Ifr 2 Chapter 16

Front 1

Pretax financial income

Back 1

GAAP
Used for financial reporting
Use full accrual method

Front 2

Taxable income

Back 2

IRS
Used for tax purposes
Use modified cash basis

Front 3

Deferred tax liability (simple)

Back 3

GAAP
Taxes that will be paid in the future

Front 4

Deferred tax asset (simple)

Back 4

GAAP
Taxes that will be lower in the future

Front 5

Temporary differences

Back 5

the difference between the tax basis of an asset or liability and its reported amount in the financial statement, which will result in taxable amounts or deductible amounts in future years

Front 6

Taxable amounts

Back 6

increase taxable income in the future (relative to pretax financial income)

Front 7

Deductible amounts

Back 7

decrease taxable income in the future (relative to pretax financial income)

Front 8

Deferred tax liability

Back 8

represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year

Front 9

What to do with expense and revenue for DTL

Back 9

1. Take the expense for IRS reporting (ex: depreciation) before GAAP reporting
2. Take the revenue for GAAP reporting before IRS reporting (ex: construction projects)

Front 10

Two components of income tax expense

Back 10

Current
Deferred

Front 11

Current component of income tax expense

Back 11

the amount of income tax payable for the period

Front 12

Deferred component of income tax expense

Back 12

the increase in DTL from the beginning to the end of the accounting period

Front 13

Why does FASB consider DTL a liability?

Back 13

1. It results from a past transaction
2. It is a present obligation
3. It represents a future sacrifice

Front 14

Deferred tax asset

Back 14

represents the increase in taxes refundable or saved in future years as a result of deductible temporary differences existing at the end of the current year

Front 15

What to do with expense and revenue for DTA

Back 15

1. Take the expense for GAAP reporting before IRS reporting (ex: warranty expense, bad debt)
2. Take the revenue for IRS reporting before GAAP reporting (ex: unearned revenue)

Front 16

Why does FASB consider DTA an asset?

Back 16

1. Results from a past transaction
2. It gives rise to a probable benefit in the future
3. The company controls access to the benefit

Front 17

When to reduce a DTA by a valuation allowance

Back 17

If it is MORE LIKELY THAN NOT that it will not realize some portion or all of the DTA

Front 18

"More likely than not" definition

Back 18

at least slightly more than 50%

Front 19

Journal entry for reducing DTA by a valuation allowance

Back 19

DR income tax expense
CR valuation allowance

Front 20

If you later realize that you can use the DTA instead of the valuation allowance

Back 20

reverse the journal entry used to record the allowance and create and allowance to reduce the DTA to the amount that will be realized

Front 21

IFRS valuation allowance

Back 21

requires a one-step approach that provides for recognition of deferred tax assets only to the extent it is PROBABLE that they will be realized

Front 22

Add/subtract these to get income tax expense on the income statement

Back 22

Increase Decrease
DTA Subtract Add
DTL Add Subtract

Front 23

Income statement disclosures

Back 23

disclose current and deferred components of income tax expense attributable to continuing operations

Front 24

Taxable temporary differences

Back 24

temporary differences that will result in taxable amounts in future years when the related assets are recovered (DTL)

Front 25

Deductible temporary differences

Back 25

temporary differences that will result in deductible amounts in future years, when the related book liabilities are settled (DTA)

Front 26

Revenues or gains that are taxable AFTER they are recognized in financial income (DTL)

Back 26

Contracts accounted for under the percentage of completion method for financial reporting and a portion of related gross profit deferred for tax purposes

Front 27

Expenses or losses that are deductible after they are recognized in financial income (DTA)

Back 27

Product warrant liabilities
Bad debt expense recognized using the allowance method for financial reporting direct write-off method used for tax purposes

Front 28

Revenues or gains that are taxable before they are recognized in financial income (DTA)

Back 28

Subscriptions received in advance
Advance rental receipts

Front 29

Expenses or losses that are deductible before they are recognized in financial income (DTL)

Back 29

Depreciable property, depletable resources, and intangibles

Front 30

Permanent differences result from items that

Back 30

1. Enter into pretax financial income but never into taxable income
2. Enter into taxable income but never into pretax financial income

Front 31

Accounting for permanent differences

Back 31

Do not give rise to future taxable or deductible amounts, so companies recognize no deferred tax consequences
Don’t take/add permanent deduction/revenue differences for income tax expense

Front 32

Items that are recognized for financial reporting purposes but not for tax purposes

Back 32

Interest received on state and municipal obligations
Expenses incurred in obtaining tax-exempt income
Proceeds from life insurance carried by the company on key officers and employees
Premiums paid for life insurance carried by the company on key officers and employees when the company is the beneficiary
Fines and expenses resulting from violating the law

Front 33

Items that are recognized for tax purposes but not for financial reporting purposes

Back 33

“Percentage depletion” of natural resources in excess of their cost
The deduction for dividends received from US corporations, generally 70% or 80% (called the dividends received deduction and is there to prevent triple taxation)

Front 34

How to determine what tax rates to use

Back 34

a company must consider PRESENTLY ENACTED changes in the tax rate that become effective for a particular future year(s) when determining the tax rate to apply to temporary differences under US GAAP

Front 35

When can you use a tax rate other than the current rate?

Back 35

when the future tax rates have been enacted

Front 36

What tax rate should you use if there are average graduated rates in effect?

Back 36

use the average tax rate

Front 37

IFRS requirements for what tax rate to use

Back 37

use enacted or “substantively enacted” tax rates and tax laws

Front 38

Accounting for a revision of future taxes

Back 38

when a change in tax rate is enacted, companies record its effect on the existing deferred income tax accounts IMMEDIATELY as an adjustment to income tax expense

Front 39

Net operating losses (NOL)

Back 39

occurs for tax purposes in a year when tax-deductible expenses exceed taxable revenues
Under certain circumstances, the tax law permits taxpayers to use the losses of one year to offset the profits of other years

Front 40

Rules for loss carrybacks

Back 40

A company may carry the NOL back 2 years and receive refunds for income taxes paid in those years (go to the earliest years first)
Always go back 2 years if possible
Then carry it forward for up to 20 years

Front 41

Journal entry for loss carrybacks

Back 41

DR income tax refund receivable (balance sheet) and
CR benefit due to loss carryback (offsets income tax expense; income statement)

Front 42

Rules for loss carryforwards

Back 42

May forgo the loss carryback option and use the loss carryforward option
Carryforward for 20 years

Front 43

Journal entry for carryforwards without valuation allowance

Back 43

DR DTA (reduces income tax payable in future years)
CR Benefits due to loss carryforward (income statement)

Front 44

Carryforwards with valuation allowance

Back 44

Record the DTA for the potential benefits of the carryforward and an allowance account to reduce it to the probable amount that will be used

Front 45

Evidence that you need valuation allowance

Back 45

1. A history of operating loss or tax credit carryforwards expiring unused
2. Losses expected in early future years (by a presently profitable entity)
3. Unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years
4. 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

Front 46

Evidence that you don't need valuation allowance

Back 46

1. 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
2. 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
3. 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 (ex: the result of an unusual, infrequent, or extraordinary item)

Front 47

Three steps for the balance sheet

Back 47

Classify amounts as current or noncurrent
Determine the net current amount
Determine the noncurrent amount

Front 48

How to decide whether to classify amounts as current or noncurrent on the balance sheet (GAAP)

Back 48

If related to a specific asset or liability, classify the amount in the same manner as the related asset or liability
If not related, classify on the basis of the expected reversal date of the temporary difference

Front 49

How to decide whether to classify amounts as current or noncurrent on the balance sheet (IFRS)

Back 49

Always noncurrent

Front 50

How to determine the net current amount

Back 50

Current DTA + Current DTL
If the net result is an asset, report it on the balance sheet as a current asset; if it’s a liability, report as a current liability

Front 51

How to determine the noncurrent amount

Back 51

Noncurrent DTA + Noncurrent DTL
If the net result is an asset, report it on the balance sheet as a non-current asset; if it’s a liability, report it as a long-term liability

Front 52

How to allocate income tax expense or benefit

Back 52

allocate to continuing operations, discontinued operations, and extraordinary items

Front 53

Recognize a current tax liability or asset for:

Back 53

the estimated taxes payable or refundable

Front 54

Recognize a deferred tax liability or asset for:

Back 54

the estimated future tax effects attributable to temporary differences and carryforwards using enacted tax rate

Front 55

Reduce the measurement of deferred tax asset by:

Back 55

the amount of any tax benefits that companies do not expect to realize

Front 56

Reporting tax effects IFRS

Back 56

Tax effects related to certain items are reported in equity

Front 57

Reporting potential tax liabilities (IFRS)

Back 57

All potential liabilities must be recognized; use an expected-value approach to measure the tax liability

Front 58

Reporting potential tax liabilities (GAAP)

Back 58

Companies must assess the likelihood of uncertain tax positions being sustainable upon audit: Accrue and disclose liabilities if the position is “more likely than not” to be disallowed