2015, Study Session # 9, Reading # 31

INCOME TAXES
I.T
DTA
DTL
C/F

= Income Tax
= Deferred Tax Asset
= Deferred Tax Liabilities
= Carry Forwards

31. a

Tax Loss Terminology

Amount of I.T expense may differ from actual taxes owed to taxing
authorities.
Taxable income income subject to tax based on tax return.
Taxes payables (current tax expense) tax liability on B.S caused by taxable
income.
Income tax paid actual CF for I.T including from prior periods payments or
refunds from received in the current period.
Tax loss carry forward current loss to reduce future taxable income (can
result in DTA).
Tax base amount at which the asset or liability is valued for tax purposes.

Financial Reporting Terminology

Accounting profit pretax financial income.
Income tax expense = taxes payable + DTL - DTA.
Carrying value net B.S value of an A or L.
Permanent difference diff. b/w taxable income & pretax income that will
not reverse in future.
Temporary difference diff. b/w tax base & CV of an A or L that result in
either taxable amounts or deductible amounts in future.

31. b
DTL is created when I.T expense is > than taxes payable due to temporary
differences.
DTL occurs when
Revenues in I.S before on tax return due to temporary differences.
Expenses are tax deductibles before recognizing in I.S.
DTA is created when taxes payable are > income tax exp due to temporary
differences.
Post-employment benefits, warranty expenses & tax loss C/F are causes of
DTA.
DTA occurs when
Revenues are taxable before recognizing in I.S.
Expenses are recognized in I.S before they are tax deductible.
Tax loss C/F is available to reduce future taxable income.

31. c
Tax base of assets amount that will be deducted on tax return in future as
eco benefit of asset are realized.
Carrying value value of asset reported on F.S, net of depreciation &
amortization.
Tax base of liabilities CV of liability any amount deductible on tax return
in future.
Tax base of revenue received in advance = CV amount of revenue that will
not be taxed in future.

Copyright FinQuiz.com. All rights reserved.

VA
A&L
NI
FS

= Valuation Allowance
= Assets & Liabilities
= Net Income
= Financial Statement

2015, Study Session # 9, Reading # 31

31.d
Example

31. e
When tax rate , DTL & DTA & vice versa.
in B.S values will affect I.T. expenses in current period.
I.T expense = taxes payable + DTL - DTA.

31. f
Permanent difference difference b/w taxable income & pretax income
that will not reverse in future.
Permanent differences do not create DTA or DTL & will cause firms effective
tax rate to differ from statutory tax rate.
Statutory rate tax rate of jurisdiction.
Effective tax rate = income tax expense / pretax income.
Temporary difference diff. b/w tax base & CV of A or L that will result in
taxable or deductible amounts in future.

31. g
Neither DTA nor DTL are carried on B.S at discounted PV.
If > 50% probability that some or all DTA will not realized, then DTA must be
reduced by valuation allowance (reduce net B/S value of DTA) I.T expense
& N.I & vice versa. (U.S.GAAP).
Management can manipulate earnings by changing valuation allowance.

31. h
Disclosure is required for DTA & DTL.
in these accounts are reflected in I.T expense.
Some examples of temporary differences may include depreciation methods.

31. i
Disclosure is about:
DTA, DTL & VA, net in VA.
Any unrecognized DTL for undistributed earnings of subsidiaries & joint
ventures.
Current year tax effect of each difference.
Components of I.T expenses & tax loss C/F & credits.
Reconciliation of reported I.T provision and the I.T provision computed
using the statutory tax rate.

Copyright FinQuiz.com. All rights reserved.

2015, Study Session # 9, Reading # 31

31. j

Tax Accounting Differences, IFRS vs. U.S.GAAP

U.S.GAAP
Revaluation of fixed assets
and intangible assets
Undistributed profit from an
investment in a subsidiary

Deferred taxes are recognized in equity.

No deferred taxes for foreign subsidiaries

that meet the indefinite reversal criterion.

Deferred taxes are recognized unless the

parent is able to control the distribution of
profit and it is probable the temporary
difference will not reverse in the foreseeable
future.

No deferred taxes for domestic

subsidiaries if the amounts can be
recovered tax free.
Undistributed profit from an
investment in a joint
venture (JV).

No deferred taxes for foreign corporate

JVs that meet the indefinite reversal
criterion.

Undistributed profit from an

investment in an associate
firm.

Deferred taxes are recognized on

temporary differences.

Deferred tax asset

recognition

Recognized in full and then reduced if

more likely than not that some or the
entire tax asset will not be realized.
Enacted tax rate only.

Tax rate used to measure

deferred taxes
Presentation of deferred
taxes on the balance sheet

IFRS

Not applicable, no revaluation allowed.

Classified as current or noncurrent based

on the classification of the underlying
asset or liability.

Deferred taxes are recognized unless the

venture is able to control the sharing of
profit and it is probable that the temporary
difference will not reverse in the foreseeable
future.
Deferred taxes are recognized unless the
investor is able to control the sharing of
profit and it is probable that the temporary
difference will not reverse in the foreseeable
future.
Recognized if probable that sufficient
taxable profit will be available to recover the
tax asset.
Enacted or substantially enacted tax rate.
Netted and classified as noncurrent.

Copyright FinQuiz.com. All rights reserved.