Presentation on theme: "Gabriela H. Schneider, CMA; Grant MacEwan College"— Presentation transcript:
1 Gabriela H. Schneider, CMA; Grant MacEwan College INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEKPrepared byGabriela H. Schneider, CMA; Grant MacEwan College2
3 Learning Objectives1. Explain the difference between accounting income and taxable income.2. Explain what a taxable temporary difference is and why a future tax liability is recognized.3. Explain what a deductible temporary difference is and why a future tax asset is recognized.4. Differentiate between timing, temporary, and permanent differences.
4 Learning Objectives5. Prepare analyses and related journal entries to record income tax expense when there are multiple temporary differences.6. Explain the effect of various tax rates and tax rate changes on future income tax accounts.7. Apply accounting procedures for a tax loss carryback.8. Apply accounting procedures and disclosure requirements for a tax loss carryforward.
5 Learning Objectives9. Explain why the future income tax asset account is reassessed at the balance sheet date.10. Explain the need for and be able to apply intraperiod tax allocation.11. Identify the reporting and disclosure requirements for corporate income taxes.12. Describe key aspects of the asset-liability (liability) method and identify outstanding issues with this method.
6 Accounting for Income Taxes Fundamentals of Accounting for Income TaxesAccounting income and taxable incomeFuture taxable amounts and future taxesFuture deductible amounts and future taxesCalculation of taxable incomeTax rate considerationsAccounting for Income Tax Loss Carryover BenefitsIntroductionLoss carryback illustratedLoss carryforward illustratedReview of future tax assetIntraperiod Tax AllocationObjectiveIllustrationFinancial Statement PresentationBalance sheet presentationIncome statement presentationOther disclosuresReview of Asset-Liability MethodSome conceptual questionsComprehensive Illustration
7 Permanent vs. Timing Differences Taxable income is determined by taking the accounting income and adjusting it for permanent and timing differencesCICA Handbook, Section 3645 refers to the accounting for future tax liabilities and future tax assets based on the tax impact of the timing differences
8 Temporary and Permanent Differences Temporary Differences Example: Tax and book depreciation deductions may be differentThese are differences in revenue and expense amounts reported on tax returns and for financial purposesOver a given period, they reversePermanent Differences Example: Interest on municipal obligations is not taxed but is income for accounting purposesItems included on the financials, but either excluded or not deducted on tax returnThese differences do not reverse
10 Permanent Differences - Examples Items, recognized for financial accounting purposes, but not for income tax purposes:Non-tax-deductible expenses (fines, expenses relating to non-taxable revenue)Dividends from taxable Canadian corporationsItems, recognized for tax purposes, but not for financial accounting purposes:Depletion allowance of natural resources in excess of cost
11 Summary of Permanent Differences Sources of PERMANENT DIFFERENCESSome itemsare recordedin Booksbut NEVERon tax returnOther itemsare NEVERrecorded in booksbut recordedon tax returnNo future tax effectsfor permanent differences
12 Timing Differences Relate to income Temporary differences relate to balance sheet valuesCause the balance of a temporary difference to change from period to periodOriginating timing differenceCause of the initial differenceReversing timing differenceCauses a temporary difference to decrease
13 Future Tax Asset and Future Tax Liability - Sources Future taxes may be a:Future tax liability, orFuture tax assetFuture tax liability arises due to net taxable amounts in the futureFuture tax asset arises due to net deductible amounts in the future
14 Recording Future Tax Liability - Example Book tax expense = $20,000Tax liability = $18,000Journal Entry: Income Tax Expense , Future Tax Liability , Tax Payable ,000
15 Recording Future Tax Asset - Example Book tax expense = $5,000Tax payable = $6,000Journal Entry: Income tax expense 5,000 Future Tax Asset , Tax payable ,000Future tax asset is recognized for all deductible differences
17 Future Taxes – Final Notes Use separate accounts, but remember to report the net effectsA future tax asset or liability is classified as long-term if the item which originated or caused the future tax amount is long-termFuture tax amounts have no impact on the current year’s tax calculationsOn the income statement, report current year’s income tax separately from future year’s income tax expense or benefitThe Future Income Tax Asset account is periodically reassessed
18 Tax Loss Carryback and Carryforward The amount reported is the tax calculated from the lossMay be carried back three years, or forward for the next seven yearsWhen applying the carry back, always apply to the oldest available year firstTax loss carry forward is reported if it is likely that a profit will be earned in future periods
19 Intraperiod Tax Allocation Income tax expense is to reported with its related itemIntraperiod Tax AllocationTax expense is allocated within the financial statements of the current periodInterperiod Tax AllocationTax expense is allocated between years
20 Basic Principles of Accounting for Income Tax Asset-liability method (liability method) objectivesRecognize taxes payable (refundable) amount for the current yearRecognize future tax liabilities or assets for events (transactions) that have been included in the current year’s financial statements or tax returnsBasic principles to achieve these objectives
21 Basic Principles of Accounting for Income Tax Current tax liability or asset is based on current year’s taxes payable (or refundable) and is recognized in the current yearA future tax liability or asset is recognized for future tax effects of temporary differences and carryforwardsMeasurement of current and future tax liabilities and assets is based on the tax rate expected at the time the liability or asset will be settledFuture tax asset is reduced by any tax benefits not expected to be realized