Defend the Asset/Liability Approach of Accounting for Inter-Period Income Tax Allocation.
The asset/liability method of income tax allocation is balance sheet oriented. The intent is to accrue and report the total tax benefit or taxes payable that will actually be realized or assessed on temporary differences when their respective future taxable or deductible amounts are expected to occur.
The book states 5 arguments:
1. The balance sheet is becoming more important financial statement. Reporting deferred taxes based on the expected tax rates when the temporary differences reverse increases the predictive value of future cash flows, liquidity, and financial flexibility.
2. Reporting deferred taxes based on the expected tax …show more content…
- Assets and Liabilities created by SFAS # 109 do meet the definitions in SFAC # 6.
- SFAS #109 states that it allows for the separate recognition and measurement of deferred tax assets and liabilities without regard to future income considerations
- Income tax consequences should be recognized in same accounting period as that event is recognized in the F/S. Most events will affect taxable income and pretax financial accounting income in same period, but income tax consequences of some events are deferred. Temporary differences will result from events that have deferred tax consequences.
- Recognition of deferred income taxes is consistent with accrual accounting. Under accrual accounting, there is an assumption that there will be future recovery and settlement of reported amounts of assets and liabilities. This makes the recognition of deferred tax consequences of those temporary differences that will become refundable or payable necessary.
- Under the asset/liability method, the deferred tax consequences of temporary differences generally are recognizable liabilities and assets. That is, a deferred tax liability represents the amount of income taxes that will be payable in future years when temporary differences result in taxable income at that time. A deferred tax asset represents the amount of income taxes that will be refundable