Accounting for Income Taxes

1
Chapter 20

• Accounting for Income Taxes

2
Taxable Income and Financial Income

• Taxable income is calculated in accordance with
  prescribed ltax regulations and rules
• Financial income is measured and reported in
  accordance with GAAP
• Differences between taxable income and financial
  income occur because tax regulations and GAAP are
  frequently different

3
Deferred Income Taxes

• A temporary difference is the difference between
  the tax basis of an asset or liability and its
  reported amount in the financial statements that
  will result in taxable amounts or deductible
  amounts in future years when the asset is
  recovered or the liability is settled

4
Deferred Income Taxes

• Taxable amounts increase taxable income
• Deductible amounts decrease taxable income
• Deferred income taxes are the future tax effects
  of temporary differences

5
Deferred Tax Liability

• A deferred tax liability represents the increase
  in taxes payable in future years as a result of
  taxable temporary differences existing at the end
  of the current year.

6
Calculation of Deferred Tax Liability

• Book basis--tax basis of asset or liability
  cumulative temporary difference cumulative
  temporary differences X enacted tax rate
• Scheduling of future taxable amounts

7
Two Components of Income Tax Expense (Benefit)

• Income tax expense (benefit) is the increase
  (Decrease) in the deferred tax liability balance
  from the beginning to the end of the accounting
  period
• Current tax expense (Benefit) which is equal to
  the amount of income taxes paid or payable for
  the period

8
Definition of Liability

• Results from a past transaction
• Is a present obligation
• Represents a future sacrifice
• Deferred tax liability meets the definition under
  SFAC 6

9
Objectives of Accounting for Income Taxes

• Recognize the amount of taxes payable or
  refundable for the current year
• Recognize deferred tax liabilities and assets for
  the future tax consequences of events recognized
  in financial statements or tax returns

10
Deferred Tax Asset

• The increase in taxes refundable (saved) in
  future years as a result of deductible temporary
  differences at the end of the current year
• FASB decided deferred tax assets meet definition
  of asset
• Results from past transaction
• Gives rise to probable future benefits
• Controls access to the benefit

11
Calculation of Deferred Tax Asset

• Book basis--tax basis of asset or liability
  cumulative temporary difference cumulative
  temporary difference X enacted tax rate
• Scheduling or deductible amounts

12
Two Components of Income Tax Expense

• Deferred tax expense (benefit) is the decrease
  (increase) in the deferred tax asset balance from
  the beginning to the end of the accounting period
• Current tax expense (equal to income taxes
  payable)

13
Allowance to Deferred Tax Assets

• Deferred tax assets should be reduced by a
  valuation allowance if it is more likely than not
  that some portion or all of the deferred tax
  asset will not be realized
• Evaluate available evidence, both pro and con
• Probability of nonrecognition (slightly more than
  50)

14
Income Statement Presentation

• Current tax expense
• Deferred tax expense

15
Temporary Differences

• Temporary differences
• Originating temporary differences are the initial
  difference between the book basis and tax basis
  of an asset or liability
• Reversing temporary differences occur when a
  temporary difference that originated in prior
  periods is eliminated and the related tax effect
  removed from the deferred tax account

16
Permanent differences

• No tax consequences to be recognized
• Items recognized for accounting but not for taxes
• Items recognized for taxes but not accounting

17
Tax Rates Used

• Current tax rate used when currently enacted rate
  will not change
• Future enacted tax rates used when known

18
Tax Rates Used

• Revisions of future tax rates and effects on the
  deferred tax accounts. Record effect as soon as
  change is enacted. Treat as an adjustment to
  income tax expense in the period of change
• Average tax rates used when graduated tax rates
  exist

19
Accounting for Net Operating Loss Carrybacks

• Refund is recorded and reported as a receivable
  on balance sheet
• Benefit Due to Loss Carryback recorded and
  reported on the income statement

20
Accounting for Net Operating Loss Carryforwards

• Los carryforwards expected to be realized
• Deferred Tax Asset recognized for future savings
• Benefit Due to Loss Carryforward recorded and
  reported on income statement of current period as
  a contra-income tax expense

21
Accounting for Net Operating Loss Carryforwards

• Loss Carryforwards not expected to be realized
• Deferred tax asset recognized on balance sheet
• Valuation allowance represents that portion which
  more likely than not will not be realized

22
Balance Sheet Presentation

• Deferred tax accounts are classified as current
  and noncurrent based on the classification of the
  related asset or liability for financial
  reporting
• Net current amount is the sum of the current
  deferred items
• Net noncurrent amount is the sum of the
  noncurrent deferrred items

23
Balance Sheet Presentation

• Disclose types of temporary differences, net
  change in total valuation allowance, and
  carryforwards and carrybacks

24
Income Statement Presentation

• Intraperiod allocation
• Significant components of income tax expense
• Current tax expense or benefit
• Deferred tax expense or benefit
• Investment tax credits
• Government grants recognized as reduction in
  income tax expense

25
Income Statement Presentation

• Significant components of income tax expense
• Operating loss carryforwards benefits
• Tax expense resulting from allocating certain tax
  benefits from acquiring another entity
• Adjustments in deferred tax assets or liabilities
  from enacted changes in tax rates or change in
  companys tax status

26
Income Statement Presentation

• Significant components of income tax expense
• Adjustments to the beginning balance of the
  valuation allowance because of changes i the
  likelihood of the realizability related to a
  deferred tax asset
• Reconciliation of income tax expense on
  continuing operations with the amount that
  results from applying federal tax rates

27
Additional Disclosures

• Disclosure of tax loss carryforwards in notes