Intermediate Chapter 19: Accounting for Income Taxes * Temporary Differences – Difference between the tax basis of an asset or liability and its reported amount in the financial statements * Taxable amounts increase taxable income in future years * Deductible amounts decrease taxable income in future years * A 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 expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period. * A deferred tax asset is the deferred tax consequence attributable to deductible temporary differences. * In other words, a 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. * A company should reduce a deferred tax asset by a valuation allowance if it is more likely than not that it will not realize some portion or the entire deferred tax asset. “More likely than not” means a level of likelihood of at least slightly more than 50 percent. * Income tax payable or refundable +/- change in deferred income taxes = total income tax expense or benefit * Taxable temporary differences are temporary differences that will result in taxable amounts in future years when the related assets are recovered. * Deductible temporary differences are temporary differences that will result in deductible amounts in future years, when the related book liabilities are settled. * Examples of expenses or loss (deductible differences): a. Product warranty liabilities b. Estimated liabilities related to discontinued operations c. Litigation accruals d. Bad debt expense e. Stock-based