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58 Cards in this Set

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Pretax financial income
GAAP
Used for financial reporting
Use full accrual method
Taxable income
IRS
Used for tax purposes
Use modified cash basis
Deferred tax liability (simple)
GAAP
Taxes that will be paid in the future
Deferred tax asset (simple)
GAAP
Taxes that will be lower in the future
Temporary differences
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
Taxable amounts
increase taxable income in the future (relative to pretax financial income)
Deductible amounts
decrease taxable income in the future (relative to pretax financial income)
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
What to do with expense and revenue for DTL
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)
Two components of income tax expense
Current
Deferred
Current component of income tax expense
the amount of income tax payable for the period
Deferred component of income tax expense
the increase in DTL from the beginning to the end of the accounting period
Why does FASB consider DTL a liability?
1. It results from a past transaction
2. It is a present obligation
3. It represents a future sacrifice
Deferred tax asset
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
What to do with expense and revenue for DTA
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)
Why does FASB consider DTA an asset?
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
When to reduce a DTA by a valuation allowance
If it is MORE LIKELY THAN NOT that it will not realize some portion or all of the DTA
"More likely than not" definition
at least slightly more than 50%
Journal entry for reducing DTA by a valuation allowance
DR income tax expense
CR valuation allowance
If you later realize that you can use the DTA instead of the valuation allowance
reverse the journal entry used to record the allowance and create and allowance to reduce the DTA to the amount that will be realized
IFRS valuation allowance
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
Add/subtract these to get income tax expense on the income statement
Increase Decrease
DTA Subtract Add
DTL Add Subtract
Income statement disclosures
disclose current and deferred components of income tax expense attributable to continuing operations
Taxable temporary differences
temporary differences that will result in taxable amounts in future years when the related assets are recovered (DTL)
Deductible temporary differences
temporary differences that will result in deductible amounts in future years, when the related book liabilities are settled (DTA)
Revenues or gains that are taxable AFTER they are recognized in financial income (DTL)
Contracts accounted for under the percentage of completion method for financial reporting and a portion of related gross profit deferred for tax purposes
Expenses or losses that are deductible after they are recognized in financial income (DTA)
Product warrant liabilities
Bad debt expense recognized using the allowance method for financial reporting direct write-off method used for tax purposes
Revenues or gains that are taxable before they are recognized in financial income (DTA)
Subscriptions received in advance
Advance rental receipts
Expenses or losses that are deductible before they are recognized in financial income (DTL)
Depreciable property, depletable resources, and intangibles
Permanent differences result from items that
1. Enter into pretax financial income but never into taxable income
2. Enter into taxable income but never into pretax financial income
Accounting for permanent differences
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
Items that are recognized for financial reporting purposes but not for tax purposes
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
Items that are recognized for tax purposes but not for financial reporting purposes
“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)
How to determine what tax rates to use
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
When can you use a tax rate other than the current rate?
when the future tax rates have been enacted
What tax rate should you use if there are average graduated rates in effect?
use the average tax rate
IFRS requirements for what tax rate to use
use enacted or “substantively enacted” tax rates and tax laws
Accounting for a revision of future taxes
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
Net operating losses (NOL)
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
Rules for loss carrybacks
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
Journal entry for loss carrybacks
DR income tax refund receivable (balance sheet) and
CR benefit due to loss carryback (offsets income tax expense; income statement)
Rules for loss carryforwards
May forgo the loss carryback option and use the loss carryforward option
Carryforward for 20 years
Journal entry for carryforwards without valuation allowance
DR DTA (reduces income tax payable in future years)
CR Benefits due to loss carryforward (income statement)
Carryforwards with valuation allowance
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
Evidence that you need valuation allowance
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
Evidence that you don't need valuation allowance
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)
Three steps for the balance sheet
Classify amounts as current or noncurrent
Determine the net current amount
Determine the noncurrent amount
How to decide whether to classify amounts as current or noncurrent on the balance sheet (GAAP)
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
How to decide whether to classify amounts as current or noncurrent on the balance sheet (IFRS)
Always noncurrent
How to determine the net current amount
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
How to determine the noncurrent amount
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
How to allocate income tax expense or benefit
allocate to continuing operations, discontinued operations, and extraordinary items
Recognize a current tax liability or asset for:
the estimated taxes payable or refundable
Recognize a deferred tax liability or asset for:
the estimated future tax effects attributable to temporary differences and carryforwards using enacted tax rate
Reduce the measurement of deferred tax asset by:
the amount of any tax benefits that companies do not expect to realize
Reporting tax effects IFRS
Tax effects related to certain items are reported in equity
Reporting potential tax liabilities (IFRS)
All potential liabilities must be recognized; use an expected-value approach to measure the tax liability
Reporting potential tax liabilities (GAAP)
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