Cpa Review- Far 6-4 (Accounting For Income Taxes)

Front 1

Intraperiod Tax Allocation

Back 1

-Involves apportioning the total tax provision for financial accounting purposes in a period between the income or loss from: IDEA PUFER. All items are net of tax except for income from continuing operations.

Hint 1

-GR: any amount not allocated to continuing operations is allocated to other I/S items, OCI, or S/E in proportion to their individual effects on income tax or benefit for the year.

Front 2

Interperiod Tax Allocation

Back 2

-Objective is to recognize through the matching principle the amount of current and future tax related to events that have been recognized in financial accounting income.

Hint 2

-Required to reconcile the temporary differences in taxable and/or deductible amounts.

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Permanent Differences

Back 3

-Don't affect the deferred tax computation. Only affect the current tax computation and affect only the period in which they occur.
-Items of revenue and expense that enter GAAP or taxable income but never into the other.
-Will never reverse.
-They are either nontaxable, nondeductible, or special tax allowances.

Hint 3

-Ex's: Tax-exempt interest, life insurance proceeds on key officer's policy, life insurance premiums when corporation is beneficiary, certain penalties (or fines, bribes, kickbacks, etc.), nondeductible portion of meal and entertainment expense, dividends-received deduction, excess percentage depletion over cost depletion.
-Investment interest expense is limited to net (taxable) investment income.

Front 4

Temporary Differences

Back 4

-Affect the deferred tax computation. They affect current and future taxes and deferred taxes are required for these differences.
-Items and revenue and expense that enter into either financial or taxable income in a period before they enter into the other.
-If it causes F/S Income to be > Tax Return Income = Asset
-If it causes F/S Income to be < Tax Return Income = Liability

Hint 4

-Will result in taxable or deductible amounts in future years when reported amount of asset or liability is recovered or settled respectively.
-Chart below has examples
-Additional causes are differences arising in a business combination accounted for as a purchase and differences due to indexing, whenever local currency is the functional currency.

Front 5

Comprehensive Allocation

Back 5

-The asset and liability method (or the B/S Approach), is required by GAAP for comprehensive allocation.
-Interperiod tax allocation is applied to all temporary differences.

Hint 5

-Requires that either income taxes payable or a deferred tax liability (asset) be recorded for all tax consequences of the current period.

Front 6

Accounting for Interperiod Tax Allocation

Back 6

1. Total income tax expense (GAAP income tax expense) or benefit for the year is the sum of: (1) Current income tax expense/benefit and (2) Deferred income tax expense/benefit.
2. Current income tax E/B is equal to the income taxes payable or refundable for the current year, as determined on the corporate tax return (Form 1120) for the current year (owe now)

Hint 6

3. Deferred income tax E/B is equal to the change in deferred tax liability or asset account on the B/S from the beg. of the current year to the end (net change in what you owe later, B/S Approach)
4. Total income tax E/B = #2 ± #3

Front 7

Deferred Tax Liabilities

Back 7

-Anticipated future tax liabilities derived from situations where future taxable income will be greater than future financial accounting income due to temporary differences.

Hint 7

1. Tax deductible first - F/S expense later
2. F/S income first - taxable income later

Front 8

Deferred Tax Assets

Back 8

-Arise when the amount of taxes paid in the current period exceeds the amount of income tax expense in the current period.
-Treat like a gift certificate.

Hint 8

-Anticipated future benefits derived from situations where future taxable income will be less than future financial accounting income due to temporary differences.

Front 9

Valuation Allowance

Back 9

-(contra account) If it is more likely than not (likelihood or more than 50%) that part or all of the deferred tax asset will not be realized, a valuation allowance is recognized.
-For amount NOT expected to be used.

Hint 9

-The net deferred tax asset should equal that portion of the deferred tax asset that, based on available evidence, is more likely than not to be realized.

Front 10

IFRS vs. GAAP- Valuation Allowance

Back 10

-A deferred tax asset is recognized when it is probable (more likely than not) that sufficient taxable profit will be available against which the temporary difference can be utilized.

Hint 10

-Valuation allowances are not permitted under IFRS.

Front 11

Uncertain Tax Positions

Back 11

-(Aggressive tax positions) defined as some level of uncertainty of the sustainability of a particular tax position taken by a company. GAAP requires a more-likely-than-not level of confidence before reflecting a tax benefit in an entity's F/S's.

Hint 11

-Scope (= Income taxes, not sales or payroll): a tax position is a filing position that an enterprise has taken or expects to take on its tax return. (See next for process)

Front 12

Two-Step Approach

Back 12

Step 1: Recognition of a Tax Benefit
1. Test "More-Likely-Than-Not:" threshold that must be met before a tax benefit can be recognized in the F/S's (Assessment: if a dispute w/ the taxing authority were taken to the court of last resort).
2. Threshold Considerations: presume that relevant taxing authority will examine the tax position and has full knowledge of all relevant information. Each tax position should be evaluated separately.
3. Test Failed: tax benefit isn't recognized in the F/S's and tax expense is increased.

Hint 12

Step 2: Measurement of the Tax Benefit
1. Recorded Amount: recognize the largest amount of tax benefit that has greater than 50% likelihood of being realized upon ultimate settlement w/in the taxing authority.
2. If tax position is based on a clear and unambiguous tax law, than recognize the full benefit in the F/S's.

Front 13

IFRS vs. GAAP- Uncertain Tax Positions

Back 13

-Under IFRS, tax consequences of events should be accounted for in a manner consistent with the expected resolution of the tax position with tax authorities as of the B/S date.

Hint 13

-Uncertain tax positions are not specifically addressed by the IFRS.

Front 14

Enacted Tax Rate

Back 14

-Used for deferred taxes (temporary difference)
-Measurement of deferred taxes is based on the applicable tax rate.

Hint 14

-This requires using the enacted tax rate expected to apply to taxable items (temp. diff.'s) in the periods the taxable item is expected to be paid (liability) or realized (asset).

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IFRS vs. GAAP- Enacted Tax Rate

Back 15

-IFRS permits the use of enacted or substantively enacted tax rates.

Front 16

Changes in Tax Law or Rates

Back 16

-Liability method requires that the deferred tax account balance (asset or liability) be adjusted when the tax rates change. Thus, if future tax rates have been enacted, the deferred tax liability and asset accounts will be calculated using the appropriate enacted future effective tax rate.

Hint 16

-Changes in tax laws or rates are recognized in the period of change (enactment).
-Amount of adjustment is measured by the change in applicable laws/rates applied to the remaining cumulative temporary differences.
-Adjustment enters into income tax expense for that period as a component of income from continuing operations.

Front 17

IFRS vs. GAAP- Changes In Laws/Rates

Back 17

-Under IFRS, adjustments for changes in deferred tax balances due to changes in tax laws or rates are recognized on the I/S, except when the deferred tax balance arises from a transaction or event that is recognized in OCI.

Hint 17

-In this case, the adjustments would also be recorded in OCI.

Front 18

Change in Valuation Allowance

Back 18

-A change in circumstances that causes a change in judgement about the ability to realize the related deferred tax asset in future years should be accounted for.

Hint 18

-The change in valuation should be recognized in income from continuing operations in the period of the change.

Front 19

Change in Tax Status of an Enterprise

Back 19

-Entity's tax status may change from taxable to nontaxable.
-If nontaxable becomes taxable, deferred tax liability or asset should be recognized for any temporary differences.
-If taxable becomes nontaxable, existing deferred tax liability or asset should be written off.

Hint 19

-The effect of recognizing or eliminating a deferred tax liability or deferred tax asset should be included in come fro continuing operations in the period of the change.

Front 20

Net Temporary Adjustment

Back 20

-(from beg. balance) Deferred tax account is adjusted for the change in deferred taxes (asset or liability), due to the current year's events.
-Ending Deferred Tax Balance - (Current Balance) = The Required Adjustment

Hint 20

-The income tax expense / benefit - deferred, is the difference between the beg. balance in the deferred tax account and the properly computed ending balance in the account.

Front 21

B/S Presentation

Back 21

-Classify based on what gave birth to it
1. Rule 1: Deferred tax items should be classified based on the classification of the related asset or liability for financial reporting.
2. Rule 2 (Exceptions): Deferred tax items not related to an asset or liability should be classified based on the expected reversal date of the temporary difference (Ex's: deferred taxes relating to carry forwards, organization costs deducted for GAAP but not for tax, percentage completion method used for GAAP but completed contract used for tax).

Hint 21

3. All deferred tax assets and liabilities classified as current must be netted (offset) and presented as one amount.
4. All noncurrent must be netter (offset) and presented as one amount.
5. Any valuation allowance for a deferred tax asset should be allocated pro rata to current and noncurrent deferred assets.

Front 22

IFRS vs. GAAP- Classification

Back 22

-Under IFRS, deferred tax assets and liabilities are reported as noncurrent on the B/S.
-May be netted is the entity has a legally enforceable right to offset them.*

Hint 22

-*And the deferred tax assets and liabilities relate to income taxes levied by the same tax authorities.

Front 23

Operating Losses

Back 23

-Under current US tax law, an operating loss of a period may be carried back two years or forward 20 years and be applied as a reduction of taxable income in those periods as permitted.
-Taxable and financial accounting income will differ for the periods in which the loss is carried back or forward.

Hint 23

-An election must be made in the year of the loss to either (1) carryback the portion of the loss that can be absorbed by the prior years' taxable income, and carryforward any excess, or (2) carryforward the entire loss.

Front 24

Operating Loss Carrybacks

Back 24

-Effects of any realizable loss carryback should be recognized in the determination of the loss period net income. A claim for refund of past taxes is shown on the B/S as a separate item from deferred taxes.
-Usually classified as current.
-100% collectible, no valuation allowance

Hint 24

-Tac carrybacks used to reduce taxes due or to receive a refund for a prior period are a tax benefit (asset) and should be recognized (to extent they can be used) in the period they occur. J/E:
DR. Tax Refund Receivable
CR. Tax Benefit
-Reduction of book loss, not a contra-expense.

Front 25

Operating Loss Carryforwards

Back 25

-If loss is carried forward, tax effects are recognized to the extent that the tax benefit is more likely than not to be realized.
-Should be recognized as deferred tax assets (b/c they represent future savings) in the period they occur.
-NOL carryforwards should be "valued" using the enacted (future) tax rate for the period(s) they are expected to be used.
-Valuation allowance may be necessary (required).

Hint 25

-Tax credit carryforwards should be "valued" at the amount of tax payable to be offset in the future.
DR. Deferred Tax Asset
CR. Tax Benefit
-Reduction of book loss, not a contra-expense.
-Deferred tax asset (DR) will reduce tax payable in a future period.
-Tax benefit (CR) would reduce the NOL of current period.

Front 26

Investee's Undistributed Earnings

Back 26

1. Income Tax Return (= Dividend Income): taxable income is the dividend received. Under US tax law, there's a dividend received deduction (exclusion) based upon the % of ownership
-Ownership 0-19% = 70%* exclusion
-Ownership 20-80% = 80%*
-Ownership > 80% = 100%*
*Permanent Differences

Hint 26

2. GAAP F/S (= % of sub's income): Report % of investee's income using the equity method for an investment between 20% and 50%
-Difference between #1 and #2 is a temporary difference
3. Temporary Difference: Should be presumed that all undistributed earnings will ultimately be distributed to the investor / parent at some future time (reverse). F/S income of investee claimed by investor / parent as earnings is greater than actual dividends received from the investee that are claimed on the tax return.

Front 27

Income Tax Disclosures- B/S

Back 27

1. Components of a net deferred tax liability or asset including total of: deferred tax liabilities, deferred tax assets, valuation allowance.

Hint 27

2. Total net change in valuation allowance.
3. Tax effect of each temporary difference and carryforward.

Front 28

Income Tax Disclosures - I/S

Back 28

1. Amount of income tax expense (benefit) allocated to continuing operations* and amounts allocated to other items.
-*Includes: current tax, deferred tax, investment tax credits, government grants, benefits of NOL carryforwards, tax allocated to S/E items, adjustments of deferred taxes, adjustments to the valuation account.

Hint 28

2. Tax benefit of an operating loss carryback (or forward) should be reported in the same manner (I/S location) as the current year source of income or loss it relates to.
3. Recognition of income tax expense attributable to continuing operations and the amount of income tax expense that would have resulted from applying the statutory rate to pretax income.