Deferred Income Taxes Flashcards
Steps to calculating deferred taxes
- Step 1: Determine temporary differences - identify assets and liabilities whose values for accounting purposes and tax purpose are different
- Step 2: Calculate balance of deferred taxes - multiply total of temporary differneces by tax rate substantively enacted
1. deductible temporary differences –> deferred tax asset
2. taxable temporary differences –> deferred tax liability
Common temporary differences
- warranty liability
- leases
- decomissioning provision
- lawsuit accruals
- property, plant and equipment (NBV versus UCC)
- deferred development costs
- some accrued liabilities
- investements classified as FVPL and FVOCI
Accounting for tax losses
Loss carryforward:
Any losses not applied in prior three years are carried forward:
* recognize as deferred tax asset - if probable will earn sufficient taxable income to use benefit
* use substantively enacted rate at future date - recovery is expected
* reassess at each reporting periof if still probable and adjust
DR Deferred Tax Asset, CR Deferred income tax expense (recovery)
ASPE 3465 vs IAS 12
**Terminology: **
* IAS 12 - Deferred taxes
* ASPE 3465 - Future income taxes
**Method of accouting taxes: **
* IAS 12 - Accrual method is required. Always account for current taxes and deferred taxes.
* ASPE 3465 - Choise of future income taxes method or taxes payable method.
What are deferred taxes and temporary differences?
- Deferred taxes: estimated taxes related to the temporary differences of accounting and tax treatment of income and expenses. They are equal to the net temporary differences times the substantively enacted tax rate, and are not discounted.
- Temporary differences: Differences between the accoutning basis and tax basis of assets and liabilities that are expted to reverse over time.
What is a taxable temporary difference?
- If the temporary difference will cause future taxable income to increase when it reverses, it is a taxable temporary difference.
- The most common taxable temporary difference arises when the NBV of depreciable capital assets is greater than the UCC of those assets. “NBV greater than UCC” means that, to date, more CCA was taken than depreciation. When this difference reverses in the future, CCA claims will be lower than depreciation, resulting in taxable income and current tax payable increasing.
- The impact of a taxable temporary difference in the financial records is recording a deferred income tax liability. The company knows in the current period that an economic resource outflow of cash on the differences between the accounting base and the tax base is an obligation that cannot be reasonably avoided in the future.
What is a deductible temporary difference?
- If the temporary difference will cause future taxable income to decrease, then it is a deductible temporary difference.
- A warranty liability is an example of a deductible temporary difference.
For accounting purposes, warranties are deducted on an accrual basis as an expense. For tax purposes, warranties are deductible on a cash basis. The balance in the warranty liability account at any point in time represents the amount that has already been deducted for accounting purposes. For tax purposes, the warranty liability will be deductible in the future as cash is paid to settle warranty claims. This will cause future taxable income to decrease and deferred taxes payable to decrease.
Temporary differences arise because of differences between the accounting and tax bases of assets and liabilities, the relationship between which is as follows:
* Accounting base of an asset + deductible temporary differences – taxable temporary differences = tax base of an asset.
— If accounting base of asset > tax base, this results in a taxable temporary difference.
— For example, NBV 100,000 > UCC 80,000; since more CCA has been claimed than the depreciation expense, it results in a taxable temporary difference.
— If accounting base of asset < tax base, this results in a deductible temporary difference. For
example, NBV 100,000 < UCC 130,000; since less CCA has been claimed than the depreciation expense, it results in a deductible temporary difference.
* Accounting base of a liability – deductible temporary differences + taxable temporary differences = tax base of a liability.
— If accounting base of liability < tax base, this results in a taxable temporary difference.
— If accounting base of liability > tax base, this results in a deductible temporary difference.
Warranty liability
Accounting basis: Warranty is accrued based on estimated warranty claims. Therefore, the accounting basis is the amount according to the SFP.
Tax basis: Payments are expensed as incurred (that is, no warranty liability recorded). When an item is deductible on a cash basis for tax purposes, the tax basis is nil. Therefore, the tax basis for a warranty liability will be nil.
Leases under IFRS and capital leases under ASPE
Accounting basis: Right-of-use asset and lease liability are recorded. The accounting basis for the asset is the amount recorded as the right-of-use asset and the accounting basis for
the liability in the amount included in the
lease liability account.
Tax basis: For tax purposes, lease payments are deductible when incurred. Thus, the tax basis for both the leased asset and lease liability will be nil.
Decommissioning
provision /
asset retirement
obligation (ARO)
Accounting basis: The accounting basis for the decommissioning cost (asset) and
decommissioning provision (liability), called an ARO under ASPE, are the amounts recorded in the SFP.
Tax basis: For tax purposes, decommissioning costs are deductible when paid; therefore, the tax basis for each of the asset and liability are nil.
Lawsuit accruals
Accounting basis: Liability is recorded when provision criteria are met. Therefore, the accounting basis is the amount recorded in the SFP.
Tax basis: Amounts are expensed for tax purposes at the time the amount becomes legally payable. If the amount is not legally payable at year end, the tax basis is nil. If the amount is legally payable at year end, the tax basis is equal to the accounting basis.
Depreciable PP&E
Accounting basis: The accounting basis is the original cost less accumulated depreciation (NBV), if the cost method and not the revaluation method is considered.
Tax basis: The tax basis is the UCC of the assets.
Deferred
development costs
Accounting basis: Development costs are recorded as an asset on the SFP when deferral criteria are met. Therefore, the accounting basis is the amount recorded on the SFP.
Tax basis: For tax purposes, development costs are deductible when incurred; therefore, the tax basis of the asset is nil.
Certain accrued
liabilities (such as
severance costs and
pension expense)
Accounting basis: The accounting basis is the liability recorded on the SFP (assuming the pension is in a net liability position).
Tax basis: If the employee has agreed to the amount of severance, the tax basis is equal to the accounting basis. If the employee has not yet agreed to the amount of severance, the tax basis is nil. Pensions are deductible on a cash basis (when the entity makes a payment to the trustee of the plan assets); therefore, the tax basis is nil.
