ACCOUNTING FOR INCOME TAXES
RECONCILIATIONS REQUIRED BY IFRS AND ASPE
RECONCILING WHEN USING THE ACCRUAL (DEFERRAL) METHOD
IFRS requires that the notes to the financial statements include a reconciliation of the accounting income before income tax multiplied by the statutory tax rate for the year and the income tax expense for the year. When the accrual (deferral) method is used, as is required by IFRS, temporary differences are accounted for through the deferred tax expense for the year so there will be two types of reconciling items. These are the tax effects of permanent differences and the effect of rate changes on deferred tax asset and liability balances.
Non-taxable revenues will result in a reconciling item equal to the tax that would have been recognized in income tax expense if the items were taxable. This will be the amount of the non-taxable revenue multiplied by the tax rate for the year. Non-deductible expenses will result in a reconciling item increasing taxes by the amount that income tax expense would have been reduced if the expenses had been deductible. This will be the amount of the non-deductible expenses multiplied by the income tax rate.
The impact of the change in income tax rates can be calculated by determining the amount of the temporary differences at the time of the rate change and multiplying by the change in the rate. This can be done for each temporary difference (and then summed) or can be done on the net temporary differences at the date of the rate change.
Consider the following example:
Faro Financial Corporation has the following balances at the end of 2009: Net book value of amortizable capital assets $400,000 Undepreciated capital cost $300,000 Warranty provision $ 50,000 Deferred income tax liability with respect to capital assets $ 32,000 Deferred income tax asset with respect to