Accounting for Income Taxes

Accounting for Income Taxes
Acct for Spring 2007 (includes FIN48) 4/15/2017 Accounting for Income Taxes Chapter 19 This presentation also includes older slides from the 11the edition of Kieso that were prepared by Jep Robertson and Renae Clark (New Mexico State University) and some original material that I created (Teresa Gordon) Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa Barbara

Acct 592 - for Spring 2007 (includes FIN48)
4/15/2017 Background Deferral approach to tax allocation (APB Opinion 11) Income tax expense = amount of taxes that would be paid if income statement numbers appeared on the current year's tax return. Deferred taxes was the plug figure (difference between taxes payable and tax expense). The effect of subsequent changes in tax rates on deferred tax account were essentially ignored. Formerly, focus was on getting the “right” number on the income statement! In fact, the balance in deferred liability had little relationship to any amounts that might expect to be paid in future. Matching Approach

4/15/2017 Background A method that was proposed theoretically (but has never been GAAP in US) Assets and liabilities would be recorded NET of any deferred tax related to the item Net-of-Tax Approach

4/15/2017 Background Liability approach to tax allocation (FASB 96, 109) Income tax expense = taxes currently payable plus change in deferred taxes. If tax rates change, the effect on deferred tax amounts affect income tax expense in the year the change is enacted. If there are no changes in tax rates, income tax expense should be approximately the same as under APB Opinion 11. Asset/Liability Measurement Approach

Fundamentals of Accounting for Income Taxes
Acct for Spring 2007 (includes FIN48) 4/15/2017 Fundamentals of Accounting for Income Taxes Financial Statements Tax Return IRS vs. Exchanges Investors and Creditors  Pretax Financial Income Taxable Income GAAP Tax Code  Income Tax Expense Income Tax Payable

4/15/2017 Temporary Differences A Temporary Difference is the difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements that will result in taxable amounts or deductible amounts in future years. Future Taxable Amounts Future Deductible Amounts 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. 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. Illustration Examples of Temporary Differences

Temporary Differences (1)
Acct for Spring 2007 (includes FIN48) 4/15/2017 Temporary Differences (1) Revenues and gains, recognized in financial income, are later taxed for income tax purposes. Installment sales Expenses and losses are deducted for income tax purposes before they are recognized in financial income. MACRS depreciation Goodwill deduction on tax return Called “taxable temporary differences”

Temporary Differences (2)
Acct for Spring 2007 (includes FIN48) 4/15/2017 Temporary Differences (2) Revenues and gains are taxed for income tax purposes before they are recognized in financial income. Subscription revenue Prepaid rent Expenses and losses, recognized in financial income, are later deducted for income tax purposes. Warranty expense Called “deductible temporary differences”

Summary of Temporary Differences
Acct for Spring 2009 (includes FIN48 and IFRS) 4/15/2017 Summary of Temporary Differences Transaction When recorded in books on tax return Deferred tax effect Rev or Gain Earlier Later Liability Rev or Gain Later Earlier Asset Exp or Loss Earlier Later Asset Exp or Loss Later Earlier Liability

Permanent Differences
Acct for Spring 2007 (includes FIN48) 4/15/2017 Permanent Differences Sources of Permanent Differences Some items are recorded in Books but NEVER on tax return Other items are NEVER recorded in books but recorded on tax return No deferred tax effects for permanent differences

Permanent Differences: Examples
Acct for Spring 2007 (includes FIN48) 4/15/2017 Permanent Differences: Examples Items, recognized for financial accounting purposes, but not for income tax purposes: Interest revenue on Municipal Bonds Life insurance premiums and proceeds when corporation is beneficiary Fines and penalties Items, recognized for tax purposes, but not for financial accounting purposes: Dividend exclusion Statutory depletion

Deferred Tax Asset & Deferred Tax Liability: Sources
Acct for Spring 2007 (includes FIN48) 4/15/2017 Deferred Tax Asset & Deferred Tax Liability: Sources Deferred taxes may be a: Deferred tax liability, or Deferred tax asset Deferred tax liability arises due to net taxable amounts in the future. Deferred tax asset arises due to net deductible amounts in the future.

Valuation Allowance for Deferred Tax Assets
Acct for Spring 2007 (includes FIN48) 4/15/2017 Valuation Allowance for Deferred Tax Assets If the deferred tax asset appears doubtful, a Valuation Allowance account is needed. Journal entry: Income Tax Expense $$ Allowance to Reduce Deferred Tax Asset to Expected Realizable Value $$ The entry records a potential future tax benefit that is not expected to be realized in the future. New GAAP = FIN 48 (not on a 2006 FARS)

4/15/2017 What Tax Rate to Apply Basic Rule: Apply the yearly tax rate to calculate deferred tax effects. If future tax rates change: use the enacted tax rate expected to apply in the future year. If new rates are not yet enacted into law for future years, the current rate should be used. The appropriate enacted rate for a year is the average tax rate [based on graduated tax brackets]. When a change in tax rate is enacted, its effect should be recorded immediately. The effect is reported as an adjustment to tax expense in the period of change. Changes in tax rates are treated just like any other change in estimate, prospectively.

Balance Sheet Presentation
Acct for Spring 2007 (includes FIN48) 4/15/2017 Balance Sheet Presentation The deferred tax classification relates to its underlying asset or liability. Classify the deferred tax amounts as current or non-current. Presentation is NET amount related to current items If DR>CR, current deferred tax asset If DR<CR, current deferred tax liability NET amount related to noncurrent items If DR>CR, noncurrent deferred tax asset If DR<CR, noncurrent deferred tax liability Accounting is NET for current and NET for noncurrent Sum the various deferred tax assets and liabilities classified as current. Sum the various deferred tax assets and liabilities classified as non-current.

Net Operating Loss (NOL)
Acct for Spring 2007 (includes FIN48) 4/15/2017 Net Operating Loss (NOL) Net operating loss is tax terminology. A net operating loss occurs when tax deductions for a year exceed taxable revenues. Net loss or operating loss is a financial accounting term. Rules for NOL keep changing – we’ll use “back 2, forward 20” In past, the carryforward period has been as little as 7 years For example, when I originally created the two example problems, it was “back 3, forward 15” Another example: For losses in 2001 and 2002, the carryback period was increased to 5 years to help companies impacted by the terrorist attacks of Sept 11, 2001

NOL Rule (subject to change)
Acct for Spring 2007 (includes FIN48) 4/15/2017 NOL Rule (subject to change) NOL for each tax year is computed. The NOL of one year can be applied to offset taxable income of other years, possibly resulting in tax refunds Current rule: NOLs can be: carried back 2 years and carried forward 20 years (carryback option), or carried forward 20 years (carryforward only)

4/15/2017 NOL Carryback Tax years next NOL 2004 Apply first Loss carryforward 20 years forward Expect tax refund here Record all tax effects here Expect tax shield here

4/15/2017 NOL Carryforward Tax years NOL 2004 Forgo 2 year rule Loss carryforward 20 years forward Record all tax effects here Expect tax shield here Not sure why one would choose this one unless tax rates will be HIGHER in the future than in the past!

Intraperiod Tax Allocation
Acct for Spring 2007 (includes FIN48) 4/15/2017 Intraperiod Tax Allocation Income tax expense, is allocated to: Continuing operations Discontinued operations Extraordinary items Cumulative effect of an accounting change,– we won’t see this one any more after FAS154 Prior period adjustments Disclose other significant components, such as: current tax expense, deferred tax expense/benefit, etc.

4/15/2017 Other Items Affected Comprehensive income items Holding gain/loss on AFS securities Certain gains/losses related to foreign currency and derivatives Pension & post-retirement benefit amounts not yet recognized on income statement Correction of error/change in accounting principle that affects beginning retained earnings Expenses for employee stock-based compensation Existing deferred amounts in quasi-reorganization

4/15/2017 From the up-date 2 to Kieso 11th edition (got it from Wiley web page)

FIN 48 –Uncertain Tax Positions
Acct for Spring 2007 (includes FIN48) 4/15/2017 FIN 48 –Uncertain Tax Positions The key points in the Interpretation are: 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 A tax benefit should be measured as the largest amount of benefit that is cumulatively greater than 50-percent likely to be realized

Examples of tax positions (1)
Acct for Spring 2007 (includes FIN48) 4/15/2017 Examples of tax positions (1) A deduction taken on the tax return for a current expenditure that the taxing authority may assert should be capitalized and amortized over future periods. A decision that certain income is nontaxable under the tax law. The determination of the amount of taxable income to report on intercompany transfers between subsidiaries in different tax jurisdictions. EXAMPLES (FROM D&T)

Examples of tax positions (2)
Acct for Spring 2007 (includes FIN48) 4/15/2017 Examples of tax positions (2) The determination as to whether an entity qualifies as a real estate investment trust or regulated investment company. The determination as to whether an entity is subject to tax in a particular jurisdiction. The determination as to whether a spin-off transaction is taxable or nontaxable. The calculation of the amount of a research and experimentation credit.

4/15/2017 FIN 48 First, identify uncertain tax positions Determine the appropriate “unit of account” Example – consider all R&D together or consider each R&D project separately FASB did not specify Next, apply FIN 48 step process to determine how much to recognize

FIN 48 – Step 1, Does it meet recognition threshold?
Acct for Spring 2007 (includes FIN48) 4/15/2017 FIN 48 – Step 1, Does it meet recognition threshold? “More likely or not” of being accepted by IRS on its technical merits Assumes taxing authority has full knowledge of all relevant facts If not, entire amount must be “reserved” (e.g., offset by the allowance account)

FIN 48 – Step 2 Measure the tax benefit
Acct for Spring 2007 (includes FIN48) 4/15/2017 FIN 48 – Step 2 Measure the tax benefit Measurement The benefit recognized for a tax position meeting the more-likely-than-not criterion is measured based on the largest benefit that is more than 50 percent likely to be realized. A new methodology is introduced based on “cumulative probability” Example needed to explain (next slide)

4/15/2017 FIN 48 – PWC example Assume that a position to claim a tax credit of $1,000 is “more likely than not,” based on its technical merits. The company seeking to claim this credit has developed the probability table [next slide] of all possible material outcomes. Refer students to a more interest example in the D&T “defining issues” newsletter posted on web page

4/15/2017 1 2 3 4 5 Amount of the “as filed” tax benefit management expects to sustain $1000 $800 $600 $400 $200 % likelihood that it will be sustained 10% 20% 25% Cumulative % 30% 55% 80% 100%

4/15/2017 FIN 48 – PWC example Assume that a position to claim a tax credit of $1,000 is “more likely than not,” based on its technical merits. The company seeking to claim this credit has developed the probability table [next slide] of all possible material outcomes. Under the Interpretation, $600 denotes the amount of tax benefit that would be recognized in the financial statements; it represents the maximum amount of benefit that is more than 50-percent likely to be the end result. How much to disclose? A big deal??

4/15/2017 FIN 48 Disclosures Must continuously monitor uncertain tax positions Should have processes and controls to identify material changes Will require much closer coordination between tax dept and financial accounting (public reporting) department!

4/15/2017 From Para. A33 Example

FIN 48 – accruing interest
Acct for Spring 2007 (includes FIN48) 4/15/2017 FIN 48 – accruing interest Interest and penalties must be paid if underpayment of tax liabilities exists A position that does not qualify as “more likely than not” under GAAP is effectively a LOAN from government Therefore, interest should be accrued on the full balance on the liability for unrecognized uncertain tax benefits

4/15/2017 FIN 48 – Balance Sheet Uncertain tax positions result in recognition of a tax liability or a decrease in recognized tax assets on the balance sheet The tax liability for “uncertain positions” is NOT a component of deferred taxes and must be classified SEPARATELY from other tax balances Current or noncurrent depending on expected timing of cash flows to/from IRS

Deferred Taxes IAS 12 vs FAS 109 versus

Which Tax Rate to Use Enacted or substantively enacted tax rat
IFRS US GAAP Enacted or substantively enacted tax rat Enacted tax rates

Deferred Tax Assets IFRS US GAAP Don’t recognize at all unless it is “more likely than not” to be usable in the future Use an allowance account to reduce to net realizable value Uses same “more likely than not” criteria

Balance Sheet Presentation
IFRS US GAAP Always classified as noncurrent Plans to revise to do it the FASB way Current items netted Noncurrent items netted

4/15/2017 COPYRIGHT Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Accounting for Income Taxes

Similar presentations

Presentation on theme: "Accounting for Income Taxes"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Accounting for Income Taxes

Similar presentations

Presentation on theme: "Accounting for Income Taxes"— Presentation transcript:

Similar presentations

About project

Feedback