Kế toán, kiểm toán - Chapter 16: Accounting for income taxes

ACCOUNTING FOR INCOME TAXESChapter 16© 2013 The McGraw-Hill Companies, Inc.Tax laws form the set the rules for preparing tax returns.Financial statement income tax expense.Income taxes payable.IFRS provides the basis for preparing financial statements.Usually. . . Results in . . .The objective of accounting for income taxes is to recognize a deferred tax liability or deferred tax assetfor the tax consequences of amounts that will become taxable or deductible in future years as a result of transactions or events that already have occurred. Deferred Tax Assets and Deferred Tax LiabilitiesTemporary DifferencesThese are called temporary differences.Often, the difference between pre-tax accounting income and taxable income results from items entering the income tax computations at different times.© 2013 The McGraw-Hill Companies, Inc.Temporary differences will reverse out in one or more future periods.Temporary DifferencesAccounting Income>Taxable IncomeFuture Taxable AmountsDeferred Tax LiabilityAccounting Income<Taxable IncomeFuture Deductible AmountsDeferred Tax Asset© 2013 The McGraw-Hill Companies, Inc.Tax BaseWhen pretax accounting income and taxable income differsthis would cause a difference between the reported amount of an asset or liability in the financial statements and its tax baseThe tax base is the “amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset.” A deferred tax liability (or asset) is the tax effect of the temporary difference between the financial statement carrying amount of an asset or liability and its tax base.A deferred tax asset or liability may not be related to a specific asset or liability.Note: If an item is non-taxable, the tax base of that asset is equivalent to the carrying amount, thereby creating no temporary differences.© 2013 The McGraw-Hill Companies, Inc.Deferred tax liabilities result in taxable amounts in the future.Deferred tax assets result in deductible amounts in the future.Deferred Tax LiabilitiesIn 2012, Baxter reports $300,000 of pretax income. Included in this amount is $100,000 resulting from interest revenue earned but not received. The revenue will be taxed as the interest is collected in 2013 and 2014. Baxter expects to collect $70,000 in 2013 and the remaining $30,000 in 2014. In 2013 and 2014, Baxter reports $200,000 of pretax income. The company is subject to a 20% tax rate. There are no other temporary differences.Deferred Tax Liabilities2012 Income tax payable = $200,000 × 20% = $40,0002012 Deferred tax liability change = ($100,000 × 20%) - $0 = $20,000Deferred Tax LiabilitiesThe Deferred Tax Liability represents the future taxes Baxter will pay in 2013 and 2014.© 2013 The McGraw-Hill Companies, Inc.Deferred Tax LiabilitiesRecall this information for Baxter.2013 Income tax payable = $270,000 × 20% = $54,0002013 Deferred tax liability change = ($30,000 × 20%) - $20,000 = - $14,000 Deferred Tax LiabilitiesFuture Taxable Amount ScheduleThe Deferred Tax Liability represents the future taxes Baxter will pay in 2014.© 2013 The McGraw-Hill Companies, Inc.Deferred Tax LiabilitiesRecall this information for Baxter.2014 Income tax payable = $230,000 × 20% = $46,0002014 Deferred tax liability change = ($0 × 20%) - $6,000  = - $6,000 Deferred Tax LiabilitiesFuture Taxable Amount ScheduleThe Deferred Tax Liability represents the future taxes Baxter will pay.© 2013 The McGraw-Hill Companies, Inc.RDP Networking reported pretax income in 2012, 2013, and 2014 of $70 million, $100 million, and $100 million, respectively. The 2012 income statement includes a $30 million warranty expense that is deducted for tax purposes when paid in 2013 ($15 million) and 2014 ($15 million). The income tax rate is 20% each year.Deferred Tax AssetsDeferred Tax AssetsNow, let’s record the income tax entry for 2012.This is the computation for the Deferred Tax Asset.© 2013 The McGraw-Hill Companies, Inc.Deferred Tax Assets2012 Income tax payable = $100,000 × 20% = $20,000 2012 Deferred tax asset change = [($30,000 × 20%] - $0 = $6,000Deferred Tax AssetsAfter posting the entry, the Deferred Tax Asset account will have the desired ending balance of $6,000.Deferred Tax Assets2013 Income tax payable = $85,000 × 20% = $17,000 2013 Deferred tax asset change = [-$15,000 × 20%] – (-$6,000) = $3,000© 2013 The McGraw-Hill Companies, Inc.Deferred Tax AssetsIn 2013, the balance in the Deferred Tax Asset should decrease to $3,000.Can you prepare the entries for 2014?© 2013 The McGraw-Hill Companies, Inc.Deferred Tax AssetsThis would be the entry for 2014.At the end of 2014, the balance in the Deferred Tax Asset would be zero.Deferred tax assets Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that the deferred tax assets will be utilized to offset future taxable income“Probable” is not defined in IAS No. 12 although it is typically considered to be more conservative than the term “more likely than not” under U.S. GAAP.Deferred tax assets may not be utilized if there is no taxable income to be reduced when the future deduction becomes available.At the end of each reporting period, the deferred tax asset is re-evaluated. The appropriate balance is decided on and the balance is adjusted.© 2013 The McGraw-Hill Companies, Inc.For example, let’s say for RDP, management determines that the company will make a loss in 2014 and it is unclear what the profits will be after 2014. It’s not probable that $15 million of the deductible temporary difference will ultimately be utilized to offset future taxable income. The deferred tax asset that is recognized on December 31, 2012 is thus $3 million [($30 million - $15 million) × 20%] and not $6 million ($30 million × 20%)Deferred Tax AssetsNontemporary DifferencesCreated when an income item is included in taxable income or accounting income but will never be included in the computation of the other. Example: Interest on tax-free government bonds is included in accounting income but is never included in taxable income.Nontemporary differences (or permanent differences) are disregarded when determining both the tax payable currently and the deferred tax effect.© 2013 The McGraw-Hill Companies, Inc.Nontemporary DifferencesThe term “permanent differences” does not appear in IAS No. 12 but the concept applies in the determination of tax expense. However, IAS No. 12 specifically prohibits: The recognition of certain temporary differences that arise on initial recognition when the underlying transaction is not a business combination and that “affects neither accounting profit nor taxable profit (tax loss)” on initial recognition.The recognition of a deferred tax liability on goodwill.© 2013 The McGraw-Hill Companies, Inc.Tax Rate ConsiderationsDeferred tax assets and liabilities should be determined using the current tax or “substantially enacted” rates.The deferred tax asset or liability must be adjusted if a change in a tax rate occurs.TaxCode© 2013 The McGraw-Hill Companies, Inc.Multiple Temporary DifferencesIt would be unusual for any but a very small company to have only a single temporary difference in any given year. Categorize all temporary differences according to whether they create Future taxable amountsFuture deductible amountsNet LossesTax laws often allow a company to use tax losses to offset taxable income in earlier or subsequent periods.When used to offset earlier taxable income: Called: loss carryback. Result: tax refund.When used to offset future taxable income: Called: loss carryforward. Result: reduced tax payable.© 2013 The McGraw-Hill Companies, Inc.Net LossesA tax loss is recognized in the year the tax loss occurs (if there is evidence of probable future profit against which the loss may be used to offset to reduce future taxable income). Otherwise, the tax loss is recognized as a tax benefit only in the year when the loss is used to offset actual taxable incomeIf a company has both tax losses (a deductible temporary difference) and taxable temporary difference, a deferred tax asset may be recognized to set off against the taxable temporary difference in the future© 2013 The McGraw-Hill Companies, Inc.Net LossesCurrent Year-1-2Carryback Period+3+2+1. . .+20+4+5Carryforward PeriodThe tax loss may be applied against taxable income from previous years. Unused tax losses may be carried forwardThe duration of the carryback or carryforward depends on tax legislation© 2013 The McGraw-Hill Companies, Inc.Net LossesIn 2012 Garson Ltd incurred an $85,000 net loss. The company is subject to a 20% tax rate. In 2010, Garson reported taxable income of $20,000, and in 2011, taxable income was $10,000. The company elects to carryback the tax losses.Let’s look at the tax benefits of the loss carryback and carryforward.© 2013 The McGraw-Hill Companies, Inc.Net LossesNet LossesThe deferred tax asset account created by the benefit of the carryforward will be used to lower income taxes payable in future years.© 2013 The McGraw-Hill Companies, Inc.Some disclosure items:Total of all deferred tax liabilities. Total of all deferred tax assets.Total deferred tax arising from transactions that are credited or debited directly to equityTax effect of each type of temporary difference (and remaining tax loss).On the statement of financial position, deferred tax assets and deferred tax liabilities are classified as noncurrent, but are not discounted.Classification on the Statement of Financial Position© 2013 The McGraw-Hill Companies, Inc.Classification on the Statement of Financial PositionDeferred tax assets and liabilities should not be reported individually but should be offset against each other This is, of course, assuming that the company has a right to legally set off current tax assets against current tax liabilities. Deferred tax assets and liabilities should relate to the same taxable entity and to taxes levied by the same taxation authority.The resulting net amount is then reported as either a noncurrent asset (if deferred tax assets exceed deferred tax liabilities) or noncurrent liability (if deferred tax liabilities exceed deferred tax assets).© 2013 The McGraw-Hill Companies, Inc.Disclosure notes include the following:Current portion of tax expense (benefit)Deferred portion of tax expense (benefit), relating to the origination and reversal of temporary differences Tax expense taken to income, other comprehensive income and equity.Adjustments due to changes in tax laws or rates.Recognition of previously unrecognized tax loss or tax credit.Adjustments due to revised estimates of deferred tax asset.Reconciliation between tax expense and accounting profit.Additional DisclosuresRelevant detailed information needed for full disclosure pertaining to deferred tax amounts is reported in disclosure notes, including the components of income tax expense and available operating loss carryforwardsCoping with Uncertainty in Income TaxesWhen there is uncertainty with respect to the assessment on current tax, IAS No. 12 does not prescribe specific accounting requirements. So, we fall back on the principles in IAS No. 37 Provisions, Contingent Assets and Contingent LiabilitiesIf the uncertainty relates to the tax liability, we consider the following questions:1. Does the company have a present obligation to tax authorities arising from a past event?If the answer is yes to all three questions, we recognize the uncertain tax liability as a provisionIf the likelihood of the outflow is only possible (and not probable), we disclose the contingent liability in the footnotes2. Is there a probable outflow of resources to tax authorities?3. Is the amount of the liability reliably estimable? Uncertain tax refunds are contingent assets, which we do not recognize until the benefit becomes is virtually certain. If the gain is probable, we disclose the gain in the footnotesCoping with Uncertainty in Income TaxesFASB Interpretation No. 48 Step 1. A tax benefit may be reflected in the financial statements only if it is “more likely than not” that the company will be able to sustain the tax return position, based on its technical merits.Step 2. A tax benefit should be measured as the largest amount of benefit that is cumulatively greater than 50-percent likely to be realized. Not “more likely than not” = none of the tax benefit is allowed to be recordedU.S. GAAP provides more explicit guidelines than the IFRS on how companies should deal with uncertainty relating to tax liabilities:Intraperiod tax allocation means the total income tax expense for a reporting period is allocated among the financial statement, specifically income, items that gave rise to it. Some items are either charged to other comprehensive income (OCI) or taken directly to equity. Tax attributed to such items is recognized in the corresponding component of the financial statement by measuring the items on a “net of tax” basisIntraperiod Tax AllocationIntraperiod Tax AllocationEach of the following income statement items is reported net of its respective income tax effects:1Income (or loss) from continuing operations2Discontinued operations3Other comprehensive income4Items recognized in other comprehensive income include:Revaluation of property, plant and equipmentForeign currency gains or losses arising on the translation of a foreign operation’s financial statements5Items recognized directly in equity include:Prior period adjustments for change in accounting policy or correction of error“Initial recognition of the equity component of a compound financial instrument”Conceptual ConcernsShould deferred taxes be recognized?Should deferred taxes be recognized for only some items?Should deferred taxes be discounted?Should classification be based on the timing of temporary difference reversals? Some accountants disagree with the IASB’s approach to accounting for income taxes. © 2013 The McGraw-Hill Companies, Inc.End of Chapter 16© 2013 The McGraw-Hill Companies, Inc.