ch19

CHAPTER 19

Accounting for Income Taxes

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Topics QuestionsBrief

Exercises Exercises ProblemsConcepts

for Analysis

1. Reconcile pretax financial income with taxable income.

1 1, 2, 3 1, 2, 3, 4, 5, 12, 18, 19, 20, 21

1, 2, 3, 4,

8

2

2. Terminology and objectives. 2, 3, 4, 5, 8 6, 7, 11 1, 4, 6, 7

3. Determine deferred income taxes and related items—single tax rate.

6, 7, 9, 13 1, 2, 3, 4, 5, 6, 7, 9, 10, 11, 12

1, 2, 3, 4, 5, 7, 8, 12, 13, 14, 15, 19, 22

3, 4, 8, 9 2, 3

4. Valuation allowance—deferred tax asset.

8, 19 7, 14 7, 14, 15, 23, 24, 25

5. Basic income statement presentation.

7, 9 4, 6, 8 3, 4, 5, 8, 10, 12, 16, 19, 23, 24, 25

1, 2, 3, 5, 7, 8, 9

7

6. Identify temporary and permanent differences.

8 4, 5, 6, 7 2, 3, 4, 7 3, 4, 5

7. Determine deferred income taxes and related items— multiple tax rates.

14 10 13, 16, 17, 18, 20, 21

1, 2, 6, 7 5, 6

8. Change in enacted future tax rate.

14 11 16 2, 5, 7 5, 6

9. Carryback and carryforwardof NOL.

16, 17, 18, 12, 13, 14 9, 10, 23, 24, 25

5 6

10. Financial statement presentation and disclosure.

10, 11, 12, 15

3, 15 8, 11, 19, 20, 21, 22

3, 6, 9 2, 3, 5

11. Conceptual issues—tax allocation.

1, 2, 8, 19 7 1, 2, 3

Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 19-1

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning ObjectivesBrief

Exercises Exercises Problems

1. Identify differences between pretax financial income and taxable income.

1, 2, 5

2. Describe a temporary difference that results in future taxable amounts.

1, 2, 4, 9, 10 1, 2, 3, 4, 5, 7, 8, 11, 12, 13, 16, 17, 18, 19, 20, 21, 22

1, 3, 4, 6,7, 8, 9

3. Describe a temporary difference that results in future deductible amounts.

5, 6, 9 4, 5, 7, 8, 11, 12, 14, 15, 17, 18, 19, 20, 21, 22

1, 2, 4, 6, 8, 9

4. Explain the purpose of a deferred tax asset valuation allowance.

7, 14 7, 14, 15, 23, 24, 25

5. Describe the presentation of income tax expense in the income statement.

4, 6, 8 1, 3, 4, 5, 8, 12, 15, 16

1, 2, 3, 4, 5, 7, 8, 9

6. Describe various temporary and permanent differences.

4, 6, 7 2, 3, 9

7. Explain the effect of various tax rates and tax rate changes on deferred income taxes.

11 13, 16, 17, 18, 21, 23, 24, 25

5, 7

8. Apply accounting procedures for a loss carryback and a loss carryforward.

12, 13, 14 9, 10, 23, 24, 25

5

9. Describe the presentation of deferred income taxes in financial statements.

3, 15 8, 11, 16, 19, 20, 21, 22

3, 5, 6, 8, 9

10. Indicate the basic principles of the asset-liability method.

*11. Understand and apply the concepts of interperiod tax allocation.

12, 13, 14 9, 10, 23, 24, 25

5

*12. Compare the accounting for income taxes under GAAP and IFRS.

3, 15 8, 11, 16, 19, 20, 21, 22

3, 5, 6, 8, 9

19-2 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only)

ASSIGNMENT CHARACTERISTICS TABLE

Item DescriptionLevel ofDifficulty

Time(minutes)

E19-1 One temporary difference, future taxable amounts, one rate, no beginning deferred taxes.

Simple 15–20

E19-2 Two differences, no beginning deferred taxes, tracked through 2 years.

Simple 15–20

E19-3 One temporary difference, future taxable amounts, one rate, beginning deferred taxes.

Simple 15–20

E19-4 Three differences, compute taxable income, entry for taxes. Simple 15–20

E19-5 Two temporary differences, one rate, beginning deferred taxes. Simple 15–20

E19-6 Identify temporary or permanent differences. Simple 10–15

E19-7 Terminology, relationships, computations, entries. Simple 10–15

E19-8 Two temporary differences, one rate, 3 years. Simple 10–15

E19-9 Carryback and carryforward of NOL, no valuation account, no temporary differences.

Simple 15–20

E19-10 Two NOLs, no temporary differences, no valuation account, entries and income statement.

Moderate 20–25

E19-11 Three differences, classify deferred taxes. Simple 10–15

E19-12 Two temporary differences, one rate, beginning deferred taxes, compute pretax financial income.

Complex 20–25

E19-13 One difference, multiple rates, effect of beginning balance versus no beginning deferred taxes.

Simple 20–25

E19-14 Deferred tax asset with and without valuation account. Moderate 20–25

E19-15 Deferred tax asset with previous valuation account. Complex 20–25

E19-16 Deferred tax liability, change in tax rate, prepare section of income statement.

Complex 15–20

E19-17 Two temporary differences, tracked through 3 years, multiple rates.

Moderate 30–35

E19-18 Three differences, multiple rates, future taxable income. Moderate 20–25

E19-19 Two differences, one rate, beginning deferred balance, compute pretax financial income.

Complex 25–30

E19-20 Two differences, no beginning deferred taxes, multiple rates. Moderate 15–20

E19-21 Two temporary differences, multiple rates, future taxable income.

Moderate 20–25

E19-22 Two differences, one rate, first year. Simple 15–20

E19-23 NOL carryback and carryforward, valuation account versus no valuation account.

Complex 30–35

E19-24 NOL carryback and carryforward, valuation account needed. Complex 30–35

E19-25 NOL carryback and carryforward, valuation account needed. Moderate 15–20


ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Item DescriptionLevel ofDifficulty

Time(minutes)

P19-1 Three differences, no beginning deferred taxes, multiple rates. Complex 40–45

P19-2 One temporary difference, tracked for 4 years, one permanent difference, change in rate.

Complex 50–60

P19-3 Second year of depreciation difference, two differences, single rate, extraordinary item.

Complex 40–45

P19-4 Permanent and temporary differences, one rate. Moderate 20–25P19-5 NOL without valuation account. Simple 20–25

P19-6 Two differences, two rates, future income expected. Moderate 20–25

P19-7 One temporary difference, tracked 3 years, change in rates, income statement presentation.

Complex 45–50

P19-8 Two differences, 2 years, compute taxable income and pretax financial income.

Complex 40–50

P19-9 Five differences, compute taxable income and deferred taxes, draft income statement.

Complex 40–50

CA19-1 Objectives and principles for accounting for income taxes. Simple 15–20

CA19-2 Basic accounting for temporary differences. Moderate 20–25

CA19-3 Identify temporary differences and classification criteria. Complex 20–25

CA19-4 Accounting and classification of deferred income taxes. Moderate 20–25

CA19-5 Explain computation of deferred tax liability for multiple tax rates. Complex 20–25

CA19-6 Explain future taxable and deductible amounts, how carryback and carryforward affects deferred taxes.

Complex 20–25

CA19-7 Deferred taxes, income effects. Moderate 20–25


LEARNING OBJECTIVES

1. Identify differences between pretax financial income and taxable income.2. Describe a temporary difference that results in future taxable amounts.3. Describe a temporary difference that results in future deductible amounts.4. Explain the purpose of a deferred tax asset valuation allowance.5. Describe the presentation of income tax expense in the income statement.6. Describe various temporary and permanent differences.7. Explain the effect of various tax rates and tax rate changes on deferred income taxes.8. Apply accounting procedures for a loss carryback and a loss carryforward.9. Describe the presentation of deferred income taxes in financial statements.

10. Indicate the basic principles of the asset-liability method.*11. Understand and apply the concepts and procedures of interperiod tax allocation.*12. Compare the accounting for income taxes under GAAP and IFRS.

*This material is covered in an Appendix to the Chapter.


CHAPTER REVIEW

Introduction

1. Chapter 19 addresses the issues related to accounting for income taxes. Taxable income is computed in accordance with prescribed tax regulations and rules, whereas accounting income is measured in accordance with generally accepted accounting principles.

2. (L.O. 1) Due to the fact that tax regulations and generally accepted accounting principles differ in many ways, taxable income and financial income frequently differ. Examples of events that can result in such differences include: (a) depreciation computed on a straight-line basis for financial reporting purposes and on an accelerated basis for tax purposes, (b) income recognized on the accrual basis for financial reporting purposes and on the installment basis for tax purposes, and (c) warranty costs recognized in the period incurred for financial reporting purposes and when they are paid for tax purposes.

3. The items discussed in paragraph 2 above can result in temporary differences between the amounts reported for book purposes and those reported for tax purposes. A temporary difference is the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable amounts (increase in taxable income) or deductible amounts (decrease in taxable income) in future years when the reported amount of the asset is recovered or when the reported amount of the liability is settled. When the book amount of an asset or liability differs from the tax basis as a result of a temporary difference, the future tax effects on taxable income must be reported in the current financial statements.

Deferred Tax Liability

4. (L.O. 2) A deferred tax liability is the amount of deferred tax consequence attributable to the temporary differences that will result in net taxable amounts in future years. The liability is the amount of taxes payable on these net taxable amounts in future years based on existing provisions of the tax law.

5. Deferred tax liabilities meet the definitions of a liability because (a) they result from past transactions, (b) a present obligation exists, and (c) future sacrifices will result when payment of the tax comes due.

6. For example, assume Angle Company has a taxable temporary difference of $5,000,000 at the end of its initial year of operations. Its tax rate is 45. A deferred tax liability ($5,000,000 × .45) is recorded. Assuming current taxes payable are $2,000,000, the required journal entry is:

Income Tax Expense......................................... 4,250,000Income Taxes Payable................................. 2,000,000Deferred Tax Liability.................................... 2,250,000


Deferred Tax Asset

7. (L.O. 3) Due to the fact that deductible amounts can arise in the future as a result of temporary differences at the end of the current year, the deferred tax consequences of these deductible amounts should be recognized as a deferred tax asset. A deferred tax asset is the amount of taxes (computed in accordance with provisions of the tax law) that will be refundable in future years as a result of these deductible amounts.

8. A key issue in accounting for income taxes is whether a deferred tax asset should be recognized in the financial records. Deferred tax assets meet the definition of an asset and therefore should be reported in the financial statements. The three main conditions for an item to be reported as an asset are: (a) it results from past transactions; (b) it gives rise to a probable benefit in the future; and (c) the company controls access to the benefits. These conditions are met by the deferred tax asset.

9. (L.O. 4) A deferred tax asset is recognized for all deductible temporary differences. However, deferred tax assets should be reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

10. For example, assume Angie Company has a deductible temporary difference of $2,500,000 at the end of its initial year of operations. Its tax rate is 45%. A deferred tax asset of $1,125,000 or ($2,500,000 × .45) is recorded. Assuming taxes payable equals $2,000,000, the required journal entry is:

Income Tax Expense......................................... 875,000Deferred Tax Asset............................................ 1,125,000

Income Taxes Payable................................. 2,000,000

If, after further consideration, it appears to be more likely than not that $300,000 of this deferred tax asset will not be realized, then the following entry is appropriate.

Income Tax Expense......................................... 300,000

Allowance to Reduce Deferred Tax Asset to Expected Realizable Value..................... 300,000

The Allowance account is a contra account that is deducted from the Deferred Tax Asset account in the financial statements.

11. (L.O. 5) The formula to compute income tax expense (benefit) is:

Income Taxes Change in Total IncomePayable or Deferred Income = Tax ExpenseRefundable Taxes or Benefit

In the income statement or in the notes to the financial statements, the significant compo-nents of income tax expense attributable to continuing operations should be disclosed.


Temporary and Permanent Differences

12. (L.O. 6) Differences between taxable income and accounting income can be categorized as either (a) temporary differences or (b) permanent differences. Temporary differences arise when the tax basis of an asset or liability and its reported amount in the financial statements differ. This difference will reverse and result in taxable or deductible amounts in future years as the asset is recovered or the liability is settled at its reported amount.

13. Temporary differences originate in one period and reverse or “turn around” in one or more subsequent periods. For example, when a company accrues a product warranty liability, an expense is recognized for accounting purposes, but not for tax purposes. In future years when the product warranty liability is settled, tax deductible amounts result which reverse the effect of the original timing differences.

14. Two concepts related to temporary differences are originating differences and reversing differences. An originating difference is the initial temporary difference between the book basis and the tax basis of an asset or liability regardless of whether the tax basis of the asset of liability exceeds or is exceeded by the book basis of the asset or liability. A reversing difference, on the other hand, occurs when a temporary difference that originated in a prior period is eliminated and the tax effect is removed from the deferred tax account.

15. Permanent differences are items that (a) enter into financial income, but never into taxable income, or (b) enter into taxable income, but never into financial income. Examples of permanent differences include interest received on state and municipal obligations, proceeds from life insurance on key executives, and fines and expenses resulting from a violation of law. These items are not included in the computation of taxable income, and the profession has concluded that the tax consequences of these differences should not be recognized.

Future Tax Rates

16. (L.O. 7) When recording deferred income taxes, consideration must be given to the tax rate in effect when the timing differences reverse. Normally, the current tax rate is used to compute deferred income taxes. However, future tax rates, other than the current rate should be used when such rates have been enacted into law. When an unexpected change in the tax rate has been enacted into law, its effect on deferred income tax and related tax expense should be recorded immediately. The effects are reported as an adjustment to tax expense in the period of the change.

Accounting for Net Operating Losses

17. (L.O. 8) A net operating loss occurs for tax purposes in a year when tax-deductible expenses exceed taxable revenues. Under certain circumstances the federal tax laws permit taxpayers to use the losses of one year to offset the profits of other years. This income-averaging provision is accomplished through the carryback and carryforward of net operating losses. Under these rules, a company pays no income taxes for a year in which it incurs a net operating loss.


18. A company may carry a net operating loss back two years and receive refunds for income taxes paid in those years. The loss must be applied to the earliest year first and then to the second year. Any loss remaining after the two year carryback may be carried forward up to 20 years to offset future taxable income. A company may elect the loss carryforward only, offsetting future taxable income for up to 20 years.

19. When a company carries a tax loss back, the tax loss gives rise to a refund that is both measurable and currently realizable. The associated tax benefit should be recognized in the current loss period. When a company carries a tax loss forward, a deferred tax asset should be established for the benefits of future tax savings. If it is more likely than not that the entire future tax loss will not be realized in future years, a valuation allowance is required.

Positive and Negative Evidence

20. A company should consider all positive and negative information in determining whether it needs a valuation allowance.

21. Negative evidence to consider includes:

a. A history of operating loss or tax credit carryforwards expiring unused.

b. Losses expected in early future years (by a presently profitable entity).

c. Unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years.

d. A carryback, carryforward period that is so brief that it would limit realization of tax benefits if (1) a significant deductible temporary difference is expected to reverse in a single year, or (2) the enterprise operates in a traditionally cyclical business.

22. Positive evidence to consider includes:

a. Existing contracts or firm sales backlog that will produce more than enough taxable income to realize the deferred tax asset based on existing sale prices and cost structures.

b. An excess of appreciated asset value over the tax basis of the entity’s net assets in an amount sufficient to realize the deferred tax asset.

c. A strong earnings history exclusive of the loss that created the future deductible amount (tax loss carryforward or deductible temporary difference) coupled with evidence indicating that the loss is an aberration rather than a continuing condition (for example, the result of an unusual, infrequent, or extraordinary item).


Balance Sheet Presentation

23. (L.O. 9) Deferred income taxes are reported on the balance sheet as assets and liabilities. An individual deferred tax liability or asset is classified as current or noncurrent based on the classification of the related asset or liability for financial reporting purposes. A deferred tax asset or liability is considered to be related to an asset or liability if reduction of the asset or liability will cause the temporary difference to reverse or turn around. A deferred tax liability or asset that is not related to an asset or liability for financial reporting shall be classified according to the expected reversal date of the temporary difference.

24. The following is a summarization of the considerations related to balance sheet presentation of deferred tax accounts.

a. Classify the amounts as current or noncurrent. If related to a specific asset or liability, classify the amounts in the same manner as the related asset or liability. If not related, classify them on the basis of the expected reversal date of the temporary difference.

b. Determine the net current amount by summing the various deferred tax assets and liabilities classified as current. If the net result is an asset, report it on the balance sheet as a current asset; if a liability, report it as a current liability.

c. Determine the net noncurrent amount by summing the various deferred tax assets and liabilities classified as noncurrent. If the net result is an asset, report it on the balance sheet as a noncurrent asset; if a liability, report it as a long-term liability.

Income Statement Presentation

25. Income tax expense (or benefit) should be allocated to continuing operations, discontinued operations, extraordinary items, and prior period adjustments. This approach is referred to as intraperiod tax allocation. The significant components of income tax expense attributable to continuing operations should be disclosed. Companies are also required to reconcile income tax expense on continuing operations with the amount that results from applying domestic federal statutory tax rates to pretax income from continuing operations. The amounts of any operating loss carryforwards not recognized in the loss period, along with the expiration of these loss carryforwards, should be disclosed.

26. Income tax disclosures are required for several reasons:

a. Assessing quality of earnings.

b. Making better predictions of future cash flows.

c. Predicting future cash flows for operating loss carryforwards.


27. Uncertain tax positions are tax positions for which the tax authorities may disallow a deduction in whole or in part. Uncertain tax positions arise when companies take an aggressive approach to tax planning. FASB recently issued rules for companies to follow to determine whether it is “more likely than not” that the tax positions will be sustained upon audit. If the probability is more than 50%, companies may reduce their liabilities or increase their assets.

Asset-Liability Method

28. (L.O. 10) The FASB believes that the asset-liability viewpoint (balance sheet approach) is the most consistent method for accounting for income taxes. One objective of this approach is to recognize the amount of taxes payable or refundable for the current year. A second objective is to recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. To implement the objectives, the following basic principles are applied in accounting for income taxes at the date of the financial statements:

a. A current tax liability or asset is recognized for the estimated taxes payable or refundable on the tax return for the current year.

b. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards.

c. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.

d. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

Interperiod Tax Allocation

*29. (L.O. 11) A comprehensive illustration of multiple temporary and permanent differences is presented in Appendix 19-A. This illustration provides a sound basis for an understanding of the many aspects of accounting for income taxes.


LECTURE OUTLINE

The material in this chapter can be covered in three class periods. The conceptual issues in this chapter are difficult and the accounting procedures complex. Illustrations 19-1 and 19-2 can aid in demonstrating the recognition of deferred tax liabilities and assets and the calculation of income tax expense. Illustration 19-3 provides examples of temporary and permanent differences. Point out to the students how these examples result in different bases for book and tax purposes.

A. (L.O. 1) Taxable Income and Pretax Financial Income.

1. Taxable income is calculated in accordance with prescribed tax regulations and rules.

2. Pretax financial income is determined and reported in accordance with generally accepted accounting principles.

3. Differences between taxable income and pretax financial income occur because tax regulations and GAAP are frequently different.

B. (L.O. 2) Deferred Income Taxes.

1. A temporary difference is the difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements, which will result in taxable amounts or deductible amounts in future years.

a. Future taxable amounts increase taxable income in future years.

b. Future deductible amounts decrease taxable income in future years.

2. Deferred income taxes are the future tax effects of temporary differences.

C. Deferred Tax Liability.

TEACHING TIP

Illustration 19-1 provides a numerical example of the calculation of a deferred tax liability and the resulting journal entry to recognize income taxes.

1. A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

2. Calculation of deferred tax liability.

a. Two bases on assets and liabilities result when temporary differences exist.


b. Book basis – Tax basis = Cumulative temporary difference.

Deferred tax liability = Cumulative temporary differences × enacted tax rate.

c. Scheduling of future taxable amounts.

3. Income tax expense (benefit) has two components:

a. Deferred tax expense (benefit) is the increase (decrease) in the deferred tax liability balance from the beginning to the end of the accounting period.

b. Current tax expense (benefit) is the amount of income taxes paid or payable for the current period.

4. To be considered to be a current deferred tax liability, it must meet the definition of a GAAP liability.

a. Results from a past transaction.

b. Is a present obligation.

c. Represents a future sacrifice.

D. Objectives of accounting for income taxes.

1. To recognize the amount of taxes payable or refundable for the current year.

2. To recognize deferred tax liabilities and assets for the future tax consequences of events already recognized in the financial statements or tax returns.

E. (L.O. 3) Deferred Tax Asset.

TEACHING TIP

Illustration 19-2 provides a numerical example of the calculation of a deferred tax asset and the resulting journal entry to recognize income taxes.

1. A deferred tax asset represents the increase in taxes refundable (saved) in future years as a result of deductible temporary differences existing at the end of the current year. A deferred tax asset meets the conceptual definition of an asset because:

a. It results from a past transaction.

b. It gives rise to a probable future benefit.

c. The entity controls access to the benefits.


2. Calculation of deferred tax asset.

a. Book basis – tax basis of asset or liability = Cumulative temporary difference; Deferred Tax Asset = Cumulative temporary difference × enacted tax rate.

b. Scheduling of deductible amounts.

3. Income tax expense.

a. Deferred tax expense (benefit) is the decrease (increase) in the deferred tax asset balance from the beginning to the end of the accounting period.

b. Current tax expense is equal to income taxes payable.

4. (L.O. 4) Deferred tax assets should be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

a. Evaluate all available evidence, both positive and negative.

b. Probability of nonrecognition (slightly more than 50%).

F. (L.O. 5) Income Statement Presentation of Income Tax Expense.

1. Current tax expense.

2. Deferred tax expense.

TEACHING TIP

Illustration 19-3 provides examples of both temporary and permanent differences.

G. (L.O. 6) Temporary and Permanent Differences.

1. Temporary differences.

a. Originating temporary differences. The initial difference between the book basis and tax basis of an asset or liability generates a deferred tax asset or a deferred tax liability.

b. Reversing temporary differences. Occurs when a temporary difference that originated in prior periods is eliminated and the related tax effect is removed from the deferred tax account.

2. Permanent differences.

a. There are no deferred tax consequences to be recognized.

b. Items are recognized for accounting purposes, but not for taxes purposes. 19-14 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only)

c. Items are recognized for tax purposes, but not for accounting purposes.

H. (L.O. 7) The effect of tax rate changes on deferred income taxes.

1. Current tax rate. Use when the currently enacted tax rate is not expected to change.

2. Future tax rates. Use when they have been enacted into law.

3. Revisions of future tax rates and effects on the deferred tax accounts. Record the effect as soon as the change is enacted. Treat as an adjustment to income tax expense in the period of the change.

4. Average tax rates may be used when graduated tax rates exist.

I. (L.O. 8) Accounting for Net Operating Losses.

1. Losses can be carried back 2 years.

a. A refund is recorded and reported as a receivable on the balance sheet.

b. A Benefit Due to Loss Carryback is recognized and reported on the income statement.

2. Losses can be carried forward up to 20 years.

a. Carryforwards expected to be realized.

(1) A deferred Tax Asset is recognized for the expected future tax savings.

(2) A Benefit Due to Loss Carryforward is recognized and reported on the income statement of the current period as a contra-income tax expense.

b. Carryforwards that are not expected to be realized.

(1) Recognize the deferred tax asset on the balance sheet.

(2) A valuation allowance which represents the portion of the deferred tax asset that more likely than not will not be realized.

J. (L.O. 9) Financial Statement Presentation.

1. Balance Sheet.

a. Deferred tax accounts are classified as current and noncurrent based on the classification of the related asset or liability for financial reporting.

(1) The net current amount is the sum of the current deferred items.


(2) The net noncurrent amount is the sum of the noncurrent deferred items.

b. Disclose types of temporary differences; the net change during the year in the total valuation allowance, and carryforwards and carrybacks.

2. Income Statement.

a. Intraperiod tax allocation.

b. Significant components of income tax expense to be disclosed:

(1) Current tax expense or benefit.

(2) Deferred tax expense or benefit.

(3) Investment tax credits.

(4) Government grants (if recognized as a reduction of income tax expense).

(5) The benefit of operating loss carryforwards.

(6) Tax expense that results from allocating tax benefits either directly to paid-in capital or to reduce goodwill or other noncurrent intangible assets of an acquired entity.

(7) Adjustments of a deferred tax liability or asset for enacted changes in tax laws

or rates or a change in the tax status of a company.

(8) Adjustments of the beginning-of-the-year balance of a valuation allowance because of a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset in future years.

c. Reconciliation of income tax expense on continuing operations with the amount that results from applying federal tax rates.

3. Disclosure of tax loss carryforwards.

K. (L.O. 10) Asset-Liability Method.

1. Objectives.

a. To recognize the amount of taxes payable or refundable for the current year.

b. To recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns.

2. Procedures for the computation of deferred income taxes.


TEACHING TIP

Illustration 19-4 summarizes the procedures for the computation of deferred income taxes.

L. (L.O. 11) Appendix 19A. Comprehensive Illustration of Interperiod Tax Allocation.

1. Multiple temporary and permanent differences for 2 years are presented.

*M. (L.O. 12) IFRS Insights

1. The accounting for income taxes in IFRS is covered in IAS 12 (“Income Taxes”). Similar to GAAP, IFRS uses the asset and liability approach for recording deferred taxes. The differences between IFRS and GAAP involve a few exceptions to the asset-liability approach; some minor differences in the recognition, measurement, and disclosure criteria; and differences in implementation guidance.

2. Similarities

a. Similar to GAAP, IFRS uses the asset and liability approach for recording deferred taxes.

3. Differences

a. The classification of deferred taxes under IFRS is always non-current. As indicated in the chapter, GAAP classifies deferred taxes based on the classification of the asset or liability to which it relates.

b. Under IFRS, an affirmative judgment approach is used, by which a deferred tax asset is recognized up to the amount that is probable to be realized. GAAP uses an impairment approach. In this approach, the deferred tax asset is recognized in full. It is then reduced by a valuation account if it is more likely than not that all or a portion of the deferred tax asset will not be realized.

c. IFRS uses the enacted tax rate or substantially enacted tax rate. (“Substantially enacted” means virtually certain.) For GAAP, the enacted tax rate must be used.

d. The tax effects related to certain items are reported in equity under IFRS. That is not the case under GAAP, which charges or credits the tax effects to income.

e. GAAP requires companies to assess the likelihood of uncertain tax positions being sustainable upon audit. Potential liabilities must be accrued and disclosed if the position is “more likely than not” to be disallowed. Under IFRS, all potential liabilities must be recognized. With respect to measurement, IFRS uses an expected-value approach to measure the tax liability, which differs from GAAP.


ILLUSTRATION 19-1DEFERRED TAX LIABILITY


ILLUSTRATION 19-1 (continued)


ILLUSTRATION 19-2DEFERRED TAX ASSET


ILLUSTRATION 19-2 (continued)


ILLUSTRATION 19-3TEMPORARY AND PERMANENT DIFFERENCES


ILLUSTRATION 19-4PROCEDURES FOR COMPUTING AND REPORTINGDEFERRED INCOME TAXES


ch19

Documents

deferred taxes

taxable income

temporary differences

pretax financial income

simple1520 e19

tax rate changes

enacted future tax rate

future taxable amounts