Deffered Income taxes Flashcards
How to calculate Tax difference
Pre book tax income \+_ Permanent difference ------------------------------------- Book Taxable \+- Temporary difference ------------------------------------- Taxable Income x Current tax rate --------------------------------------- Current tax liability less prepayment ---------------------------------------- Tax payable
Tax liability and asset
Book ExpenseTax Income=TTD
disclosure
Permanent differences are not required to be disclosed
Liablities under IFRS
are non-current
current and non-current asset or liablity
A deferred tax asset or liability is classified as current or noncurrent based on the classification of the asset or liability that the temporary difference relates to, regardless of the period in which it will reverse.
warranty costs
A warranty creates a loss contingency. Thus, if incurrence of warranty expense is probable, the amount can be reasonably estimated, and the amount is material, accrual accounting should be used. A liability for warranty costs is recognized when the related revenue is recognized.
Deffered tax
Measurement of tax liabilities and assets is based on enacted tax law. The effects of future changes in that law are not anticipated.
Required disclosures
The following are required disclosures: 1.Total deferred tax liabilities and total deferred tax assets
- Total DTA valuation allowance and its net annual change
- Tax effect of each TD or carryforward resulting in a significant deferred tax amount (by public entities)
- The significant components of income tax expense related to continuing operations
No disclosures about permanent differences are required.
recognition threshold
Before a tax position is reported in the financial statements, it must meet the basic recognition threshold. The evaluation of a tax position is a two-stage procedure.1.Recognition. The financial statement effects are initially recognized if it is more likely than not that the position will be sustained based upon its technical merits upon examination by the tax authorities.
2.Measurement. The entity recognizes the largest benefit that is more than 50% likely to be realized.
Two taxable categories
Taxable temporary difference, deductible temporary difference
Taxable temporary differences
The first category, called Taxable Temporary Differences, involves differences that initially cause a postponement in the payment of taxes.
a. In the year of origination, the item causes taxable income to decline relative to pretax accounting income.
b. When the item reverses, the item
causes future taxable income to exceed pretax accounting income. This is why these differences are called taxable differences. They increase taxable income relative to pretax accounting income in the future.
c. Future taxable differences give rise to deferred tax liabilities.
Deductible temporary diff
The second category, called Deductible Temporary Differences, involves differences that initially cause a prepayment of taxes.
a. In the year of origination, the item causes taxable income to increase relative to pretax accounting income.
b. When the item reverses, the item causes future taxable income to be less than pretax accounting income. This is why these differences are called deductible differences. They reduce taxable income relative to pretax accounting income in the future.
c. Future deductible differences give rise to deferred tax assets.
Tax IFRS
IFRS requires the use of the “liability method” to account for income taxes. Similar to US GAAP, its primary purpose is to focus on the statement of financial position and report deferred tax assets and deferred tax liabilities. IAS 12 prohibits deferred tax assets or deferred tax liabilities from being classified as current. Therefore, deferred taxes are classified as noncurrent items in the statement of financial position.
Current tax is the amount of income taxes payable or recoverable on the taxable profit or loss for the period. Deferred tax assets and liabilities arise due to temporary differences. Temporary differences are either taxable temporary differences or deductible temporary differences. A taxable temporary difference will result in an increase in taxable amounts in a future period. A deductible temporary difference will result in amounts that can be deducted in future periods.
A deferred tax asset arises when there is a deductible temporary difference. A deferred tax asset also arises when an entity has unused tax losses that can be deducted in the future or tax credits which can be used in the future. An entity can recognize a deferred tax asset if it is probable (more likely than not) that the tax benefit can be used. Deferred tax assets and liabilities are measured using the enacted rate or substantially enacted rate (unlike US GAAP which requires the use of the enacted tax rate).
The liability method requires an entity to identify all temporary differences. The differences are then classified as those giving rise to deferred tax liabilities, and those giving rise to deferred tax assets. This distinction is important because all deferred tax liabilities are reported, whereas deferred tax assets can only be recognized if it is probable (more likely than not) that the asset will be realized. Similar to US GAAP, tax expense is the sum of current tax expense and the deferred tax expense.
One of the significant differences in accounting for income taxes between US GAAP and IFRS is the classification of deferred taxes on the balance sheet. Recall that for US GAAP, the netting procedures involve netting current deferred tax assets (DTA) with current deferred tax liabilities (DTL) to present one amount, and netting noncurrent DTA with noncurrent DTL to present another amount. Under IFRS, deferred tax assets and liabilities may not be classified as current. The netting rules are also different. Netting of the components of deferred taxes is only permissible in certain situations. The rules for presentation and disclosure require that a current tax payable and a current tax recoverable (receivable) can be offset only if it relates to the same taxing authority. Likewise, the netting of deferred tax assets and deferred tax liabilities must relate to the same taxing authority. Therefore, in order to net these amounts, the entity must have a legal right to offset the amounts, and the amounts must relate to the same taxing authority.
what is the tax rate used for interim reports??
The current year effective annual tax rate is used for interim reports
