Deferred Taxes

Question 2

What is a ‘temporary difference’ related to deferred taxes?

Answer 2

GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another Example: Dividends from a subsidiary accounted for using the Equity Method; tax income, but not book income

Question 3

What is a deferred tax asset?

Answer 3

Deduction will reduce future income taxes expense.

Question 4

What is a deferred tax liability?

Answer 4

Income will be taxable in a future period and will increase future tax expense

Question 5

Which period’s tax rate is used to calculate a deferred tax asset or liability?

Answer 5

The FUTURE enacted tax rate, not the current one. It is never discounted to present value.

Question 6

What valuation allowance is used with respect to a deferred tax asset?

Answer 6

If it is “probable” that not all of a Deferred Tax Asset (debit) will be realized, then the Deferred Tax Asset account must be written down (credit) to reflect this

Question 7

What effect do ‘permanent differences’ have on deferred income taxes?

Answer 7

They have no tax impact. When calculating the total differences between book and tax income- subtract the permanent differences from the total before applying a future enacted tax rate

Question 8

What is deferred income tax expense?

Answer 8

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities GAAP Method for calculating is the ‘Asset and Liability Approach’ Note: IFRS uses the ‘Liability approach’ only

Question 10

How are deferred tax assets classified as ‘current’ or ‘non-current’ on the balance sheet?

Answer 10

‘Current’ Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet ‘Non-Current’ Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more from the Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet