rate effective taxable
year 2020.
The current tax liability or current tax asset is measured at 30% but the deferred tax
liability or deferred tax asset is measured using the new enacted tax rate of 25%.

Intraperiod and interperiod tax allocation

Intraperiod tax allocation is the allocation of income tax expense to the various
revenues that brought about the tax.
Thus, the total income tax expense is allocated to income from continuing operations,
income from discontinued operations and prior period errors or items directly charged
or credited to retained earnings.
Interperiod tax allocation is the recognition of a deferred tax asset or deferred tax
liability.

Statement of financial position approach

To account for a deferred tax asset or liability, a statement of financial position that
shows all the assets and liabilities at their carrying amount is first prepared.
The following procedures are then followed:
1. Determine the tax base of the assets and liabilities in the statement of financial
position.
2. Compare the carrying amounts with the tax base.
3. The difference between the carrying amount and tax bases normally will result
to a deferred tax asset or liability.
4. Permanent differences do not give rise to deferred tax asset or liability.
5. Apply the tax rate to the temporary differences.
6. Determine the beginning and ending balance of deferred tax asset or liability.
7. Recognize the net change between the beginning and ending balance of
deferred tax asset or liability.
Illustration 1 – Deferred tax liability
Excelsior Company reports pretax accounting income or P5,000,000 for the year
ended December 31, 2019. This income includes uncollected installment receivable of
P500,000.
The entity’s installment sales are taxable when cash is collected, so the uncollected
installment receivable would not be part of taxable income.
The income tax rate is 30%. The entity had no deferred taxes at the beginning of 2019.
Pretax accounting income 5,000,000
Installment receivable on December 31, 2019 500,000
Taxable income for 2019 4,500,000

Current tax expense (30% x 4,500,000) 1,350,000

Income tax expense 1,350,000

Income tax payable 1,350,000

The accounts on December 31, 2019 have the same basis for accounting and tax
purposes, except the installment receivable.
Carrying amount of installment receivable 500,000
Tax base 0
Taxable temporary difference 500,000

Deferred tax liability – 12/31/2019 (30% x 500,000) 150,000

Income tax expense 150,000

Deferred tax liability 150,000

If the carrying amount of an asset is higher than the tax base, the difference is a
future taxable amount and therefore, there is a deferred tax liability.
The tax base of the installment receivable is zero because the installment sales are
taxable when collected.

Income statement presentation for 2019

Income before income tax 5,000,000
Income tax expense:
 Current tax expense 1,350,000
Decrease in deferred tax
1,500,000
asset 150,000

Net Income 3,500,000

Continuation
Continuing the illustration, Excelsior Company reports pretax accounting income of
P6,000,000 for the year ended December 31, 2020.
This accounting income includes uncollected installment receivable of P300,000 on
December 31, 2020.
The installment receivable for P500,000 on December 31, 2019 is collected in 2020.

Computation for taxable income for 2020

Pretax accounting income 6,000,000
Installment receivable on December 31, 2019
collected in 2020 500,000
Installment receivable – December 31, 2019 ( 300,000)
Taxable income 6,200,000

Current tax expense (30% x 6,200,000) 1,860,000

Deferred tax liability on December 31, 2020

Carrying amount of installment receivable -
12/31/2020 300,000
Tax base 0
Taxable temporary difference 300,000

Deferred tax liability - December 31, 2020

(30% x 300,000) 90,000
Deferred tax liability - December 31, 2019 150,000

Decrease in deferred tax liability ( 60,000)

Journal entries in 2020
1. To record the current tax expense:
Income tax expense 1,860,000
Income tax payable 1,860,000

2. To record the decrease in the deferred tax asset:

Deferred tax liability 60,000

Income tax expense 60,000

Income statement presentation for 2020

Income before income tax 6,000,000
Income tax expense:
Current tax expense 1,860,000
Decrease in deferred tax liability ( 60,000) 1,800,000

Net Income 4,200,000

Notice that the total income tax expense is simply computed by multiplying
accounting income of P6,000,000 by the tax rate of 30% or P1,800,000.
This holds true if there is no change in the tax rate and the differences between
accounting income and taxable income are income statement temporary differences.

Illustration 2 – Deferred tax asset

Simple Company reports pretax accounting income of P7,000,000 for the year ended
December 31, 2019.
An unearned rent income of P800,000 is excluded from this income.
Simple Company follows the cash basis for tax purposes and the accrual basis for
accounting purposes. Accordingly, such amount is included in taxable income.
The income tax rate is 30%.
Pretax accounting income 7,000,000
Unearned rent income – December 31, 2019 800,000
Taxable income for 2019 7,800,000
Current tax expense (30% x 7,800,000) 2,340,000

Income tax expense 2,340,000

Income tax payable 2,340,000

On December 31, 2019, the statement of financial position accounts have the same
basis for accounting and tax purposes, except the unearned rent income.
Carrying amount of unearned rent income 300,000
Tax base 0
Deductible temporary difference 300,000

Deferred tax asset – 12/31/2019 (30% x 800,000) 240,000

Income tax expense 150,000

Deferred tax liability 150,000

If the tax base of a liability is lower than the carrying amount, the difference is a
future deductible amount and therefore, there is a deferred tax asset.

Income statement presentation for 2019

Income before tax 7,000,000
Income tax expense:
Current tax expense 2,340,000
Decrease in deferred tax benefit ( 240,000) 2,100,000

Net Income 4,900,000

Continuation
Continuing the illustration, Simple Company reports pretax accounting income of
P8,000,000 for the year ended December 31, 2020.
The unearned rent income on December 31, 2019 is included in the reported
accounting income.
On December 31, 2020, the unearned rent income is P1,500,000.
Moreover, Simple Company reports an estimated liability for product warranty of
P500,000 on December 31, 2020.
The warranty cost is deductible only for tax purposes when actually paid.

Taxable income for 2020

Pretax accounting income 8,000,000
Unearned rent income – December 31, 2019 ( 800,000)
Unearned rent income – December 31, 2020 1,500,000
Warranty liability 500,000
Taxable income 9,200,000

Current tax expense (30% x 9,200,000) 2,760,000

Computation of deferred tax asset

On December 31, 2020, the statement of financial position accounts have the same
basis for accounting and tax purposes except the following:
Carrying amount Tax base Difference
Unearned rent
1,500,000 0 1,500,000
income
Warranty liability 500,000 0 500,000
Total deductible temporary
2,000,000
differences

Deferred tax asset – 12/31/2020 (30% x 2,000,000) 600,000

Deferred tax asset – 12/31/2019 240,000

Decrease in deferred tax asset 360,000

Journal entries on December 31, 2020

1. To record the current tax expense:
Income tax expense 2,760,000
Income tax payable 2,760,000

2. To record the increase in deferred tax asset:

Deferred tax asset 360,000
Income tax benefit 360,000
Income statement presentation for 2020
Income before tax 8,000,000
Income tax expense:
Current tax expense 2,760,000
Income tax benefit ( 360,000) 2,400,000

Net Income 5,600,000

Notice again, the total income tax expense is computed by multiplying P8,000,000 by
30% or P2,400,000.

Comprehensive illustration
On December 31, 2019, the accounts of Easy Company have the same basis for
accounting and tax purposes, except:
Carrying amount Tax base Difference
Computer software
4,000,000 0 4,000,000
cost
Building 47,500,000 45,000,000 2,500,000

In January 2019, Easy Company incurred cost of P5,000,000 for the development of
a computer software product.
Considering the technical feasibility of the product, this cost was capitalized and
amortized over 5 years for accounting purposes using the straight line method.
Computer software cost 5,000,000
Amortization for 2019 (5,000,000/5) (1,000,000)

Carrying amount – December 31, 2019 4,000,000

The computer software cost has a zero tax base because the total amount was
expensed in 2019 for tax purposes.
The building was acquired on January 1, 2019 for P50,000,000 and depreciated using
the straight line at 5% for accounting purposes and 10% for tax purposes.
Building 50,000,000
Accumulated depreciation (50,000,000 x 5%) ( 2,500,000)
Carrying amount - December 31, 2019 47,500,000
Building 50,000,000
Accumulated depreciation (50,000,000 x 10%) ( 5,000,000)
Tax base - December 31, 2019 45,000,000

Computer software cost 4,000,000

Building (47,500,000 - 45,000,000) 2,500,000
Total taxable temporary differences 6,500,000

Deferred tax liability - December 31, 2019

(30% x 6,500,000) 1,950,000

Journal entry
If the carrying amount of an asset is higher than the tax base, the difference is a
future taxable temporary difference and therefore, there is a deferred tax liability.
The income tax rate is 30%.
Journal entry to record the deferred tax liability on December 31, 2019.
Income tax expense 1,950,000
Deferred tax liability 1,950,000

Computation for taxable income

If the pretax accounting income for 2019 is P10,000,000, the taxable income is
computed as:
Pretax accounting income 10,000,000
Computer software cost entirely expensed
in 2019 (5,000,000 – 1,000,000) ( 4,000,000)
Excess tax depreciation (5,000,000 – 2,500,000) ( 2,500,000)
Taxable income 3,500,000

Current tax expense (30% x 3,500,000) 1,050,000

Journal entry to record the current tax expense for 2019:

Income tax expense 1,050,000
Income tax payable 1,050,000
Income statement presentation for 2019
Income before tax 10,000,000
Income tax expense:
Current tax expense 1,050,000
Deferred tax expense 1,950,000 3,000,000

Net Income 7,000,000

As a proof, since there are no permanent differences, the total income tax expense is
equal to the accounting income of P10,000,000 multiplied by 30% or P3,000,000.

Continuation
Continuing the illustration, on December 31, 2020, the statement of financial position
accounts have the same basis for accounting and tax purposes, except the following:
Carrying
Tax base Difference
amount
Computer software cost 3,000,000 0 4,000,000
Building
45,000,000 45,000,000 2,500,000
Accrued liability – health
2,000,000 0 2,000,000
care

In January 2020, Easy Company entered into an agreement with the employees to
provide health care benefits. The cost of such plan for 2020 is P2,000,000.
This amount was accrued as expense in 2020 for accounting purposes. However,
health care benefits are deductible for tax purposes only when actually paid.
Computer software cost 3,000,000
Building 5,000,000
Total taxable temporary differences 8,000,000

Deferred tax liability – December 31, 2020

(30% x 8,000,000) 2,400,000
Deferred tax liability – December 31, 2019 1,950,000
Increase in deferred tax liability 450,000

Accrued liability – health care 2,000,000

Deferred tax liability – December 31, 2020 (30% x 2,000,000) 600,000

If the tax base of a liability is lower than the carrying amount, the difference is a
future deductible amount and therefore, there is a deferred tax asset.

Journal entries in 2020

1. To record the increase in deferred tax liability:
Income tax expense 450,000
Deferred tax liability 450,000

2. To record the deferred tax asset:

Deferred tax asset 600,000
Income tax benefit 600,000

Computation of taxable income for 2020

If the pretax accounting income for 2020 is P15,000,000, the taxable income is
computed as:
Pretax accounting income 15,000,000
Reversal of amortization of software cost
Excess tax depreciation 1,000,000
Health care benefits not yet deductible for tax ( 2,500,000)
purposes 2,000,000
Taxable income 15,500,000

Current tax expense (30% x 15,500,000) 4,650,000

Journal entry to record the current tax expense for 2020:

Income tax expense 4,650,000
Income tax payable 4,650,000

Income statement presentation for 2020

Income before tax 15,000,000
Income tax expense:
Current tax expense 4,650,000
 Deferred tax expense 450,000
Income tax benefit ( 600,000) 4,500,000

Net Income 10,500,000

As a proof, the total income tax expense is equal to P15,000,000 multiplied by 30% or
P4,500,000.

Net deferred tax

Deferred tax expense 450,000
Income tax benefit (600,000)

Net deferred tax benefit 150,000

Illustration – revaluation
On January 1, 2014, Simple Company acquired an equipment for P6,000,000.
The equipment is depreciated using a straight line method based on a 15-year life
with no residual value.
On January 1, 2019, after 5 years, the equipment was revalued at a replacement cost
of P6,750,000.
The income tax rate is 30%.
Replacement
Cost Appreciation
cost
Equipment 6,000,000 6,750,000 750,000
Accumulated
depreciation
(6,000,000 /15 x
2,000,000
5)
(6,750,000 /15 x
2,250,000 250,000
5)
Carrying amount/sound value/
revaluation surplus 4,000,000 4,500,000 500,000

Equipment at cost 6,000,000

Accumulated depreciation 2,000,000
Carrying amount - January 1, 2019 4,000,000
Equipment at replacement cost 6,750,000
Accumulated depreciation 2,250,000
Sound value - January 1, 2019 4,000,000

Sound value 4,500,000

Carrying amount 4,000,000
Revaluation surplus - January 1, 2019 500,000
Deferred tax liability (30% x 500,000) 150,000

Net revaluation surplus 350,000

The revaluation surplus is a future taxable amount and therefore, there is a deferred
tax liability.

Journal entries in 2019

1. To record the revaluation:
Equipment 750,000
Accumulated depreciation 250,000
Revaluation surplus 500,000

2. To recognize the deferred tax liability on the revaluation surplus:

Revaluation surplus 150,000
Deferred tax liability 150,000

Note that the deferred tax liability is charged to equity, meaning, revaluation
surplus.

3. To record the annual depreciation subsequent to revaluation (remaining life of

equipment is 10 years):
Depreciation (4,500,000/10) 450,000
Accumulated depreciation 450,000

The depreciation is based on the sound value or depreciated replacement cost for
accounting purposes.
4. To record the annual realization of the revaluation surplus:
Revaluation surplus 35,000

Retained earnings 35,000

Revaluation surplus 500,000

Deferred tax liability (150,000)
Net revaluation surplus 350,000

Annual realization (350,000 / 10) 35,000

The revaluation surplus is a component of other comprehensive income and

subsequently reclassified through equity or retained earnings.

Computation of taxable income

If the income before depreciation and before tax is P3,000,000, the taxable income is
computed as:
Income before depreciation and tax 3,000,000
Tax depreciation based on cost
(4,000,000 /10) ( 400,000)
Taxable income 2,600,000

Current tax expense (30% x 2,600,000) 780,000

Journal entry to record the current tax expense:

Income tax expense 780,000
Income tax payable 780,000

Computation of deferred tax liability

On December 31, 2019, the taxable temporary difference as a result of the revaluation
is computed as:
Equipment at replacement cost 6,750,000
Accumulated depreciation:
January 1, 2019 2,250,000
 Depreciation on revalued amount for 2019 450,000 2,700,000
Carrying amount - December 31, 2019 4,050,000

Equipment at cost 6,000,000

Accumulated depreciation:
January 1, 2019 2,000,000
Depreciation on cost for 2019 400,000 2,400,000
Tax base - December 31, 2019 3,600,000

Carrying amount 4,050,000

Tax base 3,600,000
Taxable temporary difference 450,000

Deferred tax liability - 12/31/2019 (30% x

450,000) 135,000
Deferred tax liability - January 1, 2019 150,000
Decrease in deferred tax liability (15,000)

Journal entry to record the decrease in deferred tax liability:

Deferred tax liability 15,000

Income tax expense 15,000

Income statement presentation for 2019

Income before depreciation and tax 3,000,000
Depreciation on revalued amount (450,000)

Income before income tax 2,550,000

Income tax expense:
Current tax expense 780,000
Decrease in deferred tax liability (15,000) 765,000
Net Income 1,785,000
Revaluation surplus realization 35,000

Total effect on retained earnings 1,820,000

The total income tax expense is equal to the accounting income of P2,550,000
multiplied by 30% or P765,000.
Recognition of deferred tax asset for unrealized loss
PAS 12 has been amended to clarify how to recognize a deferred tax asset for
unrealized loss on debt investment measured at fair value through other
comprehensive income.
On January 1, 2019, an entity purchased bonds at the face amount of P2,000,000.
The business model in managing the financial asset is to collect contractual cash
flows that are solely payments of principal and interest and also to sell the bonds in
the open market.
Under this business model, the entity id required to measure the bond investment at
fair value through other comprehensive income or FVOCI.
The bonds mature on December 31, 2021 and pay 10% interest annually every
December 31.
The tax law states that the tax base of the bond investment is cost. Any gain on the
bond investment is taxable when realized and any loss on the bond investment is
deductible when incurred. The income tax rate is 30%.
The bonds are quoted at 95 and 90 on December 31, 2019 and 2020, respectively.
The entity collected the bond investment on December 31, 2021 at the face amount of
P2,000,000.
Fair value - December 31, 2019 (95% x 2,000,000) 1,900,000
Tax base - historical cost 2,000,000
Unrealized loss for 2019 before tax - OCI (100,000)

The fair value on December 31, 2019 is actually the carrying amount of the bond
investment.
The tax base is equal to the historical cost of P2,000,000.
The unrealized loss is a future deductible amount that gives rise to a deferred tax
asset of P100,000 times 30% or P30,000.

Journal entries in 2019

1. To record the acquisition:
Financial asset – FVOCI 2,000,000
Cash 2,000,000

2. To record the interest received:

 Cash (10% x 2,000,000) 200,000
Interest income 200,000

3. To record the unrealized loss for 2019:

Unrealized loss – OCI 100,000
Financial asset – FVOCI 100,000

Fair value - December 31, 2019

(95% x 2,000,000) 1,900,000
Historical cost (2,000,000)
Unrealized loss – OCI for 2019 before tax (100,000)

4. To record the deferred tax asset related to the unrealized loss for 2019:
Deferred tax asset (30% x 100,000) 30,000

Unrealized loss – OCI 30,000

The unrealized loss is a future deductible amount giving rise to a deferred tax
asset.
Paragraph 61A of PAS 12 states that deferred taxes arising from other
comprehensive income shall be recognized in other comprehensive income.
The amount of unrealized loss to be recognized in the statement of comprehensive
income for 2019 is P100,000 minus P30,000 or P70,000.

Journal entries for 2020

1. To record the interest received:
Cash 200,000
Interest income 200,000

2. To record the increase in unrealized loss for 2020:

Unrealized loss – OCI 100,000
Financial asset – FVOCI 100,000

Fair value – December 31, 2020

(90% x 2,000,000) 1,800,000
Historical cost – tax base (2,000,000)
Cumulative unrealized loss – December 31, 2020 (200,000)
Unrealized loss – OCI for 2019 before tax (100,000)
Unrealized loss – OCI for 2020 before tax (100,000)

3. To record the increase in deferred tax asset for 2020:

Deferred tax asset 30,000
Unrealized loss – OCI 30,000

Deferred tax asset – December 31, 2020

(30% x 200,000) 60,000
Deferred tax asset – December 31, 2019 30,000
Decrease in deferred tax asset 30,000

Journal entries for 2020

1. To record the interest received:
Cash 200,000
Interest income 200,000

2. To reverse the deferred tax asset related to OCI due to the collection of the bond
investment on December 31, 2021:
Unrealized loss – OCI 30,000
Deferred tax asset 30,000

3. To record the collection of the bond investment at maturity on December 31, 2021:
Cash 2,000,000
Financial asset – FVOCI 2,000,000
Unrealized loss – OCI 200,000

Assume the investment was sold on July 1, 2021 for P2,500,000

plus accrued interest
1. To record interest received for six months:
Cash (2,000,000 x 10% x 6/12) 200,000
Interest income 200,000
2. To reverse the deferred tax asset:
Unrealized loss – OCI 60,000
Deferred tax asset 60,000

3. To record the sale on July 1, 2021:

Cash 2,500,000
Financial asset – FVOCI 1,800,000
Unrealized loss – OCI 200,000
Gain on sale of bond investment 500,000

Sales price 2,500,000

Historical cost 2,000,000
Gain on sale of bond investment 500,000

Disclosures
The disclosure requirements for income tax are quite extensive. However, the key
elements are:
1. Components of the total income tax expense, for example, current tax expense,
deferred tax expense and deferred tax benefit.
2. An explanation of the relationship between total income tax expense and
accounting profit.
3. The applicable tax rate, the basis on which the tax rate has been applied, and
the explanation for any change in the applicable tax rate.
4. The aggregate amount of current and deferred tax relating to items recognized
directly in equity.
5. The aggregate amount of temporary differences associated with investments
in subsidiary, associate and joint venture for which no deferred tax liability has
been recognized.
6. Analysis of the beginning and ending balance of deferred tax asset and
deferred tax liability.
CHAPTER 20

OTHER EMPLOYEE BENEFITS

TECHNICAL KNOWLEDGE

To identify short-term employee benefits.

To know the recognition and measurement of short-term employee

benefits.

To identify other long-term employee benefits.

To know the recognition and measurement of other long employee benefits.

To know the recognition and measurement of termination benefits.

Short-term employee benefits
Short-term employee benefits are employee benefits other than termination benefits
which are expected to be settled wholly within twelve months after the end of annual
reporting period in which the employees render the related service.
Short-term employee benefits include the following:
a. Salaries, wages and social security contributions
b. Short-term compensated or paid absences such as paid annual leave and paid
sick leave
c. Profit sharing and bonuses payable within twelve months
d. Nonmonetary benefits, such as medical care, housing, car and free or
subsidized goods.

Recognition and measurement

Accounting for short-term employee benefits is fairly straightforward because there
are no actuarial assumptions.
There is no requirement to discount future benefits because such benefits are all, by
definition, payable no later than twelve months after the end of the current
reporting period.
There is no possibility of actuarial gain or loss because short-term employee benefits
are measured on an undiscounted basis.

Accounting procedures
The rules for short-term employee benefits are essentially an application for basic
accounting principles and practice.
a. Unpaid short-term employee benefits at the end of the accounting period shall
be recognized as accrued expense.
b. Any short-term benefits paid in advance shall be recognized as a prepayment,
to the extent, that it will lead to a reduction in future payments or a cash
refund.
c. The cost of short-term benefits shall be recognized as expense in the period
when the economic benefit is given, except when such cost may be included
within the cost of an asset, for example, property, plant and equipment in
accordance with another standard.
Short-term compensated or paid absences
An entity may pay employees for absences for various reasons such as vacation,
sickness and short-term disability, maternity or paternity and military service.
Entitlement to paid absences falls into two categories, namely accumulating and
nonaccumulating absences.
Accumulating paid absences are those that are carried forward and can be used in
future periods if the current period’s entitlement is not used in full.
Accumulating paid absences may be either:
a. Vesting – meaning, employees are entitled to a cash payment for unused
entitlement on leaving the entity.
b. Nonvesting – meaning, employees not entitled to a cash payment for unused
entitlement on leaving the entity.

Nonaccumulating paid absences are those that re not carried forward. Such benefits
lapse if the current period’s entitlement is not used and do not entitle the employees
to a cash payment for unused entitlement on leaving the entity.
This is commonly the case for sick pay, maternity or paternity leave, and paid
absences for military service.

Illustration
Employees are each entitled to two weeks of paid vacation leave. During the year, the
employees earned 1,000 weeks of vacation leave and used 600 weeks.
The current salary of the employees is an average of P2,000 per week and the salary
is expected to increase by P200 per week or a future weekly salary of P2,200.

Accumulating paid vacation leave

1. To record the used vacation weeks:
Vacation pay expense (600 x P2,000) 1,200,000
Cash 1,200,000

2. To accrue the unused vacation weeks:

Vacation pay expense (400 weeks x P2,200) 880,000
Accrued vacation pay 880,000
PAS 19R, paragraph 13, provides that an entity shall recognize as expense the
expected cost of the short-term benefit in the form of paid absences.

Nonaccumulating paid vacation leave

1. To record the used vacation weeks:
Vacation pay expense 1,200,000
Cash 1,200,000

2. To accrue the unused vacation weeks:

No accrual is necessary because nonaccumulating paid absences are recognized
when the absences occur and lapse when the entitlement is not used in full.

Another illustration
Employees are each entitled to 10 working days of paid sick leave for each year.
Unused sick leave may be carried forward for one calendar year only.
Sick leave is taken out of any balance brought forward from the previous year and
then out of the current year’s entitlement on a FIFO basis.
On January 1, 2019, the accrued sick leave pay was measured at P20,000. On
December 31, 2019, the sick leave records of employees A, B and C are as follows:
A B C
Daily wage 1,000 1,500 2,000
Unused sick leave on January 1, 2019 8 4 2
Sick leave earned in 2019 10 10 10
Wage increase effective January 1, 2019 6 6 8
5% 10% 15%

A B C
Unused sick leave - January 1, 2019 8 4 2
Sick leave taken in 2019 from previous year (6) (4) (2)
Sick leave on 1/1/2019 not taken - forfeited 2 0 0

Sick leave earned in 2019 10 10 10

Sick leave taken in 2019 from current year - (2) (6)
Unused sick leave - December 31, 2019 10 8 4
No that the unused sick leave of employee A on January 1, 2019 is 8 days. However,
only 6 days are taken in 2019.
The balance of 2 days cannot be carried forward anymore because the sick leave is
good only for the next calendar year.
In other words, the maximum unused sick leave for each year is only 10 days which
can be carried forward for one calendar year.
In the case of B, the sick leave taken is 4 days from previous year and 2 days from
2019 or a total of 6 days taken.
In the case of C, the sick leave taken is 2 days from previous year and 6 days from
2019 or a total of 8 days taken.
Expected daily wage
A (1,000 x 105%) 1,050
B (1,500 x 110%) 1,650
C (2,000 x 115%) 2,300

Accrued sick leave pay – December 31, 2019:

A (1,050 x 10 days) 10,500
B (1,650 x 8 days) 13,200
C (2,300 x 4 days) 9,200

Total accrued liability - December 31, 2019 32,900

Accrued sick leave pay - January 1, 2019 20,000

Increase in accrued liability 12,900

Journal entry on December 31, 2019

Sick leave pay expense 12,900
Accrued sick leave pay 12,900

Profit-sharing and bonus plans

Under some profit-sharing plans, employees shall receive share of the profit only if
they remain with the entity for a specified period.
Such plans create a constructive obligation as employees render service that
increases the amount to be paid if they remain in service until the end of the specified
period.
The measurement of such constructive obligation reflects the possibility that some
employees may leave without receiving profit-sharing payments.

Recognition and measurement

PAS 19R, paragraph 19, provides that an entity shall recognize the expected cost of
profit sharing and bonus payment when all of the following conditions are present:
a. The entity has a present legal or constructive obligation to make such payment
as a result of past event.
b. A reliable estimate of the obligation can be made.
A present obligation exists when the entity has no realistic alternative but to make
the payment.

Illustration
A profit sharing bonus plan requires an entity to pay employees 5% of income for the
year. The entity reported income of P20,000,000 for the current year. The bonus
payment is to be made at the end of the following year.

Journal entries
1. To record the bonus in the current year:
Bonus expense (5% x 20,000,000) 1,000,000
Bonus payable 1,000,000

2. To record the bonus payment at the end of the following year:

Bonus payable 1,000,000
Cash 1,000,000

Another illustration
A profit sharing bonus plan requires an entity to pay 10% of income for the year to
employees who serve throughout the current year and who will continue to serve
throughout the following year.
The entity reported income of P50,000,000 for the current year. The entity expects to
save 5% of the maximum possible bonus payment through staff turnover. The bonus
will be paid at the end of the following year.
Journal entries
1. To record the bonus in the current year:
Bonus expense 4,750,000
Bonus payable 4,750,000

Maximum possible bonus (10% x 50,000,000) 5,000,000

Saving through staff turnover (5% x 5,000,000) (250,000)
Estimated liability 4,750,000

2. To record the bonus payment at the end of the following year, assuming there is
no change in the estimated liability:
Bonus payable 4,750,000
Cash 4,750,000

Any difference between the estimated liability and actual payment is accounted
for a change in accounting estimate and included in profit or loss.

Other long-term employee benefits

The term “other long-term employee benefits” is a residual definition.
Other long-term employee benefits are all employee benefits other than short-term
employee benefits, postemployment benefits and termination benefits.
In other words, other long-term employee benefits are employee benefits which are
not expected to be settled wholly within twelve months after the end of annual
reporting period in which the employees render related service.

Examples of other long-term employee benefits

a. Long-term paid absences such as long service or sabbatical leave.
b. Jubilee or other long service benefit
c. Long-term disability benefits
d. Profit sharing bonuses
e. Deferred compensation
Recognition and measurement
The recognition and measurement of liability for other long-term employee benefits
are the same as the recognition and measurement of defined benefit obligation.
In other words, the liability recognized for other long-term employee benefits is equal
to the excess of the present value of the liability over the fair value of the plan assets at
the end of reporting period.
The only difference is the recognition of the followiing components of the defined
benefit cost.
For other long-term employee benefits, all of the following components of defined
benefit cost are recognized in profit or loss and included in the computation of
employee benefit expense:
a. Current service cost
b. Past service cost
c. Any gain or loss on settlement
d. Net interest expense or net interest income
e. Remeasurements, such as actuarial gains and losses, the difference between
actual return on plan assets and interest income, and the change in the effect
of asset ceiling.
If you recall, all remeasurements are recognized fully through other comprehensive
income under a defined benefit plan.
But for other long-term employee benefits, all remeasurements are recognized in
profit or loss.

Termination benefits
Termination benefits are employee benefits provided in exchange for the termination
of an employee’s employment as a result of either:
a. An entity’s decision to terminate an employee’s employment before the
normal retirement date.
b. An employee’s decision to accept an offer of benefits in exchange for
termination of employment.
The event that gives rise to an obligation is the termination of employment rather
than employee service.
Any benefit that must be earned by working for a future period is not a termination
benefit because a termination benefit is the direct result of termination of
employment and therefore unrelated to the future employee service.
In other words, a benefit that is in any way dependent on providing service in the
future is not a termination benefit.
Termination benefits do not include employee benefits resulting from termination of
employment at the request of the employee without an entity offer, or as a result of
mandatory retirement, because these are postemployment benefits.
However, the difference between the benefit provided for the termination of
employment at the request of the employee and a higher benefit provided at the
request of the entity is a termination benefit.
Termination benefits are usually lump sum payments but sometimes also include:
a. Enhancement of postemployment benefits, either directly or indirectly through
an employee benefit plan.
b. Salary until the end of a specified period if the employee renders no further
service that provides economic benefits to the entity.

Fundamental principles
The fundamental principles in relation to termination benefit are:
a. Not conditional on future service being provided
b. Short period between offer of termination and actual termination

Recognition of termination benefits

PAS 19R, paragraph 165, provides that an entity shall recognize an expense and a
liability for termination benefits at the earlier of the following dates:
a. When the entity can no longer withdraw the offer of the termination benefits,
for example, when the plan of termination is already communicated or
announced to affected employees.
b. When the entity recognizes the cost restructuring that involves the payment of
termination benefits.
Implicit in the recognition criteria is that there needs to be an offer of termination
that binds the entity in some way.
The offer of termination is the action or activity deemed to give rise to the termination
liability.
Termination costs that are part of a restructuring plan are recognized at the same
time as the recognition of the other restructuring costs.
Restructuring costs are expenditures that are necessarily incurred for the
restructuring and not associated with ongoing activities of the entity.
For example, salaries and benefits of employees to be incurred after operations cease
and that are associated with the closure of operations are included in the
restructuring provision.

Measurement of termination benefits

PAS 19R, paragraph 169, provides that:
a. If the termination benefits are expected to be settled wholly within
twelve months after the end of reporting period in which the termination
benefit is recognized, the requirements for short-term employee benefits shall be
applied.
Simply stated, the termination benefits are measured at the undiscounted
amount.
b. If the termination benefits are expected not to be settled wholly within
twelve months after the end of reporting period, the requirements for long-
term employee benefits shall be applied.
Simply stated, the termination benefits are measured at the discounted
amount using the applicable discount rate.

Illustration
The entity is committed to close a factory in 10 months and at that time, shall
terminate the employment of all the remaining employees of the factory.
The plan of termination is as follows:
a. An employee leaving before closure of the factory shall receive P10,000.
b. Each employee that renders service until the closure of the factory shall receive
on the termination date a cash payment of P30,000.
c. There are 120 employees at the factory.
d. The entity expects 20 employees to leave before closure and 100 employees to
render service until closure.
e. The total expected cash outflow under the plan is determined as follows:
Employees leaving before
closure (20 x P10,000) 200,000
Employees leaving until closure (100 x P30,000) 3,000,000

Total cash outflow 3,200,000

The total amount of P3,200,000 shall be accounted for as partly termination benefits
and partly short-term employee benefits.

As termination benefits
The benefit provided in exchange for termination of employment is P10,000.
This is the amount that the entity would have to pay for terminating employment
without future service.
Termination benefit 10,000
Multiply by the total number of employees 120

Liability for termination benefits 1,200,000

This amount of P1,200,000 shall be paid regardless of whether the employees leave
before closure or render service until closure.

As short-term employee benefits

The incremental benefits that employees shall receive if they render services for the
full ten-month period are recognized as short-term employee benefits.
The incremental benefits for employees leaving until closure amount to P2,000,000.
Total payment for 10-month period 30,000
Termination benefit 10,000
Short-term employee benefit 20,000
Multiply by employees leaving until closure 100

Short-term employee benefit 2,000,000

The short-term employee benefit may be accrued monthly over 10 months or a

monthly expense and liability of P200,000.