Income Taxes Flashcards
Taxable income & taxes payable
Income subject to tax on the tax return
Pretax income & tax expense
EBT on the I/S
Deferred tax assets (DTA)
Created when taxes payable > tax expense and the difference is expected to be reversed in the future
So when a revenue/gain is recognized as taxable before it is recognized on the I/S
When a expense (loss) is recognized on the income statement before it is tax deductible
Deferred tax liabilities (DFL)
Created when tax expense > taxes payable
DFLs that are not expected to reverse (growth in capex) should be treated as equity
Valuation allowance (VA)
NRV of DTA = DTA - VA
Contra account to DTA based on the likelihood that the future tax benefit may not be realized
Increasing the DTA will increase income tax expense and reduce earnings –> the VA can be reversed if circumstances change
A larger or growing VA indicates that a company is estimating a decline in future taxable income b/c you need future income to reverse the DTA
Tax base (asset)
= Cost - D&A taken on tax return
Taxable gain on sale = Selling price - tax base
Income tax expense
= Taxes payable + change DTL - change DTA
where taxes payable = taxable income x statutory tax rate
Balance of DTA or DTL
= (Tax base (A or L) - Carrying value) x tax rate
Tax rate changes on DTA and DTL
Increase in tax rate increases DTL and income expense
Increase in tax rate increases DTA and decreases income tax expense
Permenant difference
Difference in taxable and pretax income that will not reverse in the future and thus no DTA or DTL
Treated as changes in the effective tax rate
IFRS Treatment
Revaluation model - any impacts on deferred taxes are recognized in equity
Indefinite reversal criterion
Under U.S. GAAP only…if a subsidiary meets the indefinite reversal criterion the undistributed profits from a subsidiary do not require the creation of a DTL
IFRS has scenarios where a DTL is not created, but it not referred to as the reversal criterion
Incorrect answers
-IFRS allows for an enacted or substantively enacted tax rate to determine value of DTA and DTL, but GAAP only allows enacted tax rates to be used
