302644 DEFERRED TAX 3D Flashcards
A publicly traded corporation reported a $10,000 deduction in its current-year tax return for an item it expects to be disallowed. The tax rate is 40%. How should the corporation report this tax position in the financial statements?
As a temporary difference disclosed in the notes to the financial statements that is not recognized
As a $10,000 deferred tax asset
As a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit
As a $4,000 deferred tax asset and a $4,000 income tax benefit
As a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit
If the company expects the item to be disallowed, it believes it does not meet the “more likely than not” threshold for recognizing a potential tax benefit. Following accounting conservatism, the company must treat the deduction as if it was disallowed from the start by recognizing tax expense and the associated liability.
The company would have $4,000 ($10,000 × 40%) more in tax expense and liability because it expects the deduction to be disallowed.
Deferred Income Tax
Deferred income tax (deferred tax expense) is the amount of future tax expense that is computed independently and does not yet appear on the tax return. It is the net change during the period in the entity’s deferred tax liability (asset) and results from changes in the deferred (noncurrent) tax liability (asset) that appears on the statement of financial position until it reverses or is settled. It is added to the current tax expense (computed on the tax return) to give the total tax expense for the period (a residual amount) that is reported on the income statement.
FASB ASC 740-10-20
Deferred Tax
Deferred tax is the amount of future tax consequences attributable to temporary differences that will result in net taxable amounts (deductions) in future years, as computed currently. Recognition and measurement generally does not anticipate the tax consequences of losses or expenses (gains or revenue) that may be incurred (earned) in future years. (Valuation allowances of deferred tax assets may depend on future estimated income.)
Deferred tax is generally computed by multiplying the amount of the temporary difference by the current income tax rate (future tax rates if different from the present rates).
A deferred tax liability is a credit balance (a future taxable amount) and a deferred tax asset is a debit balance (a future deductible amount). The liability will be paid (asset will be recovered) in future years.
FASB ASC 740-10-20
Deferred Tax Consequences
Deferred tax consequences are the future effects on income tax as measured under the provisions of current tax law resulting from temporary differences at the end of the current year without regard to the effects of future events not yet recognized or inherently assumed in the financial statements.
2342.03
Recognition
An entity must initially recognize the effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. That is, there must be a greater than 50% chance that the taxing authority will agree with the entity taking the tax position (e.g., allowing a particular deduction in the entity’s tax return). If there is only a 50% or less chance that a particular deduction will be allowed, the tax position fails the more-likely-than-not requirement. Accordingly, the entity’s financial statements must reflect that fact; usually this would mean reflecting the additional tax liability in the financial statements.
