Accounting as long as Income Taxes 16 McGraw-Hill/Irwin Copyright © 2011 by the McGraw-
Mallard, Cynthia, News/Public Affairs Director has reference to this Academic Journal, PHwiki organized this Journal Accounting as long as Income Taxes 16 McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. The Internal Revenue Code is the set of rules as long as preparing tax returns. Financial statement income tax expense. IRS income taxes payable. GAAP is the set of rules as long as preparing financial statements. Usually Results in Results in The objective of accounting as long as income taxes is to recognize a deferred tax liability or deferred tax asset as long as the tax consequences of amounts that will become taxable or deductible in future years as a result of transactions or events that already have occurred. Deferred Tax Assets in addition to Deferred Tax Liabilities Temporary Differences This results in temporary differences. The difference in the rules as long as computing between pre-tax accounting income (according to GAAP) in addition to taxable income (according to the IRS) often causes amounts to be reported in different years.
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Temporary differences will reverse in one or more future periods. Temporary Differences Deferred Tax Liabilities A temporary difference originates in one period in addition to reverses, or turns around, in one or more subsequent periods. Deferred Tax Liabilities Calculate income tax that is currently payable: $100 × 40% = $40 Calculate change in deferred tax liability: ($40 × 40%) = $16 Combine the two to get the income tax expense: $40 + $16 = $56 Income tax expense 56 Income tax payable 40 Deferred tax liability 16
The FASBs Balance Sheet Approach Types of Temporary Differences Deferred tax liabilities result in taxable amounts in the future. Deferred tax assets result in deductible amounts in the future. Deferred Tax Liabilities A temporary difference originates in one period in addition to reverses, or turns around, in one or more subsequent periods.
Deferred Tax Liabilities Calculate income tax that is currently payable: $92 × 40% = $36.8 Calculate change in deferred tax liability: ($25 – $33) × 40% = $3.2 Combine the two to get the income tax expense: $36.8 + $3.2 = $40 Journal entry at the end of 2011 Income tax expense 40.0 Income tax payable 36.8 Deferred tax liability 3.2 Deferred Tax Liabilities Calculate income tax that is currently payable: $81 × 40% = $32.4 Calculate change in deferred tax liability: (($25 – $44) × 40%)) = $7.6 Combine the two to get the income tax expense: $32.4 + $7.6 = $40 Journal entry at the end of 2012 Income tax expense 40.0 Income tax payable 32.4 Deferred tax liability 7.6 Deferred Tax Liabilities Calculate income tax that is currently payable: $110 × 40% = $44 Calculate change in deferred tax liability: (($25 – $15) × 40%)) = $4 Combine the two to get the income tax expense: $44 4 = $40 Journal entry at the end of 2013 Income tax expense 40 Deferred tax liability 4 Income tax payable 44
Deferred Tax Liabilities Journal entry at the end of 2014 Income tax expense 40.0 Deferred tax liability 6.8 Income tax payable 46.8 Deferred Tax Assets RDP Networking reported pretax accounting income in 2011, 2012, in addition to 2013 of $70 million, $100 million, in addition to $100 million, respectively. The 2011 income statement includes a $30 million warranty expense that is deducted as long as tax purposes when paid in 2012 ($15 million) in addition to 2013 ($15 million). The income tax rate is 40% each year. Deferred Tax Assets Calculate income tax that is currently payable: $100 × 40% = $40 Calculate change in deferred tax asset: $30 × 40% = $12 Combine the two to get the income tax expense: $40 12 = $28 Journal entry at the end of 2011 Income tax expense 28 Deferred tax asset 12 Income tax payable 40
Deferred Tax Assets Journal entry at the end of 2012 in addition to 2013 Income tax expense 40 Deferred tax asset 6 Income tax payable 34 Valuation Allowance A valuation allowance account is needed if it is more likely than not that some portion of the deferred tax asset will not be realized. The deferred tax asset is then reported at its estimated net realizable value. Permanent Differences Created when an income item is included in taxable income or accounting income but will never be included in the computation of the other. Example: Interest on tax-free municipal bonds is included in accounting income but is never included in taxable income. Permanent differences are disregarded when determining both the tax payable currently in addition to the deferred tax asset or liability.
U.S. GAAP vs. IFRS For example, U.S. GAAP requires a loss contingency be accrued if it is both probable in addition to can be reasonably estimated. Accruing a loss contingency leads to a deferred tax asset. Despite the similar approaches as long as accounting as long as income taxes under IFRS in addition to U.S. GAAP, differences in reported amounts as long as deferred taxes are among the most frequent between the two reporting approaches. For loss contingencies, IFRS uses a more likely than not threshold, which is lower than the U.S. probable requirement. As a result, under the lower threshold of IFRS, a loss contingency in addition to a deferred tax asset sometimes is recorded as long as IFRS but not as long as U.S. GAAP. Tax Rate Considerations Deferred tax assets in addition to liabilities should be determined using the future tax rates, if known. The deferred tax asset or liability must be adjusted if a change in a tax law or rate occurs. Multiple Temporary Differences It would be unusual as long as any but a very small company to have only a single temporary difference in any given year.
Net Operating Losses (NOL) Tax laws often allow a company to use tax NOLs to offset taxable income in earlier or subsequent periods. Net Operating Losses (NOL) Current Year Carryback Period The NOL may first be applied against taxable income from two previous years. Unused NOL may be carried as long as ward as long as 20 years. Operating Loss Carry as long as ward Deferred tax asset 50 Income tax benefit-operating loss 50
Operating Loss Carryback The carryback of the NOL must be applied to the earlier year first in addition to then to the next year. Any remaining NOL may be carried as long as ward. Operating Loss Carryback Receivableincome tax refund 29 Deferred tax asset 20 Income tax benefit-operating loss 49 Balance Sheet Classification A deferred tax asset that is not related to a specific asset or liability should be classified according to when the underlying temporary difference is expected to reverse. Deferred tax assets/liabilities are classified as current or noncurrent based on the classification of the related asset or liability.
Disclosure Notes Deferred Tax Assets in addition to Deferred Tax Liabilities Total of all deferred tax liabilities. Total of all deferred tax assets. Total valuation allowance recognized. Net change in valuation account. Approximate tax effect of each type of temporary difference ( in addition to carry as long as ward). Operating Loss Carry as long as wards Amounts. Expiration dates. Income Tax Expense Current portion of the tax expense (or benefit). Deferred portion of the tax expense (or benefit) with separate disclosures of amounts attributable to several specific items. Coping with Uncertainty in Income Taxes Two-step Decision Process Step 1. A tax benefit may be reflected in the financial statements only if it is more likely than not that the company will be able to sustain the tax return position, based on its technical merits. Step 2. A tax benefit should be measured as the largest amount of benefit that is cumulatively greater than 50 percent likely to be realized. If the tax benefit is not more likely than not, then none of the tax benefit is allowed to be recorded. Intraperiod Tax Allocation Income Statement: Income from continuing operations. Discontinued operations. Extraordinary items. Other Comprehensive Income: Investments. Postretirement benefit plans. Derivatives. Foreign currency translation.
U.S. GAAP vs. IFRS GAAP separately reports both discontinued operations in addition to extraordinary items on the income statement in addition to each are shown net of tax. The approach as long as accounting as long as intraperiod tax allocation is the same under IFRS in addition to U.S. GAAP, but the categories used on the income statement are different. IFRS does not separately report extraordinary items on the income statement. As a result, the only income statement item reported separately net of tax using IFRS is discontinued operations. End of Chapter 16
Mallard, Cynthia News/Public Affairs Director
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