Reading 27: Income Taxes Flashcards
Distinguish revaluation of fixed assets and intangible assets under IFRS and U.S. GAAP.
IFRS: Recognized in equity as deferred taxes.
U.S. GAAP: Revaluation is prohibited.
Under U.S. GAAP, how do firms record depreciation expenses on tax returns and financial reports?
Firms try to record higher depreciation expense on their tax returns to minimize taxes payable and recognize lower depreciation expense on their financial reports to maximize reported profits.
Identify the rules for calculating the tax base of unearned revenue and accrued expenses.
Tax base of accrued expense liability = Carrying amount of the liability (financial reporting) minus amounts that have not been expensed for tax purposes yet but can be expensed (are tax deductible) in the future.
The tax base of unearned revenue liability = Carrying value of the liability minus the amount of revenue that has already been taxed, and therefore will not be taxed in the future.
Name the 2 types of liabilities that can result from accrual accounting.
Unearned revenue
Accrued expenses
Give the formula that captures the relationship between taxes payable (TP), the change in deferred tax assets (DTA), and income tax expense (ITE).
ITE = TP − Change in DTA
When do deferred tax assets arise?
The tax base of an asset exceeds its carrying amount; or
The tax base of a liability is less than its carrying amount.
Distinguish deferred tax asset recognition under IFRS and U.S. GAAP.
IFRS: Recognized if it is probable that sufficient taxable profit will be available in the future.
U.S. GAAP: Deferred tax assets are recognized in full and then reduced by a valuation allowance if it is likely that they will not be realized.
Distinguish between temporary and permanent differences in pre-tax accounting income and taxable income.
Temporary differences arise because of differences between the tax base and carrying amounts of assets and liabilities. Permanent differences arise as a result of expense or income items that can be recognized on one statement (tax return or income statement), but not the other. They are differences in tax and financial reporting of revenues and expenses that will not reverse at any point in the future.
What should take place if a deferred tax liability is not expected to reverse?
It should be reduced, and the amount by which it is reduced should be taken directly to equity. Any deferred taxes related to business combinations should also be recognized in equity.
Give the formula used to calculate a firm’s reported effective tax rate.
Effective tax rate = Income tax expense / Pretax income
A deferred tax liability usually arises under what circumstances?
Higher expenses are charged on the tax return compared to the financial statements.
Taxable income is lower than pretax or accounting profit.
Taxes payable are lower than income tax expense.
An asset’s tax base is lower than its carrying value.
Give examples of items that give rise to permanent differences.
Revenue items that are not taxable. For example, government grants are tax exempted; thus, they are not accounted for in the tax returns but are still included in the financial statements.
Expense items that are not tax deductible. For example, fines and penalties in many jurisdictions are not tax-allowable expenses but are still written off in the financial statements.
Tax credits for some expenses that directly reduce taxes.
Distinguish offsetting of deferred tax assets and liabilities under IFRS and U.S. GAAP.
IFRS: Offsetting allowed only if the entity has a right to legally enforce it and the balance is related to tax levied by the same authority.
U.S. GAAP: Similar to IFRS.
When income tax rates change, how must the balances of deferred tax assets and liabilities be adjusted on the balance sheet?
When tax rates rise, the balances of both deferred tax assets and liabilities rise. When tax rates fall, the balances of both deferred tax assets and liabilities fall.
Give the formula used to calculate deferred tax asset balances.
(Carrying value of liability − Tax base of liability) × Tax rate
