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Int. Acc. FA LECT 7: CH 19 part 2: Accounting for income taxes (Describe a…
Int. Acc. FA LECT 7: CH 19 part 2: Accounting for income taxes
Describe a temporary difference that results in future taxable amounts (II)
.
Future taxable amounts and deferred tax
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.
Describe a temporary difference that results in future deductible amounts.
Sometimes, taxable income > book income
Examples
Advance payments for goods or services (not revenue, but counted as income for tax purposes).
Current expenses that are settled in future periods.
E.g., KPN (AR 2014):SLIDE 34/75
Future tax benefit -> 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.
Explain the non-recognition of a deferred tax asset.
A company should reduce a deferred tax asset if it is probable that it will not realize some portion or all of the deferred tax asset.
“Probable” means a level of likelihood of at least slightly more than 50 percent.
For example: litigation accruals or warranty liabilities turn out to be lower than initially estimated
Summary
Income tax expense is greater than income tax payable if:
Deferred tax assets decrease
Deferred tax liabilities increase
Income tax expense is smaller than income tax payable if:
Deferred tax liabilities decrease
Deferred tax assets increase
Temporary differences:
Taxable temporary differences --> Deferred tax liability
Deductible temporary differences --> Deferred tax asset