Book 3_FinAn_READING-37_ANALYSIS-OF-INCOME-TAXES

Question 1

Deferred tax assets (DTAs)

Answer 1

Balance sheet asset value that results when taxes payable (tax return) are greater than income tax expense (income statement) and the difference is expected to reverse in future periods.
- Taxable income is greater than pretax income

Question 2

Deferred tax liabilities (DTLs)

Answer 2

Balance sheet liability value that results when income tax expense (income statement) is greater than taxes payable (tax return) and the difference is expected to reverse in future periods
- Taxable income is less than pretax income

Question 3

Valuation allowance.

Answer 3

Reduction of DTAs (contra account) based on the likelihood that the future tax benefits will not be realized.

Question 4

Taxes payable

Answer 4

The tax liability from the tax return. Note that this term also refers to a liability that appears on the balance sheet for taxes due but not yet paid.

Question 5

Income tax expense

Answer 5

Expense recognized in the income statement that includes taxes payable and changes in DTAs and DTLs.

Question 6

The balance of a DTA or DTL

Answer 6

the difference between the tax base and the carrying value of the asset or liability, multiplied by the tax rate.

Question 7

Income tax expense and taxes payable are related through the change in the DTA and the change in the DTL:

Answer 7

income tax expense = taxes payable + ΔDTL - ΔDTA

Question 8

A permanent difference

Answer 8

• A difference between taxable income and pretax income that will not reverse in the future.
• Permanent differences do not create DTAs or DTLs

Question 9

When a firm’s enacted tax rate increases (decreases)

Answer 9

• DTAs and DTLs are both increased (decreased) to reflect the new rate.
• Also affect income tax expense.

Question 10

Deferred tax liabilities occur

Answer 10

• Revenues (or gains) are recognized in the income statement before they are taxable on the tax return
• Expenses (or losses) are tax deductible before they are recognized in the income statement

Question 11

DTAs are recorded

Answer 11

• Revenues (or gains) are taxable before they are recognized in the income statement
• Expenses (or losses) are recognized in the income statement before they are tax deductible
• tax loss carryforwards are available to reduce future taxable income

Question 12

The tax base for a depreciable fixed asset

Answer 12

the amount of tax-allowable depreciation that will be deducted in future tax returns.

Question 13

The tax base of a liability

Answer 13

the liability’s carrying value less amounts that will be included in future taxable income

Question 14

liabilities relating to income received in advance

Answer 14

the tax base is equal to the carrying value of the liability less any amounts that will not be included in future taxable income

Question 15

Tax base and carrying amount to calculate DTA and DTL

Answer 15

• Asset carrying > Tax base: DTL => Expense is deffered, pre-income > taxable
• Asset carrying < Tax base: DTA => Expense is over recorded, preincome < taxable
• Liability carrying > Tax base: DTA => Revenue is deferred, pre-income < taxable
• Liability carrying < Tax base: DTL => Revenue is deferred, pre-income > taxable

Question 16

some or all of a DTA will not be realized

Answer 16

• because of insufficient future taxable income to recover the tax asset),
• then the gross DTA must be reduced by a valuation allowance under U.S. GAAP
• Under IFRS a firm reports a smaller DTA if future recoverability is uncertain but does not report a valuation allowance.

Question 17

DTLs that are not expected to reverse

Answer 17

• Typically because of expected continued growth in capital expenditures, should be treated for analytical purposes as equity
• If DTLs are expected to reverse, they should be treated for analytical purposes as liabilities.

Question 18

Statutory tax rate:

Answer 18

corporate income tax rate in which the company is domiciled

Question 19

Effective tax rate

Answer 19

Income tax expense / pretax income

Question 20

Cash tax rate

Answer 20

Cash tax paid / pretax income

Question 21

the following deferred tax information is disclosed in the footnotes:

Answer 21

• DTLs, DTAs, any valuation allowance, and the net change in the valuation allowance over the period
• Any unrecognized DTL for undistributed earnings of subsidiaries and joint ventures
• Current-year tax effect of each type of temporary difference
• Components of income tax expense
• Reconciliation of reported income tax expense and the tax expense based on the statutory rate
• Tax loss carryforwards and credits