Chapter 18 Income Taxes Flashcards
What is the main objective of accounting for income taxes in a business?
To recognize taxes payable for the current period and to account for future tax consequences (deferred tax assets/liabilities).
How is accounting income different from taxable income?
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.
What are temporary differences?
Differences between the tax base and carrying amount of assets or liabilities, which will reverse in the future.
What is a taxable temporary difference?
A difference that will result in an increase in taxable income and taxes payable in the future (e.g., accelerated depreciation).
What is a deductible temporary difference?
A difference that will reduce taxable income and taxes payable in the future (e.g., warranty expenses recognized in accounting before taxes).
How do you calculate taxable income?
Adjust accounting income by adding taxable revenues and subtracting deductible expenses not yet recognized for accounting purposes.
What is a deferred tax liability (DTL)?
A tax liability arising from taxable temporary differences, which will result in higher taxes in the future.
What is a deferred tax asset (DTA)?
A tax asset arising from deductible temporary differences, which will result in lower taxes in the future.
How do you calculate deferred tax liabilities and assets?
Use the tax rate applicable to the temporary difference and multiply it by the difference between the tax base and carrying amount.
What is deferred tax expense?
The change in deferred tax assets and liabilities from the beginning to the end of the period.
What is the impact of tax rate changes on deferred tax accounts?
When tax rates change, the value of deferred tax assets and liabilities must be recalculated using the new rate.
How do you handle multiple tax rates?
Apply the appropriate tax rate to each temporary difference, considering the jurisdiction and type of income.
What is a tax loss carryforward?
A tax loss that can be carried forward to offset taxable income in future years (usually up to 20 years).
What is a tax loss carryback?
A tax loss that can be carried back to offset taxable income in the previous 3 years.
How should tax loss carryovers be accounted for?
Recognize a deferred tax asset if it is “more likely than not” that future taxable income will offset the loss.
What is a valuation allowance?
A contra account that reduces the carrying value of a deferred tax asset when it is unlikely the asset will be realized.
When is a valuation allowance necessary?
If it is not probable that future taxable income will be sufficient to realize a deferred tax asset.
What happens if there is insufficient taxable income to use tax loss carryovers?
The tax benefits may not be recognized, and a valuation allowance is recorded.
How are tax losses disclosed in financial statements?
Disclose the amount of unused losses, the period over which they can be carried forward, and their impact on tax assets.
How are deferred tax assets and liabilities presented on the SFP under IFRS and ASPE?
They are presented as non-current assets and liabilities, with no netting unless they relate to the same taxable entity and tax authority.
What is intraperiod tax allocation?
The process of allocating tax expense to the same period and financial statement line as the underlying transaction or event.
How is intraperiod tax allocation applied in IFRS?
Tax effects should be traced to where the transaction originated and presented in the same statement as in the prior period.
Does ASPE recognize OCI for tax allocation?
No, ASPE does not recognize OCI, so there is no separate OCI tax allocation.
What disclosures are required under IFRS for income tax accounting?
Major components of tax expense, tax rate reconciliation, unrecognized deferred tax assets, and temporary differences.
What disclosures are required under ASPE for income tax accounting?
Tax expense related to income before discontinued operations, capital transactions, unused tax losses, and the amount of temporary differences.
How does ASPE handle future income taxes?
ASPE allows a choice between the taxes payable method or the future income taxes method for accounting deferred tax assets and liabilities.
What are the differences between ASPE and IFRS in accounting for income taxes?
ASPE allows policy choice for tax methods, while IFRS mandates the use of the temporary difference approach.
What is the difference between taxes payable method and future income taxes method under ASPE?
Taxes payable method focuses on current tax liabilities, while future income taxes method recognizes deferred tax assets/liabilities for temporary differences.
What are the major challenges in accounting for deferred taxes?
The complexity of determining the timing of tax reversals, estimating future taxable income, and applying the correct tax rates.
How should tax effect changes be calculated when tax rates change?
Recalculate the deferred tax balances using the new tax rate and recognize the effect of the change in tax rate in the current period.
How is the quality of earnings affected by tax accounting?
Profits may be artificially improved by recognizing favorable tax effects. Judgement is needed when recognizing deferred tax assets and tax benefits
How does data analytics impact tax accounting?
It is used by tax authorities to monitor non-compliance, using methods like text mining on social media to identify discrepancies.
How does the asset-liability method work under IFRS?
It recognizes deferred tax assets and liabilities based on temporary differences between accounting and taxable income.
How is the Deferred/Future Tax Asset account reassessed?
At each reporting date, the likelihood of realizing a DTA is reassessed based on future taxable income projections.
What happens if the deferred tax asset is unlikely to be realized?
It may be written down, and a valuation allowance may be recorded to reduce the carrying amount.
How does tax planning influence the recognition of deferred tax assets?
Tax planning strategies can help determine if there will be sufficient taxable income to utilize deferred tax assets.
How are capital transactions handled in income tax accounting?
Tax effects of capital transactions (e.g., gains/losses) are allocated to the relevant income categories and reported in the period the transaction occurs.
What happens when there is a change in substantively enacted tax rates?
Deferred tax accounts are adjusted to reflect the new tax rate, and the change is recognized in the current tax expense.
What is the importance of tax rate reconciliation?
It helps explain the differences between the statutory tax rate and the effective tax rate, showing how the actual tax expense is calculated.
How are temporary differences related to the statement of financial position (SFP)?
Temporary differences between tax bases and carrying amounts are reported as deferred tax assets or liabilities on the SFP.
