Accounting for income taxes
Download
1 / 137

Accounting for Income Taxes - PowerPoint PPT Presentation


  • 1011 Views
  • Updated On :

Accounting for Income Taxes. Chapter 17. Chapter 17--Learning Objectives. 1. Contrast the objectives of income tax determination with the objectives of financial reporting. Income Taxes. Result from the earnings process Are not incurred to provide a product or service

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Accounting for Income Taxes' - RoyLauris


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

Chapter 17 learning objectives l.jpg
Chapter 17--Learning Objectives

1. Contrast the objectives of income tax determination with the objectives of financial reporting


Income taxes l.jpg
Income Taxes

  • Result from the earnings process

  • Are not incurred to provide a product or service

  • Are paid to many jurisdictions, including the U.S. government, state governments, and other national governments

  • Often require separate accounting records for each jurisdiction


U s corporations are subject to federal income taxes l.jpg
U.S. corporationsare subject to federal income taxes




Our focus is primarily on u s federal income taxes l.jpg
Our focus is primarily on U.S.federal income taxes


U s federal income taxes l.jpg
U.S. federal income taxes

Rules on taxes to be paid encompass:

1. Revenue items to be included in taxable income

2. Expense items permitted to be deducted

3. The rates applied to taxable income

4. Tax credits permitted as direct reductions to income tax liability


Financial reporting and income tax assessment have different goals l.jpg

Income

Statement

Tax

Return

Financial reporting and income tax assessment have different goals

  • Hence, the rules are different for financial reporting and for income tax calculation

  • Therefore, income for financial reporting purposes frequently differs from taxable income


Chapter 17 learning objectives10 l.jpg
Chapter 17--Learning Objectives

2. Apply the liability approach to determine (a) temporary differences and carryforwards, (b) deferred income tax assets and liabilities, and (c) income tax expense


Nature of income tax l.jpg
Nature of Income Tax

  • Expense?

  • Distribution of profits to the government?

  • ARB 43

    • Income tax is an expense

IRS Agent

At your Service


Accrual basis accounting l.jpg
Accrual Basis Accounting

  • Matching principle

    • Allocates expenses to accounting periods

  • Income tax = An expense

    • Therefore, it too should be allocated among accounting periods


Income tax allocation l.jpg
Income Tax Allocation

  • Interperiod income tax allocation

    • Allocating income tax among accounting periods

  • Intraperiod income tax allocation

    • Allocating income tax among items reported within a given accounting period

      • Income from continuing operations

      • Discontinued operations

      • Extraordinary items

      • Prior period adjustments

      • Cumulative effect of accounting change


Asset liability method l.jpg
Asset/Liability Method

  • Future tax consequences of temporary differences between pretax accounting income (AI) & taxable income (TI) are deferred tax assets & deferred tax liabilities

  • Tax rates used:

    • Future tax rates

    • Based on currently enacted tax law

  • Tax expense = Current provision +/- changes in deferred tax assets & liabilities


Differences between ai ti l.jpg
Differences between AI & TI

  • Temporary differences

  • Permanent differences


Permanent differences l.jpg
Permanent Differences

  • Item in TI, never in AI

  • Item in AI, never in TI


Items in ti never in ai l.jpg
Items in TI, never in AI

  • Tax deductions that are not expenses under GAAP

    • Percentage depletion > Cost depletion

    • Dividend exclusion


Items in ai never in ti l.jpg
Items in AI, never in TI

  • Tax exempt revenues

    • Municipal bond interest

    • Life insurance proceeds paid to corporation on death of employee

  • Non-deductible expenses

    • Life insurance premiums on officers where corporation is beneficiary

    • Tax penalties


Temporary differences l.jpg
Temporary Differences

  • Differences between AI and TI caused by differences in when amounts are recognized

    • Timing differences

    • Assets & Liabilities have different bases


Exercise l.jpg
Exercise

  • Indicate whether each of the following is a temporary difference or a permanent difference between TI and AI


Municipal bond interest l.jpg
Municipal bond interest

Permanent

Temporary


Double declining balance depreciation for tax straight line depreciation for books l.jpg
Double declining balance depreciation for tax Straight-line depreciation for books

Permanent

Temporary




Warranty expense is probable and can be reasonably estimated deduct when paid for tax l.jpg
Warranty expense is probable and can be reasonably estimated. Deduct when paid for tax

Permanent

Temporary



Use percentage of completion for books use completed contract method for tax l.jpg
Use percentage of completion for books Use completed contract method for tax

Permanent

Temporary


Tax penalties are incurred l.jpg
Tax penalties are incurred contract method for tax

Permanent

Temporary


Prepaid rent for 2 years in advance the rent deductible when paid for tax l.jpg
Prepaid rent for 2 years in advance. The rent deductible when paid for tax

Permanent

Temporary



Current period effect of temporary differences l.jpg
Current Period Effect of Temporary Differences for books

  • Temporary difference ® Current TI > AI

  • Temporary difference ® Current TI < AI


Current ti ai l.jpg
Current TI > AI for books

  • Tax Consequence:

    • Future TI < AI

    • Called deductible amounts

    • Benefit = future tax reduction

    • Asset today


Current ti ai examples l.jpg
Current TI > AI - Examples for books

  • Revenues & Gains in TI before AI

    • Rent received in advance

  • Expenses & Losses in AI before TI

    • Contingent liabilities


Current ti ai34 l.jpg
Current TI < AI for books

  • Tax consequence:

    • Future TI > AI

    • Called taxable amounts

    • Obligation to pay more tax in the future

    • Liability today


Current ti ai examples35 l.jpg
Current TI < AI - Examples for books

  • Revenues & Gains in AI before TI

    • Installment sales method for tax

    • Point of sale revenue recognition for books

  • Expenses & Losses in TI before AI

    • Accelerated depreciation for tax

    • Straight line depreciation for books


Exercise36 l.jpg
Exercise for books

  • For each temporary difference, determine:

    • The originating effect

    • The reversing effect

    • Whether there will be future taxable or deductible amounts

    • Whether there is a deferred tax asset or deferred tax liability


Depreciation l.jpg
Depreciation for books

  • DDB depreciation for tax

  • Straight-line depreciation for books

Originating Difference TI>AI or TI< AI

Reversal TI>AI or TI< AI

Reversal Taxable or Deductible amounts

Accounting Treatment D T Asset/ D T Liab

TI<AI

TI>AI

Taxable Amount

DTL


Depreciation38 l.jpg
Depreciation for books

  • Life for tax < Life for books

Originating Difference TI>AI or TI< AI

Reversal TI>AI or TI< AI

Reversal Taxable or Deductible amounts

Accounting Treatment D T Asset/ D T Liab

TI<AI

TI>AI

Taxable Amount

DTL


Sales l.jpg
Sales for books

  • Record when made for books

  • Installment sales method for tax

Originating Difference TI>AI or TI< AI

Reversal TI>AI or TI< AI

Reversal Taxable or Deductible amounts

Accounting Treatment D T Asset/ D T Liab

TI<AI

TI>AI

Taxable Amount

DTL


Warranty expense l.jpg
Warranty Expense for books

  • Accrued for books

  • Deductible when paid for tax

Originating Difference TI>AI or TI< AI

Reversal TI>AI or TI< AI

Reversal Taxable or Deductible amounts

Accounting Treatment D T Asset/ D T Liab

TI>AI

TI<AI

Deductible Amount

DTA


Rent received in advance l.jpg
Rent Received in Advance for books

  • Deferred for books

  • Taxable upon receipt for tax

Originating Difference TI>AI or TI< AI

Reversal TI>AI or TI< AI

Reversal Taxable or Deductible amounts

Accounting Treatment D T Asset/ D T Liab

TI>AI

TI<AI

Deductible Amount

DTA


Long term contract l.jpg
Long-Term Contract for books

  • Percentage of completion for books

  • Completed contract method for tax

Originating Difference TI>AI or TI< AI

Reversal TI>AI or TI< AI

Reversal Taxable or Deductible amounts

Accounting Treatment D T Asset/ D T Liab

TI<AI

TI>AI

Taxable Amount

DTL


Prepaid rent l.jpg
Prepaid Rent for books

  • Defer for books

  • Deduct when paid for tax

Originating Difference TI>AI or TI< AI

Reversal TI>AI or TI< AI

Reversal Taxable or Deductible amounts

Accounting Treatment D T Asset/ D T Liab

TI<AI

TI>AI

Taxable Amount

DTL


Steps accounting for deferred tax liabilities l.jpg
Steps: Accounting for Deferred Tax Liabilities for books

  • Identify temporary differences

  • Identify future taxable amounts

  • Identify future taxable amounts from prior temporary differences

  • Calculate DTL

  • Calculate income tax payable

  • Income tax expense =

    • Income taxes payable + D in DTL


Example deferred income tax liability l.jpg
Example for booksDeferred Income Tax Liability

  • Jan’s Cookies sells franchises

  • Price of franchise = $20,000

  • Franchisee pays equal installments over 4 years

  • Ignore time value of money

  • Recognize sale for books contract is signed

  • Cash basis for tax


Year 1 l.jpg
Year 1 for books

  • Sales $240,000

  • Pretax accounting income 200,000

  • Includes municipal bond interest of 10,000

  • Tax rate for 19x1 40%

  • Tax rate for all future years 30%


Permanent difference l.jpg
Permanent Difference? for books

Municipal bond interest $10,000


The temporary difference l.jpg

Revenue in accounting income for books

Revenue in taxable income

Temporary difference

$ 240,000

60,000

$ 180,000

The Temporary Difference?


Reversals l.jpg
Reversals for books

  • Will future TI be greater than or less than AI?

    TI > AI

  • Future Taxable or Deductible Amounts?

    Taxable Amounts

  • Future Taxable Amounts will total?

    $180,000


The balance sheet will report l.jpg
The Balance Sheet will report for books

DTA or DTL


Amount of dtl l.jpg
Amount of DTL for books

  • 180,000 x 30% = 54,000

Yr 1

Yr 2 Yr 3 Yr 4

TD

180,000

TA 60,000 60,000 60,000

30% 30% 30%

18,000 18,000 18,000

54,000


Taxable income l.jpg

Pretax accounting income for books

Municipal bond interest

Temporary difference

Taxable income

$ 200,000

( 10,000)

(180,000)

$ 10,000

Taxable Income

Tax rate?

x 40%

Taxes payable

4,000


Change in deferred tax liability l.jpg
Change in Deferred Tax Liability for books

DTL

0 Beginning Balance

Credit

54,000 Increase

54,000 Ending Balance


Income tax expense l.jpg

Income tax payable for books

Increase in DTL

Income tax expense

$ 4,000

54,000

$ 58,000

Debit

Credit

Income Tax Expense

Income Tax Expense

58,000

54,000

Deferred Tax Liab

Income Tax Payable

4,000


Balance sheet classification l.jpg
Balance Sheet Classification for books

  • Classify as short term or long term

  • Based on related asset or liability balance

  • Report 1 long-term net asset or liability

  • Report 1 current net asset or liability


Related asset or liability l.jpg
Related Asset or Liability? for books

  • Accounts Receivable $180,000

  • Current asset?

  • If so, the DTL is a current liability


Year 2 l.jpg
Year 2 for books

  • Sales $360,000

  • Pretax accounting income 235,000

  • Includes municipal bond interest of $10,000

  • Includes $1,000 for tax penalties

  • Tax law change:

    • For all years subsequent to 2003

    • Tax rate = 35%


Permanent differences58 l.jpg
Permanent Differences? for books

  • Municipal bond interest $10,000

  • Tax penalty $ 1,000


The amount of the temporary difference l.jpg

Revenue in accounting income for books

Revenue in taxable income

Temporary difference

$ 360,000

90,000

$ 270,000

The amount of the Temporary Difference?


Reversal in 2002 l.jpg

From 2001 Sales for books

Revenue in taxable income

Revenue in accounting income

Taxable amount

$ 60,000

none

$ 60,000

Reversal in 2002?


Taxable income61 l.jpg

Pretax accounting income for books

Municipal bond interest

Tax penalty

Temporary difference

Reversal (taxable amount)

Taxable income

$ 235,000

( 10,000)

1,000

(270,000)

60,000

$ 16,000

Taxable Income

Tax rate?

x 30%

Taxes payable

4,800


Year 2002 l.jpg
Year 2002 for books

Revenue in TI

Revenue in AI

TI>AI or TI<AI

TD, TA or DA

Tax Rate

From 2001

60,000

0

TI>AI

TA

30%

From 2002

90,000

360,000

TI<AI

TD


Year 2003 l.jpg
Year 2003 for books

Revenue in TI

Revenue in AI

TI>AI or TI<AI

TD, TA or DA

Tax Rate

From 2001

60,000

0

TI>AI

TA

30%

From 2002

90,000

0

TI>AI

TA


Year 2004 l.jpg
Year 2004 for books

Revenue in TI

Revenue in AI

TI>AI or TI<AI

TD, TA or DA

Tax Rate

From 2001

60,000

0

TI>AI

TA

35%

From 2002

90,000

0

TI>AI

TA


Year 2005 l.jpg
Year 2005 for books

Revenue in TI

Revenue in AI

TI>AI or TI<AI

TD, TA or DA

Tax Rate

Nothing left from 2001

35%

From 2002

90,000

0

TI>AI

TA


Amount of dtl66 l.jpg
Amount of DTL for books

Yr 2

Yr 3 Yr 4 Yr 5

TI

16,000

30%

4,800

TA 150,000 150,000 90,000

3 0% 35% 35%

45,000 52,500 31,500

Tx Payable

DTL 129,000


Change in dtl l.jpg
Change in DTL for books

DTL

54,000 Beginning Balance

Credit

75000 Increase

129,000 Ending Balance


Income tax expense68 l.jpg

Income tax payable for books

Increase in DTL

Income tax expense

$ 4,800

75,000

$ 79,800

Debit

Credit

Income Tax Expense

Income Tax Expense

79,800

75,000

Deferred Tax Liab

Income Tax Payable

4,800


Interperiod tax allocation l.jpg

Interperiod Tax Allocation for books

Deferred Tax Asset


Deferred tax assets l.jpg
Deferred Tax Assets for books

  • Future tax consequences = benefit

  • Result from temporary differences associated with future deductible amounts

  • Result from net operating loss carryovers


Net operating losses nol l.jpg
Net Operating Losses (NOL) for books

  • When deductions and losses on a tax return exceed taxable revenues and gains

  • Can carry back 3 years

  • Can carry over 15 years


Accounting for dtas additional steps l.jpg
Accounting for DTAs for booksAdditional Steps

  • Identify future deductible amounts

    • Including NOL carryovers

  • Calculate DTA

  • If more likely than not that NRV<DTA

    • Calculate allowance to reduce net DTA to NRV

  • Income Tax Expense =

    • Income Taxes Payable +

      • D in DTL

      • D in DTA

      • D in allowance


Dtl dta example l.jpg
DTL & DTA Example for books

  • 7/1/x1 - Purchased depreciable asset

  • Cost $30,000

  • Ignore salvage value

  • Useful life 6 years

  • Tax life 4 years

  • Straight-line depreciation - book & tax

  • Pretax accounting income $10,000

  • Tax rate 40% 2001

    35% after 2003


Dtl dta example74 l.jpg
DTL & DTA Example for books

  • Let TD = temporary difference

  • Let TA = taxable amount

  • Let DA = deductible amount


Slide75 l.jpg

Depr in TI for books

Depr in AI

TI>AI TI<AI

TD/TA/DA

Tax Rate

Yr

1

3,750

2,500

TI<AI

TD=1,250

40%

2

7,500

5,000

TI<AI

TD=2,500

40%

3

7,500

5,000

TI<AI

TD=2,500

40%

Equal

4

7,500

5,000

TI<AI

TD=2,500

35%

5

3,750

5,000

TI>AI

TA=1,250

35%

6

-

5,000

TI>AI

TA=5,000

35%

7

-

2,500

TI>AI

TA=2,500

35%


Taxable income for 2001 l.jpg

Accounting income for books

Temporary difference

Taxable income

$ 10,000

( 1,250)

$ 8,750

Taxable Income for 2001?

Tax rate?

x 40%

Taxes payable

$ 3,500


For 2001 l.jpg

Depreciation in TI for books

Depreciation in AI

Temporary difference

$ 3,750

2,500

$ 1,250

For 2001

Will reverse in what year?

$ 3,500


Reversal will be a l.jpg
Reversal will be a for books

Taxable Amount

Deductible Amount

The tax consequence is a

DTA or DTL


Schedule tax consequences l.jpg
Schedule Tax Consequences for books

Description

2001

Description

2005

Taxable Income

Taxable Amount

1,250

8,750

Tax Rate

x 40%

Tax Rate

x 35%

Taxes Payable

Tax Consequence

3,500

437.50

DTL


Change in deferred tax liability80 l.jpg
Change in Deferred Tax Liability for books

DTL

0 Beginning Balance

Credit

437.50 Increase

437.50 Ending Balance


2001 income tax expense l.jpg

Income tax payable for books

Increase in DTL

Income tax expense

$ 3,500.00

437.50

$ 3,937.50

Debit

Credit

2001 Income Tax Expense

Income Tax Expense

3,937.50

437.50

Deferred Tax Liab

Income Tax Payable

3,500.00


Assumption 2001 ai 8 000 l.jpg

Taxable income? for books

Accounting income

Temporary difference

NOL

(8,000)

(2,500)

(10,500)

Assumption: 2001 AI = (8,000)


Amount of tax refund l.jpg
Amount of Tax Refund? for books

  • $ 3,500

  • Income Tax Refund Receivable

  • Classified as a?

    • Current asset

TI Tax Paid Year 1 8,750 3,500

Year 2 (10,500) NOL


2002 cumulative td l.jpg
2002- Cumulative TD? for books

2002 Depreciation in TI

7,500

2002 Depreciation in AI

5,000

2002 Temporary difference

2006

2,500

2001Temporary difference

1,250

2005

Cumulative TD

3,750

In what year(s) will cumulative TD reverse?


Schedule tax consequences85 l.jpg
Schedule Tax Consequences for books

2001

2002

2005

2006

TI (NOL)

8,750

(10,500)

TA

1,250

2,500

Tax Rate

x 40%

Tax Rate

x 35%

x 35%

Taxes Payable

Tax Consequence

437.50

875.00

3,500

1,312.50

NOL CB

8,750

Tax Rate

x 40%

Tax Refund

DTL

3,500


Nol carryover l.jpg
NOL Carryover for books

  • 2002 NOL 10,500

  • Carried back to 2001 8,750

  • NOL carryover 1,750

A future benefit


Future tax consequence nol l.jpg
Future Tax Consequence - NOL? for books

  • What tax rate to choose?

  • We will use 35%

  • Tax consequence

    • 1,750 x 35% = 612.50


T account l.jpg
T Account for books

DTL


T account89 l.jpg
T Account for books

DTL

437.50

875.00

1,312.50


T account90 l.jpg
T Account for books

DTA


T account91 l.jpg
T Account for books

DTA

0

612.50

612.50


Journal entry 2002 l.jpg
Journal Entry - 2002 for books

  • Income Tax Refund Receivable 3,500.00

    DTA 612.50

    DTL 875.00

    Income Tax Benefit 3,237.50


Slide93 l.jpg
2003 for books

  • Accounting income = (10,000)

  • Tax law change:

    • Tax rate for current & future years

    • Changed to 30%


Calculate loss carryover l.jpg
Calculate Loss Carryover for books

Accounting Loss

(10,000)

Depreciation in TI

7,500

(2,500)

Depreciation in AI

5,000

2003 NOL

(12,500)

NOL Carryover to 2003

(1,750)

NOL Carryover to 2004

(14,250)


2003 temporary difference l.jpg
2003 Temporary Difference? for books

  • $ 2,500

Cumulative temporary difference?

  • From 2001 1,250

  • From 2002 2,500

  • From 2003 2,500

  • Cumulative TD 6,250


Schedule tax consequences96 l.jpg
Schedule Tax Consequences for books

2002

2003

2005

2006

TI (NOL)

(10,500)

(12,500)

TA

1,250

5,000

NOL CB

8,750

Tax Rate

x 30%

x 30%

Tax Consequence

375

1,500

NOL CO

1,750

(14,250)

1,875

DTL


Future tax consequences nol carryover l.jpg

Amount of NOL Carryover for books

Tax rate

Future tax consequence

What is it?

$ 14,250

30%

$ 4,275

DTA

Future Tax ConsequencesNOL Carryover


Assumption l.jpg
Assumption for books

  • More likely than not

  • No future taxable income

  • How much of the DTA is realizeable?

  • The amount of the DTL

  • $ 1,875


The valuation allowance l.jpg

DTA for books

Realizeable

Valuation allowance

4,275

1,875

2,400

The Valuation Allowance?


Balance sheet l.jpg
Balance Sheet? for books

  • DTA $ 4,275

  • Allowance ( 2,400)

  • Net Asset $ 1,875

  • DTL ( 1,875)

  • Net amount none


T account101 l.jpg
T Account for books

DTL


T account102 l.jpg
T Account for books

DTL

1,312.50

562.50

1,875.00


T account103 l.jpg
T Account for books

DTA


T account104 l.jpg
T Account for books

DTA

612.50

3,662.50

4,275.00


T account105 l.jpg
T Account for books

DTA-Valuation Allowance


T account106 l.jpg
T Account for books

DTA-Valuation Allowance

0

2,400

2,400


Journal entry 2003 l.jpg
Journal Entry - 2003 for books

  • DTA 3,662.50

    Valuation Allow 2,400.00

    DTL 562.50

    Income Tax Benefit 700.00


Assumptions 2004 l.jpg
Assumptions - 2004 for books

  • Accounting income = $4,000

  • Includes accrual of $8,000

    • Expected loss on lawsuit

    • Expected to be settled in 2006


Calculate loss carryover109 l.jpg
Calculate Loss Carryover for books

Accounting Income

4,000

Depreciation in TI

7,500

Depreciation in AI

5,000

TD due to depreciation

(2,500)

TD due to law suit

8,000

TI before special deductions

9,500

NOL Carryover to 2004

(14,250)

NOL Carryover to 2005

(4,750)


Cumulative td for depr l.jpg
Cumulative TD for Depr? for books

  • 2001 $ 1,250

  • 2002 2,500

  • 2003 2,500

  • 2004 2,500

  • Cumulative TD $ 8,750

Taxable Amount

or

Deductible Amount


Td from lawsuit l.jpg
TD from Lawsuit? for books

  • $ 8,000

Taxable Amount

or

Deductible Amount


Schedule current tax consequences l.jpg
Schedule Current Tax Consequences for books

Description

2002

2003

2004

Taxable Inc (Loss)

(10,500)

9,500

(12,500)

NOL CB

8,750

n/a

n/a

NOL CO

1,750

4,750

14,250

Deductible Amount


Schedule future tax consequences l.jpg
Schedule Future Tax Consequences for books

Description

2005

2006

2007

Taxable Amount

2,500

1,250

5,000

Tax Rate

x 30%

x 30%

x 30%

Taxes Consequence

375

1,500

750

2,625

DTL


Deferred tax asset l.jpg
Deferred Tax Asset? for books

  • 3,825

    • NOL 4,750

    • Deductible Amount 8,000

    • Total 12,750

    • Tax Rate 30%

    • DTA 3,825


Valuation allowance l.jpg
Valuation Allowance? for books

  • ZERO

  • No Evidence to indicate that it is more likely than not that the DTA will not be realized


T account116 l.jpg
T Account for books

DTL


T account117 l.jpg
T Account for books

DTL

1,875

750

2,625


T account118 l.jpg
T Account for books

DTA


T account119 l.jpg
T Account for books

DTA

4,275

450

3,825


T account120 l.jpg
T Account for books

DTA-Valuation Allowance


T account121 l.jpg
T Account for books

DTA-Valuation Allowance

2,400

2,400

0


Journal entry 2004 l.jpg
Journal Entry - 2004 for books

  • Valuation Allowance 2,400

    DTA 450

    DTL 750

    Income Tax Benefit 1,200


Chapter 17 learning objectives123 l.jpg
Chapter 17--Learning Objectives for books

3. Interpret the major issues central to the historical development of accounting for income taxes


Interperiod income tax allocation theories l.jpg
Interperiod Income Tax Allocation Theories for books

  • No income tax allocation

  • Partial income tax allocation

  • Comprehensive income tax allocation


No income tax allocation l.jpg
No Income Tax Allocation for books

  • Income tax expense = Income tax paid

  • Rationale

    • No income tax liability until a tax return is filed

      • No future tax consequences yet

    • Deferred income tax liabilities are never paid

      • Continuous replacement

      • Never write the check


Comprehensive allocation l.jpg
Comprehensive Allocation for books

  • Report all future tax consequences associated with items reported in the income statement

  • APB & FASB take this position


Arguments in favor of interperiod income tax allocation l.jpg
Arguments in Favor of Interperiod Income Tax Allocation for books

  • Matches

    • Items reported in earnings

    • with their future tax consequences

  • Reports the anticipated future tax consequences as

    • Assets & Liabilities


Methods of incometax allocation l.jpg
Methods of IncomeTax Allocation for books

  • Deferred method

    • Was required under APB 11

  • Asset/Liability method

    • Is required under SFAS 109


Criticism of deferred method l.jpg
Criticism of Deferred Method for books

  • Measurement based on current tax rate

  • Does not measure future tax consequence

  • Because the tax is deferred, the tax consequence occurs in the future.

  • Measurement should be based on expected future rates

  • Tax expense should be based on the change in asset & liability measures


Net of tax presentation l.jpg
Net-of-tax presentation for books

  • Refers to offsetting a deferred tax amount against a related asset or liability

  • Was used briefly in certain business combination situations

  • Is no longer acceptable under GAAP


Discounting to present value l.jpg
Discounting to Present Value for books

  • Is a subject under continuing debate

  • Is not used for deferred tax items under current GAAP

  • Yet, anticipated future cash flows for other assets and liabilities are discounted


Chapter 17 learning objectives132 l.jpg
Chapter 17--Learning Objectives for books

4. Analyze the financial reporting of income tax information disclosed in notes to financial statements


Income statement l.jpg
Income Statement for books

Items are classified in four categories

1. Continuing operations

2. Discontinued operations

3. Extraordinary items

4. Changes in accounting principles

Income tax expense is allocated among these categories


Required disclosure notes for balance sheet items include l.jpg
Required disclosure notes for booksfor balance sheet items include

  • Changes in deferred tax valuation allowances

  • Types of temporary differences and carry-forwards that involve significant deferred tax assets or liabilities with amounts and uncertainties

  • Exceptions involving deferred taxes


Required disclosure notes for income statement items l.jpg
Required disclosure notes for booksfor income statement items

  • Significant components of income tax expense for continuing operations

  • Amounts of tax expense allocated to other than continuing operations

  • Nature of differences due to state taxes, nondeductible items, tax credits, etc.

  • Nature of items affecting comparability between periods

  • Amounts and dates for any carryforwards


Chapter 17 learning objectives136 l.jpg
Chapter 17--Learning Objectives for books

5. Interpret the impact income tax accounting principles can have on analyzing a company’s financial position, results of operations, and growth potential


Tax items which can cause special concern in financial analysis l.jpg
Tax items which can cause special concern in financial analysis

  • Effects of tax-exempt income

  • Effects of tax credits and depreciation

  • Contrast of tax rates and tax credits

  • Valuation allowances

  • Actual examples of the above situations are presented in the text.


ad