Module 6

 EVENTS AFTER THE

REPORTING PERIOD AND
INCOME TAXES

AEFAR 2
Conceptual
Framework and
Accounting
Standards

to your 6TH Module

Modulmodule!

This module is a
combination of
synchronous &
asynchronous
learning
and will last for
1 week
Pretest will be
given via
Google Form in
asynchronous
test
Overview

Yves A. Mortillero/Deborah
Vasquez
mortilleroyves123@gmail.com
Course Coach

No part of this module may be

reproduced in any form without
prior permission in writing from
the Instructor.

October 11, 2021

Date Initiated
October 15, 2021
Date of Completion
 INVENTORIES
MODULE 5 OUTLINE

MODULE DURATION

I. October 11 to October 15 2021 Synchronous Meeting and Asynchronous Learning For

asynchronous learning inquiries, you may reach me through the messenger group or may
send an email to mortilleroyves123@gmail.com every Monday and Wednesday
II. For asynchronous learning inquiries, you may reach me through email
(mortilleroyves123@gmail.com) every Monday and Wednesday

LEARNING OBJECTIVES
After completing this module, you are expected to:
1. Define events after the reporting period.
2. State the accounting requirements for events after the reporting period.
3. State the scope and the fundamental principle of PAS 12.
4. Interpret the terminology used in the accounting for current and deferred taxes.
5. State the recognition, measurement and presentation of current and deferred taxes.

LEARNING ACTIVITIES

ASSESSMENT/EVALUATION
I.Synchronous Test with a time limit.
II. Asynchronous Learning

ASSIGNMENT

Using the google classroom, please answer the assignment.

Progressive Requirement:

Deadline :

LEARNING RESOURCES

Conceptual Framework and Accounting Standards, 2019 Edition by: Zeus Vernon B. Millan

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 2

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez
Disclaimer. DISCLOSURE STATEMENT

The contents of this module was taken from the book, Conceptual Framework and
Accounting Standards, 2019 Edition by: Zeus Vernon B. Millan with an intention of
putting more emphasis, guidance to accounting students. It is not the intention of the
coach to take credit to any of his/her wonderful and informative writings

Disclaimer. DISCLOSURE STATEMENT

The contents of this module were taken from the book, Conceptual Framework and
Accounting Standards, 2019 Edition by: Zeus Vernon B. Millan with an intention of putting
more emphasis, guidance to accounting students. It is not the intention of the coach to
take credit to any of his/her wonderful and informative writings

PAS 10 Events after the Reporting Period

Introduction

PAS 10 prescribes the accounting for, and disclosures of, events after the reporting period,
including disclosures regarding the date when the financial statements were authorized for issue.

Events after the Reporting Period

Events after the reporting period are “those events, favorable and unfavorable, that occur between
the end of the reporting period and the date when the financial statements are authorized for
issue.” (PAS 10.3)
For example, Entity A’s reporting period ends on December 31, 20x1 and its financial
statements are authorized for issue on March 31, 20x2. Events after the reporting period are those
events that occur within January 1, 20x2 to March 31, 20x2.

 The date of authorization of the financial statements is the date when management
authorizes the financial statements for issue regardless of whether such authorization is final or
subject to further approval.

Two types of events after the reporting period

1. Adjusting events after the reporting period - are events that provide evidence of conditions
that existed at the end of the reporting period
2. Non adjusting events after the reporting period — are events that are indicative of conditions
that arose after the reporting period.

Adjusting events after the reporting period

Adjusting, events, as the name suggests, require adjustments of amounts in the financial
statements. Examples of adjusting events:

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 3

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez
a. The settlement after the reporting period of a court case that confirms that the entity has a
present obligation at the end of reporting period.
b. The receipt of information after the reporting period indicating that an asset was impaired aft the
end of reporting period. For example:
i. The bankruptcy of a customer that occurs after the reporting period may indicate that the
carrying amount of a trade receivable at the end of reporting period is impaired.
ii. The sale of inventories after the reporting period may give evidence to their net realizable
value at the end of reporting period.
c. The determination after the reporting period of the cost of asset purchased, or the proceeds
from asset sold, before the end of reporting period.
d. The determination after the reporting period of the amount of profit-sharing or bonus payments,
if the entity had a present legal or constructive obligation at the end of reporting period to make
such payments.
e. The discovery of fraud or errors that indicate that the financial statements are incorrect. (PAS
10.9)

Non-adjusting events after the reporting period

Non-adjusting events do not require adjustments of amounts in the financial statements. However,
they are disclosed if they are material. Examples of non-adjusting events:

a. Changes in fair values, foreign exchange rates, interest rates of market prices after the
reporting period.
b. Casualty losses (e.g., fire, storm, or earthquake) occurring after the reporting period but before
the financial statements were authorized for issue.
c. Litigation arising solely from events occurring after the reporting period.
d. Significant commitments or contingent liabilities entered after the reporting period, e.g.,
significant guarantees.
e. Major ordinary share transactions and potential ordinary share transactions after the reporting
period.
f. Major business combination after the reporting period.
g. Announcing, or commencing the implementation of, a major restructuring after the reporting
period.
h. Announcing a plan to discontinue an operation after the reporting period.
i. Change in tax rate enacted after the reporting period.
j. Declaration of dividends after the reporting period

(PAS 10.22)

Dividends
Dividends declared after the reporting period are not recognized as liability at the end of reporting
period because no present obligation exists at the end of reporting period.

Going Concern
PAS 10 prohibits the preparation of financial statements on a going concern basis if management
determines after the reporting period either that it intends to liquidate the entity or to cease trading,
or that it has no realistic alternative but to do so.

PAS 12 Income Taxes

Introduction
PAS 12 prescribes the accounting for income taxes. For purposes of PAS 12, income taxes refer to
taxes that are based on taxable profits.

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 4

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez
 The income tax expense reported in the statement of comprehensive income may be
different from the amount of income tax required to be paid to the Bureau of Internal Revenue
(BIR). This is because the income tax expense in the statement of comprehensive income is
computed using PFRSs while the current tax expense in the income tax return (ITR) is computed
using Philippine tax laws, and the PFRSs and tax laws have different accounting treatments for
some economic activities.
Some items are appropriately recognized as income (expense) under financial reporting but
are either (a) non-taxable (non-deductible) or (b) taxable (deductible) only at some other periods
under Philippine tax laws. These varying treatments result to permanent and temporary
differences. PAS 12 addresses the accounting, presentation and reconciliation of these
differences.
For example, assume Entity A accrues bad debts expense of #100 under financial
reporting. However, under taxation, this amount is tax deductible only when it is deemed worthless.
The difference is analyzed below:

Accounting profit and Taxable profit

 Accounting profit is “profit or loss for a period before deducting tax expense.”
 Taxable profit (tax loss) is “profit (loss) for a period, determined in accordance with the rules
established by the taxation authorities, upon which income taxes are payable (recoverable).”
(PAS 12.5)

Income tax expense and Current tax expense

 Tax expense or income tax expense (tax income) — 1s the total amount included in the
determination of profit or loss for BY period. It “comprises current tax expense (current tax
income and deferred tax expense (deferred tax income).” (PAS 12.6)
 Current tax or current tax expense — is “the amount of income taxes payable (recoverable) in
respect of the taxable profit (tax loss) for a period.” (PAS 12.5)

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 5

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez
 Deferred tax expense (income or benefit) — is the sum of the net changes in deferred tax
assets and deferred tax liabilities during the period.

- If the increase in deferred tax liability exceeds the increase in deferred tax asset, the
difference is deferred tax expense.
- If the increase in deferred tax asset exceeds the increase in deferred tax liability, the
difference is deferred tax income or benefit.

Let’s continue the example above (i.e., Entity A):

Using the definition above, we can reconcile the income tax expense as follows:

Income tax expense = Current tax expense + Deferred tax expense / - Deferred tax benefit

Income tax expense = 300 computed using tax laws – 30

determined using PFRSs = 270 amount presented in the statement of comprehensive
income

or

In accounting, to “squeeze” means to come up with an unknown amount in a given formula by performing basic arithmetic
functions like adding, subtracting, multiplying or dividing. When squeezing “upwards” (just like in the illustration above), the
arithmetic function is simply reversed. Thus, the amount ®30 which is added when solving downwards is deducted when
“squeezing” upwards.

The varying treatments of economic activities between the PFRSs and the tax laws result to
following differences:

a. Permanent differences
b. Temporary differences

Permanent differences
Permanent differences arise when income and expenses enter in the computation of either
accounting profit or taxable profit but not both. If an item is included in the computation of one, it
will never enter in the computation of the other
Permanent differences usually arise from non-taxable and non-deductible expenses and
those that have already been subjected to final taxes. In other words, these are items excluded
from the income tax return.
Since permanent differences are non-taxable, non-tax deductible or have already been
taxed under final taxation, they do not have future tax consequences, and hence do not give rise
to deferred tax assets and liabilities.

Examples of permanent differences:

a. Interest income on government bonds and treasury bills

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 6

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez
b. Interest income on bank deposits
c. Dividend income
d. Fines, surcharges, and penalties arising from violation of law
e. Life insurance premium on employees where the entity is the irrevocable beneficiary

Temporary differences
Temporary differences are “differences between the carrying amount of an asset or liability in the
statement of financial position and its tax base.” (PAS 12.5) Temporary differences may be either:

a. Taxable temporary differences ~ those that result to future taxable amounts when the
carrying amount of the asset of liability is recovered or settled; or
b. Deductible temporary differences ~ those that result to future deductible amounts when the
carrying amount of the asset or liability is recovered or settled.

Temporary differences have future tax consequences; hence they give rise to either deferred
tax assets or deferred tax liabilities.
Taxable temporary differences give rise to deferred tax liabilities while Deductible temporary
differences give rise to deferred tax assets
Temporary differences include timing differences. Timing differences arise when income and
expenses are recognized for financial reporting purposes in one period but are recognized for
taxation purposes in another period (or vice versa). They are called “timing differences” because
only the timing or period of their recognition differs between financial reporting and taxation. They
are temporary differences because their effect reverses in one or more subsequent periods.

Taxable temporary differences

Taxable temporary differences arise when:
a. financial income (accounting profit) is greater than the Taxable income (taxable profit);
b. The carrying amount of an asset is greater than its tax base; or
c. The carrying amount of a liability is less than its tax base

Examples of 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.

Taxable temporary difference multiplied by the tax rate results to deferred tax liability.

Deferred tax liabilities are “the amounts of income taxes payable in future periods in respect of
taxable temporary differences.” (PAS 12.5)

Deductible temporary differences

Deductible temporary differences arise when:

a. Financial income (accounting profit) is less than the Taxable income (taxable profit);
b. The carrying amount of an asset is less than its tax base; or
c. The carrying amount of a liability is greater than its tax base.

Examples of 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.

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 7

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez
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.

Deductible temporary difference multiplied by the tax rate results to deferred tax asset

Deferred tax assets are “the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences; (b) the carryforward of unused tax losses; and (c) the
carryforward of unused tax credits.” (PAS 12.5)

The recognition of deferred tax assets and liabilities does not alter the amount of tax to be
paid to the BIR in the current period. However, when they reverse in a future period:

a. Deferred tax liability results to a higher amount of tax to be paid to the BIR
b. Deferred tax asset results to a lower amount of tax to be paid to the BIR

Accounting for Deferred Taxes

PAS 12 requires the use of the asset-liability method (also called “balance sheet liability
method”) in accounting for deferred taxes.
This method is a comprehensive approach in accounting for deferred taxes in that it accounts
both (a) timing differences and (b) differences between the carrying amounts and tax bases of
assets and liabilities.
Timing difference are differences between accounting profit and taxable profit that originate
in one period and reverse on one or more subsequent periods. Temporary differences are
differences between the carrying amount of an asset or liability in the statement of financial
position and its tax base. Temporary differences include all timing differences; however, not all
temporary differences are timing differences.

“The tax base of an asset or liability is the amount attribute, to that asset or liability for tax
purposes,” (PAS 12.5)
Tax base of an asset - is “the amount that will be deductible), for tax purposes against any
taxable economic benefits that will flow to an entity when it recovers the carrying amount o, the

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 8

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez
asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its
carrying amount.” (PAS 12.8)
Tax base of a liability — is “its carrying amount, less any amount that will be deductible for tax
purposes in respect of that liability in future periods. In the case of revenue which is received in
advance, the tax base of the resulting liability is its carrying amount, less any amount of the
revenue that will not be taxable in future periods.” (PAS 12.8)

Examples:

1. An asset has a carrying amount of 1,000 and a tax base of P400.

- Analysis: The difference of 600 (1,000 - 400) is a taxable temporary difference, i.e., carrying
amount of an asset greater than its tax base. If the tax rate is 30%, the deferred tax liability is 180
(600 x 30%).

2. Entity A has dividends receivable with carrying amount of 1,000. The dividends are not taxable.
- Analysis: Since the dividends are not taxable, the tax base is equal to the carrying amount of
1,000. No temporary difference or deferred tax arises from the dividends, i.e., 1,000 carrying
amount - 1,000 tax base = 0 difference

3. Entity A has accounts receivable with carrying amount of 1,000. The receivable is taxable only
when collected.
- Analysts: Since the carrying amount is taxable in full when collected, the tax base is zero. The
difference of 1,000 (1,000 carrying amount - 0 tax base) is a taxable temporary difference. If the
tax rate is 30%, the deferred tax liability is 300 (1,000 x 30%).

Recognition

The fundamental principle under PAS 12 is that “an 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.” (PAS 12.10)

 Deferred tax liability is recognized for all taxable temporary differences, except those that arise
from the following:
a. initial recognition of goodwill (PAS 12.15)
b. 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). (PAS 12.15)
c. investments in subsidiaries, branches, and associates, and interests in joint arrangements
to the extent that the entity is able to control the timing of the reversal of the differences and
it is probable that the reversal will not occur in the foreseeable future. (PAS 12.39)

 Deferred tax asset is recognized for all 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 a transaction that is not a
business combination and, at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss) (PAS 12.24)

Limitation on the recognition of deferred tax asset

A deferred tax asset reduces the tax payment when it reverses in a future period. However, an
entity can benefit from this reduction only if it earns sufficient taxable profit against which the
reduction can be applied.

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 9

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez
 Accordingly, PAS 12 permits an entity to recognize deferred tax assets only when it is
probable that taxable profits will be available against which the deductible temporary differences
can be utilized or there are sufficient taxable temporary differences that are expected to reverse in
the same period that the deductible temporary differences are expected to reverse.
When it is not probable that a deferred tax asset will be realized, it is either (a) not
recognized or (b) reduced to its realizable value, whichever is appropriate. The reduction in
deferred tax asset increases income tax expense but does not affect ‘current tax expense.

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.
Illustration:

Entity A has a taxable temporary difference of 2,000 in Year 1. The difference is expected to
reverse as follows: 1,000 in Year 2 and 1,000 in Year 3. The tax rate in Year 1 is 30%. However,
by the end of Year 1, a tax law is enacted which requires tax rates of 32% in Year 2 and 35% in
Year 3 and in succeeding years.
 Entity A recognizes a deferred tax liability of 670 at the end of Year 1, computed as follows:
[(1,000 x 32%) + (1,000 x 35%)]

Presentation in the Statement of financial position

Deferred tax assets and deferred tax liabilities are presented separately as noncurrent assets
and noncurrent liabilities, respectively, in a classified statement of financial position.

PAS 12 permits offsetting of deferred tax assets and deferred tax liabilities only if:
a. the entity has a legally enforceable right to offset current tax assets against current tax
liabilities; and
b. the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the
same taxation authority.

Accounting for Current Taxes

An entity uses relevant tax laws in computing for its current taxes. Unpaid current taxes are
recognized as current tax liability, e.g., income tax payable. Excess tax payments over the
current tax due are recognized as current tax asset, e.g., prepaid income tax.

PAS 12 permits offsetting of current tax assets and current tax liabilities only if the entity
has:

a. a legally enforceable right to, offset the recognized amounts; and

b. b. an intention to settle/realize the recognized amounts on a net basis or simultaneously.

Presentation in Statement of comprehensive income

Tax consequences are accounted for in the same way as the related transactions or events.
Thus, if a transaction is recognized in profit or loss, its tax effect is also recognized in profit or loss.
If a transaction is recognized outside profit or loss, the tax effect is also recognized outside profit
or loss (e.g., in other comprehensive income or directly in equity).
Current and deferred taxes are usually recognized in profit or loss. The following are
examples taxes that are recognized outside of profit or loss:

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 10

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez
Taxes recognized in other comprehensive income:
a. Revaluation of property, plant and equipment.
b. Exchange differences arising on the translation of the financial statements of a foreign
operation.

Taxes recognized directly in equity:

a. Adjustment to the opening balance of retained earnings resulting from a change in
accounting policy or correction of a prior-period error.
b. Amounts arising on initial recognition of the equity component of a compound financial
instrument. (PAS 12.62)

A tax effect that is recognized directly in equity is accounted for as a direct adjustment to the
related component of equity, e.g., retained earnings or share premium, rather than presented in
the profit or loss or other comprehensive income sections of the statement of comprehensive
income.

Summary
 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 ternporary
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.
 If the increase in deferred tax liability exceeds the increase in deferred tax asset, the
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.
 A deferred tax asset is recognized only to the extent that it is realizable.
 Deferred taxes are measured using enacted or substantially enacted tax rates that are
applicable to the Periods of their expected reversals.
 Deferred tax assets and liabilities are not discounted.
 In the statement of financial position, current tax assets and liabilities are presented
separately as current items while deferred tax assets and liabilities are presented separately
as noncurrent items.
 Tax consequences are recognized either in profit or loss, other comprehensive income, or
directly in equity depending on the accounting treatment of the related transaction or event.

San Mateo Municipal College AEFAR 2/ Module 6– PAS 10 & PAS 12 / Page 11

College of Business and Accountancy Prepared by Yves A. Mortillero and Deborah Vasquez