Chapter 18 Income Taxes

Question 1

What is the main objective of accounting for income taxes in a business?

Answer 1

To recognize taxes payable for the current period and to account for future tax consequences (deferred tax assets/liabilities).

Question 2

How is accounting income different from taxable income?

Answer 2

Accounting income is based on IFRS/ASPE standards, while taxable income is based on tax laws, often leading to differences due to temporary and permanent differences.

Question 3

What are temporary differences?

Answer 3

Differences between the tax base and carrying amount of assets or liabilities, which will reverse in the future.

Question 4

What is a taxable temporary difference?

Answer 4

A difference that will result in an increase in taxable income and taxes payable in the future (e.g., accelerated depreciation).

Question 5

What is a deductible temporary difference?

Answer 5

A difference that will reduce taxable income and taxes payable in the future (e.g., warranty expenses recognized in accounting before taxes).

Question 6

How do you calculate taxable income?

Answer 6

Adjust accounting income by adding taxable revenues and subtracting deductible expenses not yet recognized for accounting purposes.

Question 7

What is a deferred tax liability (DTL)?

Answer 7

A tax liability arising from taxable temporary differences, which will result in higher taxes in the future.

Question 8

What is a deferred tax asset (DTA)?

Answer 8

A tax asset arising from deductible temporary differences, which will result in lower taxes in the future.

Question 9

How do you calculate deferred tax liabilities and assets?

Answer 9

Use the tax rate applicable to the temporary difference and multiply it by the difference between the tax base and carrying amount.

Question 10

What is deferred tax expense?

Answer 10

The change in deferred tax assets and liabilities from the beginning to the end of the period.

Question 11

What is the impact of tax rate changes on deferred tax accounts?

Answer 11

When tax rates change, the value of deferred tax assets and liabilities must be recalculated using the new rate.

Question 12

How do you handle multiple tax rates?

Answer 12

Apply the appropriate tax rate to each temporary difference, considering the jurisdiction and type of income.

Question 13

What is a tax loss carryforward?

Answer 13

A tax loss that can be carried forward to offset taxable income in future years (usually up to 20 years).

Question 14

What is a tax loss carryback?

Answer 14

A tax loss that can be carried back to offset taxable income in the previous 3 years.

Question 15

How should tax loss carryovers be accounted for?

Answer 15

Recognize a deferred tax asset if it is “more likely than not” that future taxable income will offset the loss.

Question 16

What is a valuation allowance?

Answer 16

A contra account that reduces the carrying value of a deferred tax asset when it is unlikely the asset will be realized.

Question 17

When is a valuation allowance necessary?

Answer 17

If it is not probable that future taxable income will be sufficient to realize a deferred tax asset.

Question 18

What happens if there is insufficient taxable income to use tax loss carryovers?

Answer 18

The tax benefits may not be recognized, and a valuation allowance is recorded.

Question 19

How are tax losses disclosed in financial statements?

Answer 19

Disclose the amount of unused losses, the period over which they can be carried forward, and their impact on tax assets.

Question 20

How are deferred tax assets and liabilities presented on the SFP under IFRS and ASPE?

Answer 20

They are presented as non-current assets and liabilities, with no netting unless they relate to the same taxable entity and tax authority.

Question 21

What is intraperiod tax allocation?

Answer 21

The process of allocating tax expense to the same period and financial statement line as the underlying transaction or event.

Question 22

How is intraperiod tax allocation applied in IFRS?

Answer 22

Tax effects should be traced to where the transaction originated and presented in the same statement as in the prior period.

Question 23

Does ASPE recognize OCI for tax allocation?

Answer 23

No, ASPE does not recognize OCI, so there is no separate OCI tax allocation.

Question 24

What disclosures are required under IFRS for income tax accounting?

Answer 24

Major components of tax expense, tax rate reconciliation, unrecognized deferred tax assets, and temporary differences.

Question 25

What disclosures are required under ASPE for income tax accounting?

Answer 25

Tax expense related to income before discontinued operations, capital transactions, unused tax losses, and the amount of temporary differences.

Question 26

How does ASPE handle future income taxes?

Answer 26

ASPE allows a choice between the taxes payable method or the future income taxes method for accounting deferred tax assets and liabilities.

Question 27

What are the differences between ASPE and IFRS in accounting for income taxes?

Answer 27

ASPE allows policy choice for tax methods, while IFRS mandates the use of the temporary difference approach.

Question 28

What is the difference between taxes payable method and future income taxes method under ASPE?

Answer 28

Taxes payable method focuses on current tax liabilities, while future income taxes method recognizes deferred tax assets/liabilities for temporary differences.

Question 29

What are the major challenges in accounting for deferred taxes?

Answer 29

The complexity of determining the timing of tax reversals, estimating future taxable income, and applying the correct tax rates.

Question 30

How should tax effect changes be calculated when tax rates change?

Answer 30

Recalculate the deferred tax balances using the new tax rate and recognize the effect of the change in tax rate in the current period.

Question 31

How is the quality of earnings affected by tax accounting?

Answer 31

Profits may be artificially improved by recognizing favorable tax effects. Judgement is needed when recognizing deferred tax assets and tax benefits

Question 32

How does data analytics impact tax accounting?

Answer 32

It is used by tax authorities to monitor non-compliance, using methods like text mining on social media to identify discrepancies.

Question 33

How does the asset-liability method work under IFRS?

Answer 33

It recognizes deferred tax assets and liabilities based on temporary differences between accounting and taxable income.

Question 34

How is the Deferred/Future Tax Asset account reassessed?

Answer 34

At each reporting date, the likelihood of realizing a DTA is reassessed based on future taxable income projections.

Question 35

What happens if the deferred tax asset is unlikely to be realized?

Answer 35

It may be written down, and a valuation allowance may be recorded to reduce the carrying amount.

Question 36

How does tax planning influence the recognition of deferred tax assets?

Answer 36

Tax planning strategies can help determine if there will be sufficient taxable income to utilize deferred tax assets.

Question 37

How are capital transactions handled in income tax accounting?

Answer 37

Tax effects of capital transactions (e.g., gains/losses) are allocated to the relevant income categories and reported in the period the transaction occurs.

Question 38

What happens when there is a change in substantively enacted tax rates?

Answer 38

Deferred tax accounts are adjusted to reflect the new tax rate, and the change is recognized in the current tax expense.

Question 39

What is the importance of tax rate reconciliation?

Answer 39

It helps explain the differences between the statutory tax rate and the effective tax rate, showing how the actual tax expense is calculated.

Question 40

How are temporary differences related to the statement of financial position (SFP)?

Answer 40

Temporary differences between tax bases and carrying amounts are reported as deferred tax assets or liabilities on the SFP.