3.9 income taxes

Question 1

Deferred tax assets

Answer 1

represent taxes that have been recognized for tax reporting purposes but not on financial reporting statements

represent taxes that have been paid but not yet recognized on the income statemen

emerge when taxable income is greater than accounting profit.

A valuation allowance is used to represent the likelihood future profits will be sufficient to realize the deferred tax asset.

Question 2

Deferred tax liabilities

Answer 2

represent taxes that have been recognized for financial reporting purposes but not for tax reporting.

result from accounting profit being greater than taxable income.

Question 3

Accounting profit

Answer 3

the basis for the income tax expense (or recoverable) that appears on a company’s income statement.

Question 4

Taxable income

Answer 4

based on the tax laws that are enforced in the jurisdictions in which a company operates.

Any tax obligations are recorded as an income tax payable liability (or an income tax recoverable asset) on the balance sheet.

Question 5

The tax base

Answer 5

the value of an asset or liability for tax purposes

Question 6

the carrying amount

Answer 6

the value of an asset or liability based on accounting standards

Question 7

When the tax base for an asset or liability differs from its carrying amount…

Answer 7

accounting profits will differ from taxable income.

Question 8

The current tax asset or liability is based on taxable income.

Differences between accounting profit and taxable income can arise from items such as:

Answer 8

Revenues and expenses recognized in different periods for accounting and tax purposes

Items recognized for accounting purposes but not tax purposes

Difference between carrying amount and tax base of assets or liabilities

Tax losses in prior years reducing taxable income in later years

Question 9

Under IFRS, deferred tax assets and liabilities must be classified as:

Answer 9

noncurrent

Question 10

The tax base of an asset

Answer 10

the amount attributed for tax purposes

Question 11

The tax base of a liability

Answer 11

the carrying amount less amounts that will be deductible in the future for tax purposes

Question 12

Permanent differences

Answer 12

will not be reversed in the future, so no deferred tax asset or liability is created.

These may arise from income or expense items that are not allowed by tax legislation or tax credits for certain expenditures that directly reduce taxes.

Permanent differences result in a discrepancy between the statutory tax rate and a company’s effective tax rate.

Question 13

reported effective tax rate formula

Answer 13

income tax expense / pretax accounting profit

Question 14

Taxable temporary differences

Answer 14

result in taxes in future periods, thus creating a deferred tax liability

It results when the carrying amount of an asset exceeds its tax base or the tax base of liability exceeds its carrying amount.

Question 15

Deductible temporary differences

Answer 15

result in a deferred tax asset.

This results in a reduction of taxable income in future periods.

There must be a reasonable expectation of recovery in future periods (i.e., sufficient future profits).

Question 16

Under US GAAP, deferred tax assets to be recognized should be reduced with a…

Answer 16

valuation allowance contra account if it is deemed more likely than not that the full amount will not be realized

Question 17

Deferred tax balance sheet accounts should be based on the…

Answer 17

expected tax rate when the asset or liability will be settled.

Question 18

Even if there have been no changes in temporary differences during the accounting period, the carrying amounts of deferred tax assets and liabilities will need to be adjusted to reflect any of the following:

Answer 18

Changes in applicable tax rates

Reassessments of the likelihood of recovering deferred tax assets

Changes in expectations about the factors that influence deferred tax assets or liabilities

Question 19

Deferred taxes are normally recognized on the income statement, but certain circumstances require a direct equity charge.

Items that bypass the income statement and get recorded directly to equity on the balance sheet include:

Answer 19

Changes in the fair value of certain investments

The impact of changes in accounting policies

The impact of exchange rate fluctuations

PP&E revaluations (IFRS only)

–> If any such items result in deferred tax liability, the deferred tax should also be taken directly to equity.

–> If it is determined a deferred tax liability will not be reversed, the liability should be reduced and the change should be recorded directly in the equity account.

Deferred taxes that are attributable to business combinations are also charged directly to equity.