Module 14: Deferred Taxes

Question 1

Temporary Differences

Answer 1

A difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Examples include: Estimated warranty liability, unearned rent (royalty) revenue, Plant Assets and accumulated depreciation, donated assets, involuntary conversion of assets, and goodwill.

Question 2

Permanent Differences

Answer 2

A permanent difference occurs when a revenue or expense item is only included in pretax financial (book) income or in taxable income but will never be included in both. No deferred taxes need to be recognized because no future tax consequences are created. Some common examples include: State and municipal bond interest income, Life Insurance premium expense when the corporation is the beneficial, Federal income tax expense, payment of penalty or fine, and Dividend Received Deduction (DRD).

Question 3

Income Tax Expense

Answer 3

ASC Topic 740 states that income tax expense must be reported in two components: the amount currently payable (current portion) and the tax effects of temporary differences (deferred portion).

Question 4

Temporary Differences resulting in Future Taxable Amounts

Answer 4

A deferred tax liability must be recorded in the current year because a past event has resulted in a present obligation which will require a probably future sacrifice. Note that a temporary difference which will result in net deductible amounts in future years, would prompt the recording of a deferred tax asset.

Question 5

Deferred Tax Asset

Answer 5

Future deductible amount (reversal of a temporary difference that will cause taxable income to be lower than book income).

Question 6

Deferred Tax Liability

Answer 6

This results when taxable income will be higher in the future. Is recognized for temporary differences that will result in net taxable amounts in future years. Based on future taxable amounts (FDA)

Question 7

Loss Carrybacks

Answer 7

Occur when losses in the current period are carried back to periods in which there was income. Loss carry backs result in tax refunds in the loss period and thus should be recognized in the year of the loss

Question 8

Loss Carryforwards

Answer 8

Recognized in the year the loss occurs. Under ASC Topic 740 (SFAS 109), the benefit of a loss carryforward is always recognized as a deferred tax asset which may be reduced by a valuation allowance if necessary

Question 9

IFRS netting of deferred tax assets and liabilities

Answer 9

IFRS provides that the netting of deferred tax assets and liabilities may only occur if the accounts relate to the same taxing authority and the entity has a legal right to offset the taxes.

Question 10

Income Tax Expense includes the following components…

Answer 10

1. Current Tax Expense or benefit
2. Deferred tax expense or benefit, exclusive of (5) below
3. Investment tax credit and grants
4. The benefits of operating loss carryforwards
5. Adjustment of a deferred tax liability or asset for enchanted changes in tax laws or a change in the tax status of an enterprise.