FUNDAMENTALS OF ACCOUNTING FOR INCOME TAXES
Pretax financial income
For financial reporting according to GAAP
Providing information to investors and creditor
Used to compute the Income Tax Expense
Taxable income
According to Internal Revenue Code
Used to compute the Income Tax Payable
Income tax expense and income taxes payable differed over years, but the they are equal in total
Temporary difference: the difference between the tax basis of an asset of liability and its reported (book) amount in the financial statements, which will result in taxable amounts or deductible amounts in future years.
Taxable amounts: increase taxable income in future years
Deductible amounts: decrease taxable income in future years
Deferred Tax Liability
The deferred tax consequences due to taxable temporary difference; the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year
Income tax expense = current tax expense (income taxes payable for the period) + deferred tax expense (inc. in the deferred tax liability balance from beg. to the end of the period)
Deferred Tax Asset
Recognize in the current year the tax benefits for the tax deductions that will result from the future settlement of a liability
The increase in taxes refundable (or saved) in the future years as a result of deductible temporary differences existing at the end of the current year
Deferred tax benefit: the inc. in the deferred tax asset from the beg. to the end of the period; it is a negative component of income tax expense
Valuation Allowance (deferred tax asset)
Increase income tax expense because one does not expect to realize a favorable tax benefit for a portion or all of the deductible temporary difference
Income Statement Presentation
Income taxes payable or refundable +/- change in deferred income taxes = total income