University:
California State University, Northridge
Course:
ACCT 352 | Intermediate Financial Accounting III
Academic year:

2024
Views:

173

Pages:

16
Author:

crazy4lime9284zb

16 Accounting for Income Taxes Part 2 Valuation Allowance • A valuation allowance account is needed if it is more likely than not that some portion of the deferred tax asset will not be realized. • The deferred tax asset is then reported at its estimated net realizable value. 16 - 17 Permanent Differences Created when an income item is included in taxable income or accounting income but will never be included in the computation of the other. Example: Interest on tax-free municipal bonds is included in accounting income but is never included in taxable income. Permanent differences are disregarded when determining both the tax payable currently and the deferred tax asset or liability. 16 - 18 U.S. GAAP vs. IFRS Despite the similar approaches for accounting for income taxes under IFRS and U.S. GAAP, differences in reported amounts for deferred taxes are among the most frequent between the two reporting approaches. • For example, U.S. GAAP requires a loss contingency be accrued if it is both probable and can be reasonably estimated. Accruing a loss contingency leads to a deferred tax asset. 16 - 19 • For loss contingencies, IFRS uses a “more likely than not” threshold, which is lower than the U.S. “probable” requirement. As a result, under the lower threshold of IFRS, a loss contingency and a deferred tax asset sometimes is recorded for IFRS but not for U.S. GAAP. Tax Rate Considerations • Deferred tax assets and liabilities should be determined using the future tax rates, if known. • The deferred tax asset or liability must be adjusted if a change in a tax law or rate occurs. 16 - 20 Multiple Temporary Differences It would be unusual for any but a very small company to have only a single temporary difference in any given year. Categorize all temporary differences according to whether they create … Future taxable amounts 16 - 21 Future deductible amounts Net Operating Losses (NOL) Tax laws often allow a company to use tax NOLs to offset taxable income in earlier or subsequent periods. When used to offset earlier taxable income:  Called: operating loss carryback.  Result: tax refund. 16 - 22 When used to offset future taxable income:  Called: operating loss carryforward.  Result: reduced tax payable. Net Operating Losses (NOL) Carryback Period -2 -1 Carryforward Period +1 +2 +3 +4 +5 Current Year . . . +20 The NOL may first be applied against taxable income from two previous years. Unused NOL may be carried forward for 20 years. 16 - 23 Operating Loss Carryforward Deferred tax asset Income tax benefit-operating loss 16 - 24 50 50 Operating Loss Carryback The carryback of the NOL must be applied to the earlier year first and then to the next year. Any remaining NOL may be carried forward. 16 - 25 Operating Loss Carryback Receivable—income tax refund Deferred tax asset Income tax benefit-operating loss 16 - 26 29 20 49 Balance Sheet Classification Deferred tax assets/liabilities are classified as current or noncurrent based on the classification of the related asset or liability. A deferred tax asset that is not related to a specific asset or liability should be classified according to when the underlying temporary difference is expected to reverse. 16 - 27 Deferred Tax AssetsDisclosure and Notes Deferred Tax Liabilities • Total of all deferred tax liabilities. • Total of all deferred tax assets. • Total valuation allowance recognized. • Net change in valuation account. Income Tax Expense • Current portion of the • Approximate tax effect of each tax expense (or benefit). type of temporary difference • Deferred portion of the (and carryforward). tax expense (or benefit) with separate disclosures of amounts Operating Loss Carryforwards attributable to several • Amounts. specific items. • Expiration dates. 16 - 28 Coping with Uncertainty in Income Taxes Two-step Decision Process Step 1. A tax benefit may be reflected in the financial statements only if it is “more likely than not” that the company will be able to sustain the tax return position, based on its technical merits. Step 2. A tax benefit should be measured as the largest amount of benefit that is cumulatively greater than 50 percent likely to be realized. If the tax benefit is not “more likely than not,” then none of the tax benefit is allowed to be recorded. 16 - 29 Intraperiod Tax Allocation Income Statement: • Income from continuing operations. • Discontinued operations. • Extraordinary items. Other Comprehensive Income: • Investments. • Postretirement benefit plans. • Derivatives. • Foreign currency translation. 16 - 30 U.S. GAAP vs. IFRS The approach for accounting for intraperiod tax allocation is the same under IFRS and U.S. GAAP, but the categories used on the income statement are different. • GAAP separately reports both discontinued operations and extraordinary items on the income statement and each are shown net of tax. 16 - 31 • IFRS does not separately report extraordinary items on the income statement. As a result, the only income statement item reported separately net of tax using IFRS is discontinued operations.