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Int. Acc. FA LECT 7: CH 19 part 1: Accounting for income taxes (Overview…
Int. Acc. FA LECT 7: CH 19 part 1: Accounting for income taxes
Overview
accounting for income taxes-IAS12
Temporary differences and deferred taxes
Deferred tax liabilities
Deferred tax assets
Permanent differences
Pretax financial income versus taxable income
Accounting for losses and income taxes
Book versus tax reporting
Identify differences between pretax financial income and taxable income.
Book VS Tax reporting
Amount reported as tax expense will often differ from the amount of taxes payable to the taxing authority.
For example:
For book (IFRS) reporting, company A uses straight-line depreciation for fixed assets
For tax purposes, A uses accelerated depreciation
Corporations must file income tax returns following the guidelines developed by the appropriate taxing authority, thus they:
Calculate
taxes payable (current income tax)
based upon tax regulations,
Calculate income
tax expense
based upon IFRS
Accounting for income taxes
For financial reporting (book) purposes, companies use
accrual accounting
For tax purposes, the reporting is more like
cash accounting
Book VS tax difference
IFRS reporting
Expenses
Pretax financial income
Revenues
Income tax expense
Tax reporting
Expenses
Taxable income
Revenues
Income tax payable
Comparison
Income tax expense (IFRS)
Income tax payable (tax authority)
difference
Are the differences accounted for in the financial statements? yes
Describe a temporary difference that results in future taxable amounts (I)
.
Book-tax differences
Management of large listed companies have incentives to report IFRS income as high as possible
Positive effect on stock price
Positive effect on performance evaluation
Positive effect on bonus
At the same time, companies want the tax burden to be as low as
possible
Report low taxable income
But: less flexibility compared with IFRS reporting
Temporary differences
Future taxable amounts
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.
Future deductible amounts
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
Temporary Difference
is the difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements that will result
in taxable amounts or deductible amounts in future years
.