In accordance with the "Basic Standards for Enterprise Accounting," the Ministry of Finance issued Enterprise Accounting Standard No. 18—Income Taxes on 2006/2/15, effective as of 2007/1/1.
1. Overview of Guidelines
This standard prescribes the recognition, measurement, and disclosure of income taxes. Income taxes include all domestic and foreign tax liabilities based on taxable income.
Core Accounting Method
Enterprises shall account for income taxes using the balance sheet liability method. This approach requires enterprises to start from the balance sheet by comparing the carrying amounts of assets and liabilities, as determined in accordance with accounting standards, with their tax bases as prescribed by tax laws. Based on this comparison, temporary differences are analyzed, and deferred tax assets and deferred tax liabilities are recognized.
Temporary differences
Temporary differences are the differences between the carrying amount of an asset or liability and its tax base. Based on their impact on taxable amounts in future periods, they are classified as either taxable temporary differences or deductible temporary differences.
II. Tax Base
Tax basis of the asset
The tax base of an asset is the amount that can be deducted from taxable economic benefits for computing taxable income under tax laws, in the process of recovering the asset's carrying amount.
Tax basis of liabilities
The tax base of a liability is the carrying amount of the liability minus the amount deductible for tax purposes in future periods when calculating taxable income.
3. Recognition and Measurement of Deferred Income Tax
Taxable temporary differences
Except in specific cases, an entity shall recognize all deferred tax liabilities arising from taxable temporary differences. Such exceptions include: the initial recognition of goodwill; and the initial recognition of assets or liabilities in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting profit nor taxable income.
Deductible temporary differences
An enterprise shall recognize a deferred tax asset arising from deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized.
4. Recognition and Measurement of Income Tax Expense
Income tax expense in the income statement comprises current and deferred tax components.
Measurement Principles
- • Current income tax shall be determined in accordance with tax laws.
- • Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply when the asset is recovered or the liability is settled.
- • If applicable tax rates change, re-measure recognized deferred tax assets and deferred tax liabilities.
- Deferred tax assets and deferred tax liabilities shall not be discounted.
Regulatory Document Attachment
Enterprise Accounting Standards No. 18 — Income Tax (PDF)