F6- Def.Taxes Flashcards
What is a temporary difference related to deferred taxes?
GAAP says to recognize a revenue/expense in one period
- Tax laws say to recognize it in another
- Affect the deferred tax & the computation
What is a deferred tax asset?
Deduction will reduce future income taxes expense.
What is a deferred tax liability?
Income will be taxable in a future period and will increase future tax expense
Which period’s tax rate is used to calculate a deferred tax asset or liability?
The FUTURE enacted tax rate not the current one.
It is never discounted to present value.
What valuation allowance is used with respect to a deferred tax asset?
- 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
What effect do permanent differences have on deferred income taxes?
They have no tax impact.
What is deferred income tax expense?
The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities
How are deferred tax assets classified as ‘Current’ on the balance sheet?
- 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
Comprehensive Allocation
- Balance Sheet Approach
- Asset/Liability method is required by GAAP for comprehensive allocation
Acct. for Interperiod Tax Allocation
- Total Income tax expense (GAAP inc. tax exp) or benefit for the yr is the sum of:
- Current Inc. tax exp./benefit
+ - Deferred Inc. tax exp/benefit
Total Inc Tax Exp/Benefit
Current Inc Tax Payable or refundable as determined on the corporate tax return
[Owe Now]
-/+
Change in the deferred Inc tax asset or liab. from the beg. to the end of the reporting pd.
[Owe in future]
Permanent Differences
- Transaction that affects only income per books or taxable income but not both.
- Inc. Tax Exp. for a period is calc. only on taxable items.
No Deferred Taxes
[Perm. Taxes]
- B/C do not reverse themselves
- No interperiod tax allocation is necessary
- Inc. Tax provision for Fin. acct purposes is computed on the basis of pretax book inc adjusted.
Perm. Differences Examples
- Tax-Exempt interest
- Life Insur. proceeds on officer’s key man policy
- Life Insur. premium when corp is beneficiary
- Certain penalties, fines, bribes, kickbacks
- Nondeductible portion of meal & entertainment Exp
- Dividends-received deduction for corporations
- Excess % depletion over cost depletion
Deferred Tax Liabilities
Future tax accounting income > Future Financial accounting income
Deferred Tax Asset
Future Tax accounting income < Future financial accounting income.
The net of income tax payable & any changes in the deferred tax asset & deferred tax liab. accounts.
- Total income tax expense for financial accounting purposes
Uncertain Tax Positions
- Some level of uncertainty of the sustainability of a particular tax position taken by a company.
- US GAAP requires a more-likely-than-not level of confidence before reflecting a tax benefit in an entity’s Fin. St.
How are deferred tax assets classified as ‘Non-Current’ on the balance sheet?
- 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
What changes will cause an increase in def. Income Tax Liab.?
- Increase in Prepaid Insurance
& - Increase in Rent Receivable
Both would cause an increase in Deferred Tax Liab.
What would effect current income Tax Exp. for Year 3?
Change in Income Tax Rate for Year 3
Justification for the method of determining periodic Def. Tax Exp. is based on the concept of?
Recognition of Assets & Liabilities
A Temp. Difference arises when Extraordinary items is included this yr after being recogn. in last yr.
[US GAAP]
Extraordinary Gains & Losses are both considered temp. differences.
Reporting a Current Def. Tax Asset, will reversal of temp differences result in taxable or deductible amounts?
Will be deductible and reporting a Profit of the year.
The Deferred. Income Taxes based on the differences in Current Assets that will reverse should be classified in a B/S ?
[IFRS]
-Report as a Non-current Asset
Under IFRS:
-All Def. Tax Assets/Liab. are reported as NON-Current on the B/S
What should be disclosed in a company’s financial statements related to Deferred Taxes?
- The types & amounts of existing Temporary Differences
- The nature & amount of each type of operating loss & tax credit carry forward.
What items is not subject to the application of intra-period income tax allocation?
-GAAP does not req. tax allocation for:
Operating Income.
Find the Deferred Income Tax Expense
Multiply the ‘Difference” between F.S Inc & Taxable Income:
by the Tax Rate %
Find the Deferred Inc. Tax Liability
-Multiply the Future/Enacted Tax Rate by the Cumulative Temp Differences.
(Future Taxable Amts)
Depreciated Def. Tax Liability
Multiply the Future/ Enacted Tax Rate by the ‘Exceeded Dep. Amount’
When Dep. Expense Exceeds its tax basis is the Temp. Difference a Deferred Tax Asset or Liability?
A Deferred Tax Liability
When calculating the total differences between book and tax income:
- Subtract the permanent differences from the total before applying a future enacted tax rate
Deferred Income Tax Expense Calc. GAAP Approach
The Asset and Liability Approach
Deferred Income Tax Expense Calc. IFRS Approach
- Liability approach only
