FAR - Financial Statement Acct - Interperiod Tax Allocation Basis Flashcards
Interperiod Tax Allocation
measuring and recognizing the total income tax consequences of transactions in the year (matching principle , but mainly the measurement of assets/liab)
- temp differences & net operating losses carryforwards enter this process
Difference between IRS tax code & GAAP
GAAP = not laws
Tax rules = Laws (congress)
Income Tax Liab is based on Taxable Income
Measure income tax expense for financial reporting
emphasis on income tax assets/liab (emphasis on B/S)
1) deferred tax asset
2) deferred tax liab
3) income tax liab
3 types of differences between GAAP & Tax Law
1) Permanent
2) Temporary
3) Net Operating Losses
taxable items
amounts cause income tax to increase (revenue)
deductible items
cause income tax to decrease (expenses)
pretax acct income
pretax financial income
taxable income
income that the tax rates will be applied to
income tax liab
amount of income tax firm must pay in quarterly installments
income tax exp
derived amount or “plug” figure, net change caused by changes in deferred tax accounts and income tax liability.
deferred income tax provision
amount of income tax not currently due = net sum of change in deferred tax accts
permanent difference
(nontemp difference) amount appears in tax return/income statement but never both, revenues/expenses never taxable/deductible (penalty/fine/municipal bond interest)
- Can never be reversed
- don’t contribute to deferred tax accounts
temporary difference
revenue/expense affect taxable income, but will be recognized in different amounts in any given year (depreciation)
- reversals occur
- cause changes in deferred tax accts
Net Operating Loss
negative taxable income.
carried back 2 years to reduce tax income and carried 20 years to reduce tax liab
Deferred Tax Asset
tax effect of future deductible temporary differences, cause future tax income to decrease
Deferred Tax Liab
tax effect of future taxable temporary differences, cause future tax income to increase
Tax-free interest income (PD)
investment in a state interest
municipal bond interest
included in pretax acct income, not taxable income
Life Insurance Expense (PD)
Expense for financial reporting, life insurance premiums for employee where the firm is beneficiary are not deductible
Life Insurance Proceeds (PD)
considered as a gain, but not taxable
Dividend Received Deduction (PD)
- deduction = 80% of qualified divs rec’d
- entire amount included in pretax income
Fines/Penalties (PD)
penalties from law violation are not deductible but expensed
Depletion (PD)
based on cost of natural resource used up
Tax Accrual Entry
future temp. diff. (reversal of originating diff) cause deferred tax accts
Future temp. Differences
1) future taxable temporary differences (postponement of tax payments)
A) reversals cause future taxable income > future pretax acct income = increase tax
B) Deferred tax liab
2) future deductible temporary differences (prepayment of taxes)
A) reversals cause future taxable income
Future Taxable Differences
Deferred Tax Liab
- Rev recognized earlier for books than for tax (A/R, unrealized gain on Trading Sec.)
- Expenses recognized later for books than for tax (prepaid expenses, depreciation)
Future Deductible Differences
Deferred Tax Assets
- Rev recognized later for books than for tax (unearned rev)
- expenses recognized earlier for books than deductible for tax (accrued expenses - bad debt expense/warranties)
- prepaid tax benefit (asset)
tax rate should be used when computing the change in the deferred tax accounts?
future enacted tax rates
book vs. tax differences does the computation of income tax liability consider?
current perm. differences & current temp. differences
permanent differences affect the tax accrual entry?
Taxable income excludes them; this exclusion is reflected in income tax expense - a plug figure.
Deferred Tax Expense
net the future temporary differences: taxable & deductible (difference between tax & acct records) and multiply against the future enacted tax rate
Estimated Tax Payments
don’t reduce income tax expense, instead they are included in the current year’s income tax liability
Interperiod Tax Allocation Process
1) Identify perm./temp. differences
2) Calculate current income tax expense
3) Measure DTAs & DTLs w/applicable tax %s
4) Calculate Deferred Income Tax Expense
5) Determine total financial tax expense
6) Record income-tax related J/Es
7) Prepare financials/disclosures
effect does a reversing taxable difference have on the tax accrual entry?
decreases the deferred tax liab balance
deferred tax liability balance expressed?
Product of sum of future taxable differences and the future enacted tax rate
effect does an originating deductible difference have on the tax accrual entry?
increases deferred tax asset balance
formula for computing income tax expense?
Income tax liability plus or minus the change in the deferred tax accounts.
2 classifications of deferred tax accts
1) current (current assets/liab)
2) non-current (non-current assets/liab)
*some items cause both a current/non-current deferred tax item
Exceptions to classification rule
temp differences w/o b/s acct
1) organization costs
2) net operating losses
- future differences not associated with 1 acct
- classification depends on timing of reversal
Reporting of Deferred Tax Accts
4 possible deferred tax accts:
1) asset
2) liab
3) current
4) NC
- current deferred accts netted into 1 asset/liab
- NC deferred accts netted into 1 asset/liab
Organization Costs
Deferred Tax Asset, classification depends on reversal, firm’s early costs for start up
Deferred Tax Asset
expected to reduce income tax
EX: warranty expense yields future deductible difference/DTA
w/o future tax income, future deduction may have no value
Valuation Allowance fo DTA
GAAP - “more likely than not”
1) recognize fully DTA > 50% realization
2) valuation allowance DTA
Factors - DTA should be recognized
1) strong history of profits
2) solid customer base
3) backlog o orders
4) appreciated assets
5) high taxable income in last couple of years
Factors - DTA should not be recognized
1) past expiration of unused NOL carryforwards
2) recent string of operating losses
3) doubt about future profitability
Sources for realizing DTA
1) Expected future taxable income
2) Tax carrybacks/forwards
A) tax income/deductible differences carried back 2 yrs
B) tax income in future offset current losses for 20 yrs in future
3) Future tax differences within carryback/forward (DTLs)
4) Tax Planning strategies - actions to achieve DTA realization
Uncertain Tax Positions
tax return affected by estimates/uncertainties - not sustainable on IRS audit.
(EX: deductions, credits, exemptions)
Uncertain Tax Position
2 step process
1) cumulative probability less than/equal to 50%
- income tax exp not reduced
- add’tl tax liab recognized
- no benefit recognized
2) probability > 50%
- firm estimate specific outcomes of audit/probabilities
- benefit recognized in income tax exp = largest amount for which cumulative probability exceeds 50%
minimum probability of sustaining an uncertain tax position to reduce income tax expense for an uncertain tax position?
Greater than 50%
accounting effect when actual tax benefit is less than expected in a later year
Recognize income tax expense for the difference between benefit recognized in previous year and the actual benefit
accounting effect when actual tax benefit is greater than expected in a later year
Reduce income tax expense for the difference between benefit recognized in previous year and the actual benefit
account effect when the probability of sustaining an uncertain tax position is less than the minimum for reducing income tax expense
Report a liability for the uncertain tax position in addition to the income tax liability
accounting effect when the probability of sustaining an uncertain tax position is equal to or greater than the minimum for reducing income tax expense
Recognize a reduction in income tax expense for the largest amount for which the cumulative probability of realization exceeds 50%, and an additional liability for the unrecognized portion
Net Operating Loss
negative taxable income for a year (deductions exceed revenues)
carried back 2 or forward 20 years to absorb taxable income
Value of CB & CF
CB - refund of taxes paid in past
CF - savings of future taxes
NOL tax treatment?
CB - NOLs offset past income and company files for refund of taxes paid
CF - NOLs offset future income and avoid paying tax
- create financial benefit = DTA
- usually start with CB to get tax refund
NOLs & Temp difference
Interperiod tax allocation accommodates DTA and NOL CF the same for future deductible differences
Ending DTA = (sum of future deductible differences including CF) X (future tax %)
Change in DTA = (EOY DTA - BOY DTA)
US - Valuation Allowance
2 step process
1) DTA recognized in full for all temp diff between book and tax basis
2) net amounts of DTA assessed to determine if they should be reduced by valuation allowance by “more likely than not” the DTA will not be realized
IFRA - NO Valuation Allowance
1 step process - recognition of DTA to extent they will be realized
difference shouldn’t result in determining net DTA to recognize
GAAP vs IFRS - Deferred Tax Rate Considerations
GAAP
enacted tax % & tax law are applicable when measuring current/deferred taxes
IFRS
enacted/substantively tax % and tax law apply
- IASB has guidelines
deferred tax accounts under international accounting standards be classified as?
noncurrent
effect of net operating loss (NOL) on ending deferred tax asset balance for carryforward only option
Include in ending DTA the full NOL multiplied by the future enacted tax rate
journal entry for recording a net operating loss carryback
DR: Refund Receivable
CR: Income Tax Benefit
expression for the change in DTA for a period for a (NOL) CF that is not fully used up in the period?
End of period sum of future deductible differences plus unused NOL CF, multiplied by future enacted tax rate, less beginning deferred tax asset
effect of (NOL) on ending DTA balance for CB-CF option
Include in ending DTA for the portion of NOL remaining after being used in the carryback, multiplied by the future enacted tax rate
journal entry for recording a NOL CF?
DR: Deferred Tax Asset
CR: Income Tax Benefit
required ending balance of a deferred tax asset when there are future deductible differences and an unused (NOL) CF?
future enacted tax rate X (sum of future deductible differences + unused NOL carryforward)
True/False
Total of all deferred tax assets and deferred tax liabilities are required to be disclosed.
True
carryforward valued?
enacted future tax rate X NOL remaining to CF
ending balance of deferred tax asset for a net operating loss (NOL) carryforward?
enacted future tax rate X NOL remaining to CF
what must be disclosed in financials ?
income tax expense tax credits Carryforwards Gov't Grants DTA DTL Temporary differences Valuation Allowance
