3.9 income taxes Flashcards
Deferred tax assets
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.
Deferred tax liabilities
represent taxes that have been recognized for financial reporting purposes but not for tax reporting.
result from accounting profit being greater than taxable income.
Accounting profit
the basis for the income tax expense (or recoverable) that appears on a company’s income statement.
Taxable income
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.
The tax base
the value of an asset or liability for tax purposes
the carrying amount
the value of an asset or liability based on accounting standards
When the tax base for an asset or liability differs from its carrying amount…
accounting profits will differ from taxable income.
The current tax asset or liability is based on taxable income.
Differences between accounting profit and taxable income can arise from items such as:
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
Under IFRS, deferred tax assets and liabilities must be classified as:
noncurrent
The tax base of an asset
the amount attributed for tax purposes
The tax base of a liability
the carrying amount less amounts that will be deductible in the future for tax purposes
Permanent differences
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.
reported effective tax rate formula
income tax expense / pretax accounting profit
Taxable temporary differences
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.
Deductible temporary differences
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).
Under US GAAP, deferred tax assets to be recognized should be reduced with a…
valuation allowance contra account if it is deemed more likely than not that the full amount will not be realized
Deferred tax balance sheet accounts should be based on the…
expected tax rate when the asset or liability will be settled.
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:
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
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:
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.
