1 Future Tax Liability Example Chelsea Inc AccountingTax Revenue$130,000$100,000 Expenses 60,000 Income$ 70,000$ 40,000 40%$ 28,000$ 16,000

2 Future Tax Liability Example Chelsea Inc Accounting Income$70,000 Adjust for revenue taxable in future period (30,000) 20,000 Taxable Income$ 40,000$ 90,000 Tax 40% $ 16,000$ 36, $70,000 10,000 $ 80,000 $ 32,000

3 Future Tax Liability Example Chelsea Inc Books Tax Accounts receivable $30,000 0 Income reported in 2010 $70,000 $40,000 Tax rate = 40% Future Income tax liability (30,000 x 40%) 12,000 Income tax payable (40,000 x 40%) 16,000 Income Tax Expense (total) 28,000

4 Chelsea Inc. – example continued Total $30,000 40% $ 12, Future taxable amounts $20,000$10,000 Future tax rate40% Future income tax liability $ 8,000$ 4,000

5 Recording Journal Entries – e.g. Chelsea Inc Journal Entries: Current Income Tax Expense 16,000 Income Tax Payable 16,000 Future Income Tax Expense 12,000 Future Income Tax Liability 12,000

6 Future Income Tax Liability Net Assets reported End of 2010 End of 2011 Accounts receivable (in assets) $30,000$10,000 Future income tax liability (in liabilities) 12,000 4,000 Net assets reported$ 18,000$ 6,000 Note: Balance sheet reflects eventual cash impact of recovering the A/R

7 Future Tax Asset – Example Cunningham Inc. sells microwave ovens with a 2 year warranty In 2011, estimated warranty expense is $500,000 Actual warranty costs are $300,000 in 2012 and $200,000 in 2013

8 Future Income Tax Asset: Example Books Tax Warranty liability $500,000 0 Tax rate = 40% Future Income tax asset (500,000 x 40%) 200,000 Income tax payable (assumed) (Taxable Income x 40%) 600,000 Income Tax Expense (total) 400,000

9 Future Income Tax Asset: Example Journal Entries: Current Income Tax Expense 600,000 Income Tax Payable 600,000 Future Income Tax Asset 200,000 Future Income Tax Expense 200,000 The total income tax expense of $400,000 is made up of a current tax expense of $600,000 and a future income tax benefit of $200,000

10 Future Income Tax Asset: Example In subsequent years (2012 and 2013): -warranty expense of $500,000 deducted for tax, but not for books -Income taxes payable reduced by $500,000 × 40% = $200,000 -Entry in future, therefore: Income tax expense$x Future income tax asset $ 200,000 Income taxes payable$x − 200,000

11 Future Tax Rate - example Hostel Corp. had the following at end of 2009: Property, plant, and equipment: Net book value (NBV) = $4,000,000 Tax value (Undepreciated capital cost, UCC) = 1,000,000 Taxable temporary difference = 3,000,000 (to reverse by $1,000,000 each year in 2011, 2012 and 2013) Tax rate 40% Future tax liability 1,200,000

12 Future Tax Rate - example Assume a new income tax rate is enacted from 40% to 35%, effective January 1, 2012 Recalculate Future tax liability as follows: 2011$1,000,000 x 40% = $400, $1,000,000 x 35% = $350, $1,000,000 x 35% = $350,000 Total $1,100,000 Required Adjusting Entry: Future Income Tax Liability100,000 Future Income Tax Benefit100,000 (1,200, ,100,000)

13 Under IFRS –All deferred tax assets and liabilities are recorded as noncurrent Under PE GAAP –Future tax asset or liability is classified as current or noncurrent based on the classification of the underlying asset or liability giving rise to the specific temporary difference –If the a future asset or liability is not related to specific asset or liability (e.g. expensed research costs deferred for tax purposes), classification is based on date that temporary difference is expected to reverse or tax benefit expected to be realized Balance Sheet Presentation

14 Intraperiod Tax Allocation Income tax expense is reported with its related item, such as discontinued operations, other comprehensive income, adjustments to RE, etc. Intraperiod Tax Allocation –Tax expense is allocated within the financial statements of the current period Interperiod Tax Allocation –Tax expense is allocated between years, and results in the recognition of future income taxes

15 Intraperiod Tax Allocation: Example Assume the following information for Copy Doctor Inc.: –Tax rate of 35% –A loss from continuing operations of $500,000 –Income from discontinued operations of –Unrealized holding gain of $25,000 on investment accounted for at FV-OCI Prepare the journal entries to record current and future tax expenses

16 Intraperiod Tax Allocation: Example Current Income Tax Expense (discontinued operations)241,500 Current Income Tax Benefit (continuing operations)175,000 Income Tax Payable 66,500 Calculations: income of 690,000 x 35% = 241,500 expense loss of 500,000 x 35% = 175,000 benefit

17 Intraperiod Tax Allocation: Example Future Income Tax Expense (OCI)8,750 Future Income Tax Liability 8,750 Calculations: 25,000 x 35% = 8,750

18 Disclosure Requirements IFRS has more extensive disclosure requirements than PE GAAP, including: –Major components of income tax expense or benefits –Sources of both current and future taxes –Amount of current and future tax recognized in equity –Reconciliation of effective and statutory tax rates –Information about unrecognized future tax assets –Information about each type of temporary difference and future tax asset or liability recognized on statement of financial position

19 Analysis Extensive disclosure help users asses quality of earnings, as well as assist in better prediction of future cash flows

20 Outstanding Conceptual Issues Asset-liability method (or balance sheet liability approach) is considered most conceptually sound method of income tax accounting Significant conceptual questions remain about: –Lack of discounting (and therefore, no difference between short-term deferral and long-term deferral) –Recognition of future tax assets

21 Income Taxes Current Income Taxes Accounting income and taxable income Calculation of taxable income Calculation of current income taxes Income Tax Loss Carryover Benefits Introduction to tax losses Loss carryback illustrated Loss carryforward illustrated Carryforward with valuation allowance Review of future income tax asset account Future/Deferred Income Taxes Tax basis Future income tax liabilities Future income tax assets Income tax accounting objectives Multiple differences illustrated Tax rate considerations Presentation, Disclosure, and Analysis Balance sheet presentation Income and other statement presentation Disclosure requirements Analysis Outstanding conceptual questions IFRS / Private Entity GAAP Comparison Comparison chart Looking ahead

22 Looking Ahead Additional changes are expected as IASB and FASB revisit the income tax standard

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