Module 27.5: Permanent Differences Flashcards
What is a permanent difference? What causes permanent differences?
difference between taxable income and pretax income that will not reverse in the future.
Can be caused by revenue that is not taxable, expenses that are not deductible, or tax credits.
What is the cause of effective tax rates to differ from statutory tax rates?
permanent differences.
What is the formula for effective tax rate?
income tax expense / pretax income
According to US GAAP, when must a DTA be reduced by a valuation allowance?
What is a valuation allowance?
Does the same principal apply to IFRS?
if its more likely than not that some or all of the DTA will not be realized (greater than 50%) then it must be reduced.
Valuation allowance is a contra asset account that reduces the net balance sheet value of a DTA.
Yes - applies to IFRS, although only the net amount is shown.
How can managment use the valuation allowance to manipulate earnings?
an increase (decrease) in the valuation allowance will decrease (increase) earnings
Why would accelerated depreciation cause a deferred tax liability? what should the analyst consider to determine if it will reverse?
dep expense is greater on the tax base than the income statement.
analyst should consider the firms growth rate and capital spending levels when determining whether the difference will actually reverse.
Why do impairments result in a deferred tax asset?
because the write down is recognized immediately on the IS, but later on the tax return.
Why would restructuring cause a deferred tax asset?
costs are recognized on the IS, but not deducted for tax until actually paid.
Why would post-employment benefits and deferred compensation cause a deferred tax asset?
recognized on the IS when earned, but not for tax purposes until paid.
What are the six disclosures usually made on deferred tax assets and liabilities?
1) Deferred tax liabilities, deferred tax assets, any valuation allowance, and the net change in valuation allowance
2) any unrecognized deferred tax liability for undistributed earnings
3) current year tax effect of each type of temporary difference
4) components of income tax expense
5) reconciliation of reported income tax expense and the tax expense based on the statutory rate
6) tax loss carryforwards and credits.
What are the five main reasons that statutory income tax can differ from reported income tax?
1) Different tax rates in different tax jurisdictions
2) permanent tax differences: tax credits, tax-exempt income
3) Changes in tax rates and legislation
4) deferred taxes provided on the reinvested earnings of foreign and unconsolidated domestic affiliates.
5) tax holidays in some countries.
Explain how revaluation of fixed assets and intangible assets affect DTA and DTL under GAAP and IFRS?
GAAP - N/A
IFRS - deferred taxes are recognized in equity
Explain how undistributed profit from an investment in a subsidiary affect DTA and DTL under GAAP and IFRS?
GAAP - no deferred taxes for foreign subsidiaries that meet the indefinite reversal criterion. No deferred taxes for domestic subsidiaries if the amounts are tax-free.
IFRS - deferred taxes are recognized unless the parent is able to control the distribution of profit and it is probable that temporary difference will not reverse in the future.
Explain how undistributed profit from JV affect DTA and DTL under GAAP and IFRS?
GAAP - no deferred taxes for foreign corporate JVs that meet the indefinite reversal criteron
IFRS - deferred taxes are recognized unless the parent is able to control the distribution of profit and it is probable that temporary difference will not reverse in the future.
Explain how undistributed profit from an investment in an associate firm affect DTA and DTL under GAAP and IFRS?
GAAP = deferred taxes are recognized from temporary differences
IFRS - deferred taxes are recognized unless the parent is able to control the distribution of profit and it is probable that temporary difference will not reverse in the future.
