In this chapter we explore the financial accounting and reporting standards for the effects of income taxes. The discussion defines and illustrates temporary differences, which are the basis for recognizing deferred tax assets and deferred tax liabilities, as well as non-temporary differences, which have no deferred tax consequences.
Trang 1ACCOUNTING FOR INCOME
TAXES
Trang 2Tax laws form the set the rules for preparing tax returns.
Tax laws form the set the rules for preparing tax returns.
IFRS provides the basis for preparing
financial statements.
IFRS provides the basis for preparing
financial statements.
Usually Results in
The objective of accounting for income taxes is to
recognize a deferred tax liability or deferred tax asset for the tax consequences of amounts that will become taxable or deductible in future years as a result of
transactions or events that already have occurred.
The objective of accounting for income taxes is to
recognize a deferred tax liability or deferred tax asset
for the tax consequences of amounts that will become taxable or deductible in future years as a result of
transactions or events that already have occurred.
Liabilities
Trang 3Often, the difference between pre-tax
accounting income and taxable income results from items entering the income tax computations at different times.
Trang 4Temporary differences will reverse out in
one or more future periods.
Temporary differences will reverse out in
one or more future periods.
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Trang 5Tax Base
Note: If an item is non-taxable, the tax base of that asset is
equivalent to the carrying amount, thereby creating no temporary differences.
Trang 6Deferred tax liabilities
result in taxable amounts in
Estimated expenses and losses (tax deductible
Unrealized loss from recording investments at fair value or inventory at LCM (tax deductible when asset is sold)
Items
reported on
the tax return
Rent or subscriptions collected in advance
Prepaid expenses (tax deductible when paid)
Trang 7Deferred Tax Liabilities
In 2012, Baxter reports $300,000 of pretax income Included in this amount is $100,000 resulting from interest revenue earned but not received The revenue will be taxed as the interest is collected in
2013 and 2014 Baxter expects to collect $70,000 in 2013 and the remaining $30,000 in 2014 In 2013 and 2014, Baxter reports $200,000
of pretax income The company is subject to a 20% tax rate
There are no other temporary differences.
In 2012, Baxter reports $300,000 of pretax income Included in this amount is $100,000 resulting from interest revenue earned but not received The revenue will be taxed as the interest is collected in
2013 and 2014 Baxter expects to collect $70,000 in 2013 and the remaining $30,000 in 2014 In 2013 and 2014, Baxter reports $200,000
of pretax income The company is subject to a 20% tax rate
There are no other temporary differences.
Trang 8income on the
tax return 70,000 30,000 100,000
Taxable income $ 200,000 $ 270,000 $ 230,000 $ 700,000
Reverses Temporary Difference
Deferred Tax Liabilities
Income tax expense 60,000 Income tax payable 40,000 Deferred tax liability 20,000
General Journal
2012 Income tax payable = $200,000 × 20% = $40,000
2012 Deferred tax liability change = ($100,000 × 20%) - $0 = $20,000
2012 Income tax payable = $200,000 × 20% = $40,000
2012 Deferred tax liability change = ($100,000 × 20%) - $0 = $20,000
Trang 9Deferred Tax Liabilities
Future taxable amounts $ 70,000 $ 30,000 $ 100,000
Deferred tax liability $ 20,000
20,000 2012
Deferred Tax Liability
The Deferred Tax
Income tax expense 60,000 Income tax payable 40,000 Deferred tax liability 20,000
General Journal
Trang 10income on the
tax return 70,000 30,000 100,000
Taxable income $ 200,000 $ 270,000 $ 230,000 $ 700,000
Reverses Temporary Difference
Deferred Tax Liabilities
Description Debit Credit
Income tax expense 40,000 Deferred tax liability 14,000 Income tax payable 54,000
General Journal
Recall this
information for
Baxter.
2013 Income tax payable = $270,000 × 20% = $54,000
2013 Deferred tax liability change = ($30,000 × 20%) - $20,000 = - $14,000
2013 Income tax payable = $270,000 × 20% = $54,000
2013 Deferred tax liability change = ($30,000 × 20%) - $20,000 = - $14,000
Trang 11Deferred Tax Liabilities
Future taxable amounts $ 30,000 $ 30,000
Deferred tax liability $ 6,000
The Deferred Tax Liability represents the future taxes
Baxter will pay in 2014.
Trang 12income on the
tax return 70,000 30,000 100,000
Taxable income $ 200,000 $ 270,000 $ 230,000 $ 700,000
Reverses Temporary Difference
Description Debit Credit
Income tax expense 40,000 Deferred tax liability 6,000 Income tax payable 46,000
2014 Income tax payable = $230,000 × 20% = $46,000
2014 Deferred tax liability change = ($0 × 20%) - $6,000
= - $6,000
2014 Income tax payable = $230,000 × 20% = $46,000
2014 Deferred tax liability change = ($0 × 20%) - $6,000
= - $6,000
Trang 132013 14,000 20,000 2012
2014 6,000 6,000 Balance
0 Balance Deferred Tax Liability
Deferred Tax Liabilities
2014 Total Future taxable amounts $ - $ -
Deferred tax liability $
-Future
Taxable
Amount
Schedule
The Deferred Tax Liability represents the future taxes
Baxter will pay.
Trang 14RDP Networking reported pretax income in 2012,
2013, and 2014 of $70 million, $100 million, and $100
million, respectively
The 2012 income statement includes a $30 million warranty expense that is deducted for tax purposes when paid in 2013 ($15 million) and 2014 ($15 million)
The income tax rate is 20% each year.
Deferred Tax Assets
Originates
Accounting income $ 70,000 $ 100,000 $ 100,000 $ 270,000 Warranty expense on
the income statement 30,000
Trang 15Deferred Tax Assets
Now, let’s record the income tax entry for 2012.
This is the computation for the Deferred Tax Asset.
Trang 16Deferred Tax Assets
Description Debit Credit
Income tax expense 14,000
Deferred tax asset 6,000
Income tax payable 20,000
General Journal
2012 Income tax payable = $100,000 × 20% = $20,000
2012 Deferred tax asset change = [($30,000 × 20%] - $0 = $6,000
2012 Income tax payable = $100,000 × 20% = $20,000
2012 Deferred tax asset change = [($30,000 × 20%] - $0 = $6,000
Originates
Accounting income $ 70,000 $ 100,000 $ 100,000 $ 270,000 Warranty expense on
the income statement 30,000
Trang 17Calculation of Deferred Tax
Deferred Tax Asset
Deferred Tax Assets
After posting the entry, the Deferred Tax Asset account
will have the desired ending balance of $6,000.
Description Debit Credit
Income tax expense 14,000
Deferred tax asset 6,000
Income tax payable 20,000
Trang 18Accounting income $ 70,000 $ 100,000 $ 100,000 $ 270,000 Warranty expense on
the income statement 30,000 Warranty expense
on the tax return (15,000) (15,000) Taxable income $ 100,000 $ 85,000 $ 85,000 $ 270,000
-Temporary Difference
Reverses
Deferred Tax Assets
Income tax expense 20,000
General Journal
2013 Income tax payable = $85,000 × 20% = $17,000
2013 Deferred tax asset change = [-$15,000 × 20%] – (-$6,000) = $3,000
2013 Income tax payable = $85,000 × 20% = $17,000
2013 Deferred tax asset change = [-$15,000 × 20%] – (-$6,000) = $3,000
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Trang 19Calculation of Deferred Tax
Deferred Tax Assets
In 2013, the balance in the Deferred Tax Asset should
decrease to $3,000.
2012 6,000 3,000 2013
Balance 3,000
Deferred Tax Asset
Can you prepare the entries for 2014?
Trang 20Deferred Tax Assets
This would be the entry for 2014.
2012 6,000 3,000 2013
3,000
2014
Balance
-Deferred Tax Asset
At the end of 2014, the balance in the Deferred
Tax Asset would be zero.
Income tax expense 20,000
General Journal
Trang 21Deferred tax assets
Trang 22For example, let’s say for RDP, management determines that the company will make a loss in 2014 and it is unclear what the profits will be after 2014 It’s not probable that
$15 million of the deductible temporary difference will
ultimately be utilized to offset future taxable income The deferred tax asset that is recognized on December 31,
2012 is thus $3 million [($30 million - $15 million) × 20%]
and not $6 million ($30 million × 20%)
Deferred Tax Assets
Income tax expense 17,000
Deferred tax asset 3,000
General Journal
Trang 23Nontemporary Differences
Created when an income item is included in taxable income or accounting income but will never be
included in the computation of the
other.
Example: Interest on tax-free government
bonds is included in accounting income but is never included in taxable income.
• Nontemporary differences (or permanent differences) are
disregarded when determining both the tax payable currently and the deferred tax effect.
Trang 24Nontemporary Differences
The term “permanent differences” does not
appear in IAS No 12 but the concept applies
in the determination of tax expense However,
IAS No 12 specifically prohibits:
• The recognition of certain temporary differences
that arise on initial recognition when the
underlying transaction is not a business
combination and that “affects neither accounting
profit nor taxable profit (tax loss)” on initial
Trang 25Tax Rate Considerations
liabilities should be
determined using the current
tax or “substantially enacted”
rates.
The deferred tax asset or
liability must be adjusted if a
change in a tax rate occurs.
Deferred tax assets and
liabilities should be
determined using the current
tax or “substantially enacted”
rates
The deferred tax asset or
liability must be adjusted if a
change in a tax rate occurs.
Tax Code
Trang 26Multiple Temporary Differences
It would be unusual for any but a very small company to have only a single temporary
difference in any given year
Categorize all temporary differences according to whether they create …
Future taxable
amounts
Future deductible
amounts
Trang 27Net Losses
Tax laws often allow a company to use tax
losses to offset taxable income in earlier or
subsequent periods.
Tax laws often allow a company to use tax
losses to offset taxable income in earlier or
subsequent periods.
When used to offset
earlier taxable income:
Called: loss carryback.
Result: tax refund.
When used to offset
earlier taxable income:
Called: loss carryback
Result: tax refund
When used to offset future taxable income:
Called: loss carryforward.
Result: reduced tax
payable.
When used to offset
future taxable income:
Called: loss carryforward
Result: reduced tax
payable
Trang 28Net Losses
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Trang 29Net Losses
Current Year
-1 -2
Carryback
Period
+3 +2
+1 +4 +5 +20
Carryforward
Period
The tax loss may be applied against taxable
income from previous years
Unused tax losses may be carried forward
The duration of the carryback or carryforward
depends on tax legislation
The tax loss may be applied against taxable
income from previous years Unused tax losses may be carried forward
The duration of the carryback or carryforward
depends on tax legislation
Trang 30Net Losses
In 2012 Garson Ltd incurred an $85,000 net loss The company is subject to a 20% tax rate In 2010, Garson reported taxable income of $20,000, and in 2011, taxable income was $10,000 The company elects
to carryback the tax losses.
In 2012 Garson Ltd incurred an $85,000 net loss The company is subject to a 20% tax rate In 2010, Garson reported taxable income of $20,000, and in 2011, taxable
income was $10,000 The company elects
to carryback the tax losses.
Taxable
Income
Tax rate Taxes Paid
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Trang 31Deductible
Receivable income tax refund 6,000
Deferred tax asset 11,000
Income tax
tax loss 17,000
Trang 32Net Losses
Garson Ltd Partial Income Statement For the Year Ended December 31, 2012
The deferred tax asset account created by the
benefit of the carryforward will be used to lower
income taxes payable in future years.
The deferred tax asset account created by the
benefit of the carryforward will be used to lower
income taxes payable in future years.
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Trang 33Some disclosure items:
Total of all deferred tax liabilities
Total of all deferred tax assets.
Total deferred tax arising from transactions that are credited or debited directly
to equity
Tax effect of each type of temporary difference (and remaining tax loss).
Some disclosure items:
Total of all deferred tax liabilities
Total of all deferred tax assets.
Total deferred tax arising from transactions that are credited or debited directly
to equity
Tax effect of each type of temporary difference (and remaining tax loss).
Trang 34Deferred tax assets and liabilities should not be reported individually but should be offset
against each other
◦This is, of course, assuming that the company has a right to legally set off current tax assets against
current tax liabilities
◦Deferred tax assets and liabilities should relate to the same taxable entity and to taxes levied by the same taxation authority
◦The resulting net amount is then reported as either a noncurrent asset (if deferred tax assets exceed
deferred tax liabilities) or noncurrent liability (if
deferred tax liabilities exceed deferred tax assets)
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Trang 35Disclosure notes include the following:
Current portion of tax expense (benefit)
Deferred portion of tax expense (benefit), relating
to the origination and reversal of temporary
differences
Tax expense taken to income, other
comprehensive income and equity.
Adjustments due to changes in tax laws or rates.
Recognition of previously unrecognized tax loss
or tax credit.
Adjustments due to revised estimates of deferred tax asset.
Reconciliation between tax expense and
Disclosure notes include the following:
Current portion of tax expense (benefit)
Deferred portion of tax expense (benefit), relating
to the origination and reversal of temporary
differences
Tax expense taken to income, other
comprehensive income and equity.
Adjustments due to changes in tax laws or rates.
Recognition of previously unrecognized tax loss
Relevant detailed information needed
for full disclosure pertaining to deferred tax amounts is reported in disclosure notes, including the components of income tax expense
and available operating loss
carryforwards
Relevant detailed information needed
for full disclosure pertaining to deferred tax amounts is reported in
disclosure notes, including the components of income tax expense
and available operating loss
carryforwards
Trang 36Coping with Uncertainty in Income Taxes
When there is uncertainty with respect to the assessment on current tax, IAS No 12 does not prescribe specific accounting requirements
So, we fall back on the principles in IAS No 37 Provisions, Contingent
Assets and Contingent Liabilities
2 Is there a probable outflow of resources to tax authorities?
3 Is the amount of the liability reliably estimable?
Uncertain tax refunds are contingent assets, which we do not
recognize until the benefit becomes is virtually certain If the gain is
probable, we disclose the gain in the footnotes