C.1 GAAP Deferred taxes

Question 1

Tax vs STAT vs GAAP income

Answer 1

Tax income = STAT income +/- adjustments for:

• Life insurance reserve differences
• DAC tax
• PH Div reserves
• Tax exempt investment income
• Stock divs from other corporations
• other accrued liability
• NOL carrybacks and rollforwards

GAAP vs STAT income:

• DAC doesnt exist under STAT
• different liability assumptions
• different treatment of deferred/uncollected premiums
• IMR and AVR dont exist under GAAP
• Unrealized G/L due to changing IRs are recognized in GAAP equity

Question 2

Main Objective of FAS 109

Answer 2

Primary objective - treatment of deferred tax assets and liabilities DTA and DTL

FAS 109 governs GAAP accounting for tax consequences related to:

1. Timing differences between GAAP and Tax acct
2. Other events that create differences between the tax and GAAP value of assets and liabilities
3. Carryforwards and Carrybacks

GAAP acct principles applied to income tax:

1. Recognize current DTA and DTL for taxes estimated to be paid in the current year
2. recognize DTL for estimated future temporary differences
3. DTAs and DTLs always based on current tax laws
4. Reduce DTAs for amounts that arent expected to be realized

Question 3

FAS 109 Asset and liability method

Answer 3

FAS 109 uses the asset and liability method

ex: accounting for a bond purchased at discount:
- assume a company buys a $100 par bond for $90
- after one year, the GAAP value of the bond is $91
- the $1 increase in GAAP value is due to the amortization of the discount
- Tax accounting doesnt recognize changes in discount so the tax value of the bond is still $90
- at EOY 1: DTL = 0.21 * $1
- this is a taxable temporary difference, recognition of the $1 is delayed under tax accounting

Question 4

Steps to apply FAS 109

Answer 4

1. Recognize current tax liability/Assets under tax expense payable/refundable for the current year
2. for future years, identify taxable and deductible temp differences separately
3. identify carryforwards
4. recognize DTL for taxable temp differences in (2)
5. Recognize DTA for deductible temp differences in (2) and carryforwards
6. establish a valuation allowance for DTAs with >50% prob of NOT being realized
7. Recognize the deferred tax expenses or benefits = DTA change - Val Allowance Change - DTL Change
8. allocate DTAs between current and noncurrent assets if applicable