Download Deferred Tax Assets and Deferred Tax Liabilities

Accounting for Income Taxes
Chapter 16
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Deferred Tax Assets and
Deferred Tax Liabilities
GAAP is the set of
rules for preparing
financial
statements.
Results in . . .
Financial statement
income tax expense.
16-2
The Internal Revenue
Code is the set of
rules for preparing
tax returns.
Results in . . .
Usually. . .
IRS income taxes
payable.
The objective of accounting for income taxes is to
recognize a deferred tax liability or deferred tax asset
for the tax consequences of amounts that will become
taxable or deductible in future years as a result of
transactions or events that already have occurred.
16-3
Temporary Differences
The difference in the rules for computing
between pretax accounting income
(according to GAAP) and taxable income
(according to the IRS) often causes
amounts to be reported in different years.
This results in
temporary
differences.
16-4
Temporary Differences
Temporary differences will reverse
in one or more future periods.
Accounting Income > Taxable Income
Accounting Income < Taxable Income
Future Taxable Amounts
Future Deductible Amounts
Deferred Tax Liability
Deferred Tax Asset
16-5
Types of Temporary Differences
Deferred tax assets
result in deductible
amounts in the future.
Deferred tax liabilities
result in taxable amounts
in the future.
16-6
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.
16-7
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.
16-8
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.
•
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.
16-9
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.
16-10
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
Future deductible
amounts
16-11
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.
When used to offset
future taxable income:
 Called: operating loss
carryforward.
 Result: reduced tax
payable.
16-12
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.
16-13
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.
16-14
Disclosure Notes
Deferred Tax Assets and Deferred
Tax Liabilities
• Total of all deferred tax liabilities.
• Total of all deferred tax assets.
• Total valuation allowance
Income Tax Expense
recognized.
• Current portion of the tax
• Net change in valuation account.
expense (or benefit).
• Approximate tax effect of each type
• Deferred portion of the
of temporary difference (and
tax expense (or benefit)
carryforward).
with separate disclosures
of amounts attributable to
Operating Loss Carryforwards
several specific items.
• Amounts.
• Expiration dates.
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.
16-15
16-16
Intraperiod Tax Allocation
Income Statement:
• Income from continuing operations.
• Discontinued operations.
• Extraordinary items.
Other Comprehensive Income:
• Investments.
• Postretirement benefit plans.
• Derivatives.
• Foreign currency translation.
16-17
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.
•
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.
16-18
End of Chapter 16