Kế toán, kiểm toán - Chapter 18: Income taxes

CHAPTER 18:INCOME TAXES2CHAPTER 18: Income TaxesAfter studying this chapter, you should be able to:Understand the importance of income taxes from a business perspective.Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities.Explain what a deductible temporary difference is, determine its amount, and calculate deferred tax assets.Prepare analyses of deferred tax balances and record deferred tax expense.Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.Account for a tax loss carryback.Account for a tax loss carryforward, including any note disclosures.Explain why the Deferred Tax Asset account is reassessed at the statement of financial position date, and account for the deferred tax asset with and without a valuation allowance account.Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation.Identify the major differences between ASPE and IFRS for income taxes.3Income Taxes from a Business PerspectiveA major consideration for new companies is the tax rate that will be paid on their profitsCorporations file income tax returns that are administered by the Canada Revenue Agency (CRA)The purpose is to raise money to support government operations4Accounting and Taxable IncomeAccounting income (or profit) is a pre-tax conceptDetermined according to IFRS or ASPEObjective is to provide useful information to users of the financial statementsTaxable income is a tax accounting termDetermined according to the Income Tax Act and RegulationsUsed to determine income tax payableTherefore, accounting income ≠ taxable income5Accounting Income and Taxable IncomeTo determine taxable income, companies prepare a reconciliation of accounting income to taxable income: Accounting income ± differences Taxable incomeTaxable income × current tax rate = taxes payable and current income tax expense 6Accounting and Taxable Income - Example2017AccountingTaxRevenue$130,000$100,000Expenses 60,000 60,000Income$ 70,000$ 40,0007Accounting and Taxable Income - Example201720182019Accounting Income$70,000$70,000$70,000Adjust for revenue taxable in future period (30,000) 20,000 10,000Taxable Income$ 40,000$ 90,000$ 80,000Tax payable (25%)$ 10,000$ 22,500$ 30,0008Reversing and Permanent DifferencesTaxable income is determined by starting with accounting income and adjusting it for reversing/temporary and permanent differences in the year9Reversing/Temporary DifferencesReversing differences are treated the same for books and tax but in different periodsRelate to income statement differencesThe balance of a temporary difference changes from period to periodOriginating timing differenceCause of the initial differenceReversing timing differenceCauses a temporary difference to decrease 10Permanent DifferencesSome itemsare recordedin booksbut neveron tax returnOther itemsare neverrecorded in booksbut recordedon tax returnNo future tax effectsfor permanent differences11Permanent DifferencesItems recognized for financial accounting purposes but never for income tax purposes:Non-tax-deductible expenses (e.g., fines, golf dues, expenses related to non-taxable revenue)Dividends from taxable Canadian corporationsItems recognized for tax purposes but not for financial accounting purposes:Depletion allowance of natural resources in excess of cost 12Calculation of Current Income TaxesTwo methods:Taxes payable methodAllowed under ASPECurrent Income Taxes = Taxable income x Tax rateAsset and liability approachRequired by IFRS and option under ASPEStarts with Current Income Taxes and - Adjusts for future/deferred income tax assets and liabilities - Recognizes a future/deferred income tax expense13TerminologyASPE and IFRS use different terminology for the asset and liability approach to income taxesUnder ASPEThis method is called the future income taxes methodRelated tax accounts are called future income tax assets, future income tax liabilities, and future income tax expense (benefit)Under IFRSThis method is called the temporary difference approachRelated tax accounts are called deferred tax assets, deferred tax liabilities, and deferred tax expenseAs a result, you will see the terms future and deferred used interchangeably14Temporary DifferencesTemporary differences are: Accumulated timing differencesThe difference between book value of an asset or liability and its tax base or basisThe tax base of an asset or liability is similar to a measurement attribute 15Temporary DifferencesThere are two types of temporary differences:Taxable temporary differences (i.e., will be added to accounting income in calculating taxable income in the future) Deductible temporary differences (i.e., will be deducted from accounting income in calculating taxable income in the future)16Deferred Tax Liabilities and Deferred Tax AssetsDeferred tax liabilitiesFuture tax consequences of a taxable temporary differencesDeferred tax assetsFuture tax consequences of a deductible temporary difference17Deferred Tax Liabilities – Example Carrying Value Tax BaseAccounts receivable $30,000 -0-Tax rate = 25%Income tax payable = $10,000Deferred tax liability at the end of 2017: $7,500**(30,000 x 25%) 18Deferred Tax Liabilities - Example20182019TotalFuture taxable amounts$20,000$10,000$30,000Future tax rate25%25%25%Deferred income tax liability$ 5,000$ 2,500$7,50019Deferred Tax Liabilities - ExampleJournal Entries in 2017: Current Income Tax Expense 10,000 Income Tax Payable 10,000 Deferred Tax Expense 7,500 Deferred Tax Liability 7,50020Deferred Tax Assets – ExampleCunningham Inc. sells microwave ovens with a 2 year warrantyIn 2018, estimated warranty expense is $500,000Actual warranty costs are $300,000 in 2019 and $200,000 in 2020Income tax payable for 2018 is $600,00021Deferred Tax Assets – Example Carrying Amount Tax BaseWarranty liability $500,000 -0-Tax rate = 25%Deferred tax asset at the end of 2018: $125,000**(500,000 x 25%) 22Deferred Tax Assets – ExampleJournal Entries for 2018:Current Income Tax Expense 600,000 Income Tax Payable 600,000 Deferred Tax Asset 125,000 Deferred Tax Expense/Benefit 125,000The total income tax expense of $475,000 is made up of a current tax expense of $600,000 and a deferred tax benefit of $125,00023Income Tax Accounting ObjectivesRecognize the amount of tax that is payable or refundable for the current yearRecognize tax effects in the same accounting period as the related transactions and eventsReferred to as interperiod tax allocation24Future Tax RatesShould use the rates that are expected to apply when the tax assets are realized or the tax liabilities are settledi.e., the enacted rate or substantively enacted rate25Revision of Future Tax RatesThe effect of future tax rate changes should be immediately recognized on all deferred tax accountsRecorded as an adjustment to the deferred tax expense/benefitIFRS requires separate disclosure of the future tax expense or benefit due to a change in tax rates (ASPE does not)26Revision of Future Tax Rate - ExampleGiven:Hostel Corp. had the following at end of 2017:$3,000,000 of excess capital cost allowance (CCA)Deferred tax liability of $900,000 ($3,000,000 x 30%)Temporary difference is expected to reverse equally in 2018, 2019 and 2020 ($1,000,000 per year)Assume a new income tax rate is enacted from 30% to 25%, effective January 1, 2019Calculate the adjustment to the deferred tax liability and provide the required journal entry27Revision of Future Tax Rate - ExampleAdjustment to the deferred tax liability: 2018 $1,000,000 x 30% = $300,000 2019 $1,000,000 x 25% = $250,000 2020 $1,000,000 x 25% = $250,000 Total $800,000Journal entry: Deferred Tax Liability 100,000* Deferred Tax Benefit 100,000*($900,000 - $800,000)28Income Tax Loss Carryover BenefitsTax law permits the use tax losses to offset taxable income in other yearsMay be carried back three years (loss carryback) or forward for the next twenty years (loss carryforward)29Tax Loss CarrybackWhen applying the loss carryback, it is usually applied against the earliest available incomePrior year’s tax returns are refiled, reducing prior taxable income with the current year’s lossTo record the tax loss carryback: Income Tax Receivable xx Current Tax Benefit xxIf a tax loss still remains, carry it forward30Tax Loss CarryforwardA tax loss carryforward can only be recognized if:It is more likely than not (i.e., probable) that benefit will be realized (i.e., company will generate taxable income in the future to apply loss against)To record the tax loss carryforward: Deferred Tax Asset xx Deferred Tax Benefit xxTo record the use of a recognized tax loss carryforward: Deferred tax expense xx Deferred tax asset xx31Tax Loss CarryforwardIf future taxable income not likely (i.e., not likely that benefit will be realized), then do not record the tax benefitInstead, report existence of loss carryforward in notes to the financial statementsDisclose the amounts and expiry dates of unrecognized income tax assets related to the carryforward of unused tax losses 32Tax Loss Carryforward (Cont’d)If the tax loss carryforward was not recognized but the company does generate taxable income in the future and uses the unrecognized losses:Taxable income, current tax expense and income tax payable are reduced in the year that the tax loss carryforward is usedSeparate disclosure of the tax benefit from realization of unrecorded loss carryforward is not required under ASPE, but is required under IFRS if it makes up a major component of tax expense33Carryforward with Valuation AllowanceThis approach permitted under ASPE (but not permitted under IFRS)Assuming a 20% tax rate and a $150,000 loss carryforward where it is unlikely that benefit will be realized in the future: Deferred Tax Asset 30,000* Deferred Tax Benefit 30,000 Deferred Tax Expense 30,000 Allowance to Reduce Future Income Tax Asset to Expected Realizable Value 30,000 *(150,000 x 20%)34Carryforward with Valuation AllowanceThe second entry indicates that the company cannot conclude that it is more likely than not that the company will benefit from the tax loss in the futureThe financial statements would be the same whether the allowance method is used or the future income tax asset is not recognized at all35Review of Deferred Tax Asset AccountLike all assets, deferred tax assets must be reviewed at year end to ensure that the carrying amounts are appropriate based on existing conditions at the SFP dateThis depends on whether taxable income will be earned in the future against which temporary differences can be deducted36Statement of Financial Position PresentationCurrent income tax receivable or payable are reported separately from deferred/future income tax assets and liabilitiesThey are reported as current Shown on a gross basis unless there is a legal right to offset37Statement of Financial Position PresentationDeferred Tax Assets and Liabilities: IFRSAll deferred tax assets and liabilities are recorded as non-currentDeferred Tax Assets and Liabilities: ASPEFuture tax asset or liability is classified as current or non-current based on the classification of the underlying asset or liability giving rise to the specific temporary differenceIf the future asset or liability is not related to a specific asset or liability (e.g., expensed research costs deferred for tax purposes), classification is based on date that temporary difference is expected to reverse or tax benefit is expected to be realized38Income and Other Statement PresentationIncome tax expense is reported with its related item such as discontinued operations, other comprehensive income, adjustments to Retained Earnings etc.This is referred to as Intraperiod Tax AllocationResults in the tax expense being allocated within the financial statements of the current period39Intraperiod Tax Allocation - ExampleAssume the following information for Copy Doctor Inc.:Tax rate of 25%A loss from continuing operations of $500,000Income from discontinued operations of $900,000 ($210,000 is not taxable)Unrealized holding gain of $25,000 on investment accounted for at FV-OCI Prepare the journal entries to record deferred tax expenses40Intraperiod Tax Allocation - ExampleCurrent Income Tax Expense (discontinued operations) 172,500* Current Income Tax Benefit (continuing operations) 125,000** Income Tax Payable 47,500*taxable income of 690,000 x 25% = 172,500 expense**loss of 500,000 x 25% = 125,000 benefit41Intraperiod Tax Allocation - ExampleDeferred Tax Expense (OCI) 6,250 Deferred Tax Liability 6,250Calculations: $25,000 unrealized holding gain (not taxable until realized) x 25% = 6,25042Disclosure RequirementsIFRS has more extensive disclosure requirements than ASPE, including: Major components of income tax expense or benefitsSources of both current and deferred taxesAmount of current and deferred tax recognized in equityReconciliation of effective and statutory tax ratesInformation about unrecognized deferred tax assetsInformation about each type of temporary difference and deferred tax asset or liability recognized on statement of financial position43AnalysisExtensive disclosure help users assess quality of earnings as well as assist in better prediction of future cash flows44Outstanding Conceptual QuestionsAsset-liability method (or temporary difference approach) is considered most conceptually sound method of income tax accountingSignificant conceptual questions remain about: Lack of discounting (and therefore, no difference between short-term deferral and long-term deferral)Recognition of deferred tax assets45Looking AheadAdditional minor changes are expected as the result of current and future IASB projects46