...1.0 Introduction This assignment focuses on the effects of Deferred Tax Assets (DTA) on entities and how entities make justifications on DTA arise or in this case, the Product Warranty, and the recognition criteria for DTA. A Deferred Tax Asset represents the increase or decrease in taxes payable or refundable in future years as a result of ‘Temporary Differences’ and Net Operating Loss or Tax Credit carry-forwards that exist at the reporting date (Nelson, Spiceland and Sepe, 2011). This is similar to the definition of DTA stated in the Accounting Standards AASB 112 Paragraph 5. Temporary Differences arise when the events are recognized in one period in a bank’s book but are recognized in a different period on its tax return. To find Deferred Tax Assets (DTA), first find Tax Base (TB) by taking Carrying Amount (CA) less the Future Taxable Amount and adds Future Deductible Amount. Having TB larger than CA, there will be Deductible Temporary Difference (DTD), while having TB lesser than CA gives rise to Taxable Temporary Difference (TTD). By multiplying the DTD with the Tax Rate, DTA will be calculated. 2.0 Discussion 2.1 Provision for Product Warranty A Product Warranty is generally a guarantee from one party to another that a certain conditions or facts are true or will happen. A product warranty is a provision because when a product warranty is issued, there is a legal obligation and settlement is expected to result in an outflow of resources (McNicholas and...
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...Income Taxes DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES Fundamental Concepts There are fundamental differences in the amount of income and expenses reported for GAAP and income tax purposes. The objective for GAAP reporting is to report the economic activities of the entity. The objective for income tax purposes is for the government to raise revenue. There are two terms that identify the types of income subject to tax under each reporting system. 1 Pretax financial income Pretax financial income is the income determined using GAAP. It is the amount of income on which income tax is computed for financial statement purposed. It is formally presented in the income statement as income before income taxes. We normally refer to it is pretax income. 2 Taxable income Taxable income is the income determined using Internal Revenue Code rules and regulations. It is the amount of income on which the entity will actually pay income tax in the current accounting period. Temporary Differences Deferred taxes arise as a result of temporary difference between income tax expense and income tax payable. A temporary difference is the difference between the book value of an asset or liability and the tax basis of the same asset or liability. If the income tax expense in the income statement is larger than the current income tax liability the difference is called a deferred tax liability. If the income tax expense in the income statement is smaller than the current income tax liability the...
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...taxes is how to account for the current and future tax consequences of certain items. One item it advises on is the future recovery or settlement of the carrying amount of assets or liabilities that are recognized in an entity’s statement of financial position. The second main item the standard covers is transactions and other events of the current period that are recognized in an entity’s financial statements. It is essential in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying amount of that asset or liability. If it is probable that the recovery or settlement of that carrying amount will make future tax payments increase or decrease, this standard requires an entity to recognize a deferred tax asset or deferred tax liability with certain limited exceptions. Tax consequences of transactions and events are accounted for in the same way they transactions and events are accounted for. This means that if an event or transaction affects profit or loss then the tax consequence will also affect profit or loss. If an event or transaction affects equity then the tax consequence of that transaction or event will also affect equity. International Accounting Standard 12 also deals with presentation of income taxes in the financial statements, disclosure of information relating to income taxes, and the recognition of deferred tax assets arising from unused tax losses or unused tax credits. For the scope of IAS 12, this standard...
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...GAAP, deferred taxation is one of the most common areas where differences arise. The reason is that a high proportion of transactions recognized in either the statement of income or balance sheet will have consequential effects on deferred taxes. • US GAAP, deferred tax asset is recognized in full. It is then reduced by a valuation account if it is more likely than not that all or a portion of the deferred tax asset will not be realized. IFRS requires a one-step approach that provides for recognition of the deferred tax assets only to the extent it is probable that they will be realized. 2 Executive summary • IFRS classifies deferred tax assets and liabilities as noncurrent in a classified balance sheet while US GAAP classifies these items based on the classification of the related asset or liability, or for tax losses and credit carryforwards, based on the expected timing of realization. • IFRS offsets deferred tax assets and liabilities when specific conditions are met which includes when an entity has a legally enforceable right to offset and when the taxes are levied by the same taxing authority for the same taxable entity. US GAAP offsets these balances and reports them net by current and noncurrent classification. 3 Primary pronouncements US GAAP IFRS • • IAS 12, Income Taxes ASC740, Income Taxes • IAS 37, Provisions, Contingent Liabilities and Contingent Assets 4 General US GAAP Takes an asset-liability...
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...CHAPTER 19 Accounting for Income Taxes ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics 1. Reconcile pretax financial income with taxable income. 2. Identify temporary and permanent differences. 3. Determine deferred income taxes and related items— single tax rate. 4. Classification of deferred taxes. 5. Determine deferred income taxes and related items— multiple tax rates, expected future income. 6. Determine deferred taxes, multiple rates, expected future losses. 7. Carryback and carryforward of NOL. 8. Change in enacted future tax rate. 9. Tracking temporary differences through reversal. 10. Income statement presentation. 9 8 16, 17, 18, 14, 21, 22 Questions 1, 13 3, 4, 5 6, 7, 13 2, 3, 4, 5, 6, 7, 9 15 10 Brief Exercises Exercises 1 1, 2, 4, 7, 12, 18, 20, 21 4, 5, 6, 7 Concepts Problems for Analysis 1, 2, 3, 8 2, 3, 4 3, 4, 5 2 1, 3, 4, 5, 7, 8, 3, 4, 8, 9 12, 14, 15, 19, 21, 23, 25 7, 11, 16, 18, 19, 20, 21, 22 2, 13, 16, 17, 18, 20, 22 3, 6 1, 2, 6, 7 10, 11, 12 2, 3, 5 1, 6, 7 10 12, 13, 14 11 9, 10, 23, 24, 25 16 8, 17 5 2, 7 2, 7 5, 6 1, 2, 3, 4, 5, 7, 1, 2, 3, 5, 10, 12, 16, 19, 7, 8, 9 23, 24, 25 7 1, 2, 7 11. Conceptual issues—tax allocation. 1, 2, 8, 19, 21, 22 7 12. Valuation allowance—deferred 8, 19 tax asset. 13. Disclosure and other issues. 15 7, 14, 15, 23, 24, 25 Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 19-1 ASSIGNMENT CLASSIFICATION...
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...|Objective | Topic |Edition |Edition | | | | | | | |1 |LO 1 |Book versus taxable income |Unchanged |1 | |2 |LO 1 |Entities included in financial statements |Modified |2 | |3 |LO 1 |Entities included in consolidated tax |Modified |3 | | | | return | | | |4 |LO 1 |Tax return tax expense versus book tax |Unchanged |4 | | | | expense | | | |5 |LO 1 |Temporary and permanent differences |Unchanged |5 | |6 |LO 1 |Temporary and permanent differences |New | | |7 |LO 1 |Temporary vs. permanent differences |Unchanged |7 ...
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...Question 16-1 Income tax expense is comprised of both the current and the deferred tax consequences of events and transactions already recognized. Specifically, it includes (a) the income tax that is payable currently and (b) the change in the deferred tax liability (or asset). Apparently, in the situation described, temporary differences required a $4.4 million increase in the deferred tax liability, a $4.4 million decrease in the deferred tax asset, or some combination of the two. Question 16-2 Temporary differences between the reported amount of an asset or liability in the financial statements and its tax basis are primarily caused by revenues, expenses, gains, and losses being included in taxable income in a year earlier or later than the year in which they are recognized for financial reporting purpose, although there are other, less common, events that can cause these temporary differences. Some temporary differences create deferred tax liabilities because they result in taxable amounts in some future year(s) when the related assets are recovered or the related liabilities are settled (when the temporary differences reverse). An example is the receivable created when installment sale gross profit is recognized for financial reporting purposes. When this asset is recovered, taxable amounts are produced because the installment sale gross profit is then recognized for tax purposes. Some temporary differences create deferred tax assets because they result in...
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...Accounting for Income Taxes I. Overview – Accounting for income taxes involves both intraperiod and interperiod tax allocation. Intraperiod allocation matches a portion of the provision for income tax to the applicable components of net income and retained earnings. Income for federal tax purposes and financial accounting income frequently differ. Income for federal tax purposes is computed in accordance with the prevailing tax laws, whereas financial accounting income is determined in accordance with GAAP. Therefore, a company’s income tax expense and income taxes payable may differ. The incongruity is caused by temporary differences in taxable and/or deductible amounts and requires interperiod tax allocation. II. Intraperiod Tax Allocation – Intraperiod Tax Allocation involves apportioning the total tax provision for financial accounting purposes in a period between the income or loss from: a. Income from continuing operations b. Discontinued operations c. Extraordinary items d. Cumulative effect of an accounting change e. Other comprehensive income i. Pension Adjustment ii. Unrealized gain/loss on available for sale security iii. Foreign translation adjustment f. Components of stockholders’ equity iv. Retained earnings for prior period adjustments and v. Items of accumulated (other) comprehensive income g. General Rule – Any amount not allocated to continuing operations...
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... | |October 1996 |IAS 12 Income Taxes | |1 January 1998 |Effective date of IAS 12 (1996) | |October 2000 |Limited Revisions to IAS 12 | |1 January 2001 |Effective date of the October 2000 revisions | |March 2009 |Exposure Draft of a Revised IAS 12 | |20 December 2010 |IAS 12 amended in Deferred Tax: Recovery of Underlying Assets. Click for More Information | |1 January 2012 |Effective date of...
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...Chapter 16 Accounting for Income Taxes AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise, and problem in Intermediate Accounting, 7e, with the following AACSB learning skills: Questions 16–1 16–2 16–3 16–4 16–5 16–6 16–7 16–8 16–9 16–10 16–11 16–12 16–13 16–14 16–15 AACSB Tags Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Diversity, Reflective thinking Analytic Analytic Analytic Analytic Analytic Analytic Reflective thinking Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Exercises (cont.) 16–6 16–7 16–8 16–9 16–10 16–11 16–12 16–13 16–14 16–15 16–16 16–17 16–18 16–19 16–20 16–21 16–22 16–23 16–24 16–25 16–26 16–27 16–28 16–29 16–30 AACSB Tags Reflective thinking Analytic Analytic Analytic Analytic Analytic Communications Analytic Analytic Analytic Analytic, Reflective thinking Analytic Analytic Analytic Analytic Analytic...
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...questions are available at the end of this chapter. TRUe-FALSe—Conceptual Answer No. Description F 1. Taxable income. F 2. Use of pretax financial income. T 3. Taxable amounts. T 4. Deferred tax liability. F 5. Deductible amounts. T 6. Deferred tax asset. F 7. Need for valuation allowance account. T 8. Positive and negative evidence. F 9. Computation of income tax expense. T 10. Taxable temporary differences. F 11. Taxable temporary difference examples. T 12. Permanent differences. T 13. Applying tax rates to temporary differences. F 14. Change in tax rates. F 15. Accounting for a loss carryback. T 16. Tax effect of a loss carryforward. T 17. Possible source of taxable income. T 18. Classification of deferred tax assets and liabilities. F 19. Classification of deferred tax accounts. F 20. Method used for accounting for income taxes. Multiple Choice—Conceptual Answer No. Description b 21. Differences between taxable and accounting income. c 22. Differences between taxable and accounting income. b 23. Determination of deferred tax expense. a 24. Differences arising from depreciation methods. a P25. Temporary difference and a revenue item. b S26. Effect of future taxable amount. c P27. Causes of a deferred tax liability. d S28. Distinction between temporary and permanent differences. b S29. Identification of deductible temporary difference. c S30. Identification of taxable temporary difference. d S31...
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...does not address: • Investment tax credit • Methods of accounting for government grant However it does address the accounting for temporary differences arising due to above. Definitions Accounting Profit is profit or loss for a period before deducting tax expense. Taxable Profit (or tax loss) is profit (or loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which it will be determined whether income taxes are payable (or recoverable). Tax Expense (or tax income) is the aggregate amount included in the determination of profit or loss for the period in respect of current and deferred tax. i.e. tax expense (tax income) = current tax + deferred tax Current tax is the amount of income taxes payable (or recoverable) in respect of taxable profit (or tax loss) for a period. i.e. current tax = taxable profit (or tax loss) * tax rate Tax Base of an asset or liability is the amount attributed to the asset or liability for tax purposes. For e.g. Cost of an asset is 100 and depreciation is 20 but tax depreciation is 25then carrying value of that asset is 80 and tax base is 75. • Tax base of an asset is equal to the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when the carrying value of such asset will be recovered. If those economic benefits are not taxable then the tax base is equal to the carrying amount of asset. • Tax base of a...
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...Deferred tax is an accounting concept, meaning a future tax liability or asset, resulting from temporary differences between book (accounting) value of assets and liabilities and their tax value, or differences between the recognition of gains and losses in financial statements and their recognition in a tax computation (FASB). Deferred tax is important in understanding the financial situation of a company’s operation because it provides a more accurate calculation of accrual earnings and accurate measure of the equity position, and moderates earning by increasing the tax liability in good years and decreasing the tax liability in bad years (Todd A. Doehring). Generally, deferred tax could be deferred tax assets or deferred tax liability and a temporary difference can be either a deductible or a taxable temporary. Deferred tax assets are the deductible amounts from taxes in the future of a business. The causes of deferred tax assets include differences caused by recognizing expenses earlier in GAAP income statement and recognizing revenues earlier in the tax returns. These differences include recognition of accrued expenses in the GAAP financial statements such as rent, utility and salaries. Recognized losses which arise due to fair value or the calculation of inventory by lower of cost or market value in the shareholders’ income statement also cause differences in income tax expense and tax payable. The recognition of advance revenues received in the tax returns and not in the...
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... Any income of the entity must be subject to the tax even though they are having profit or suffering loss. The accounting treatment for income taxes is determined by Australian Accounting Standards Board (AASB) 112 which adopts the tax effect method that incorporates both current and future tax consequences of “transactions and other events of the current period that are recognised in an entity’s financial statements and the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of financial position”. Through this essay, the author wants to explain how unused tax losses create deferred tax assets, discuss whether these deferred tax assets satisfy definition and recognition criteria for assets according to the AASB Framework for the Preparation and Presentation of Financial Statements and would the answer change if the asset definition in the IASB / FASB proposed Conceptual Framework was applied. As the author is more focus on tax loss, therefore future tax consequences is only focus deferred tax asset. Future tax consequences incurred because there is differences between the carrying amount and the tax base which is known as a temporary differences. The future tax consequences of a temporary difference that decrease taxable income relative to accounting profit which is called as a deductible temporary difference (DTD), will be recognised as deferred tax asset (Spiceland, Sepe & Nelson, 2010). However, only...
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...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...
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