CH 14: Taxes in the Financial Statement

to account for the tax consequences of a transaction or event in the same period that is recognized in the financial statement

matching

Accounting for income taxes includes the computation and reporting of ___ on the income statement

current and deferred income tax exp (benefit)

Accounting for income taxes includes the computation and reporting of ___ on the balance statement

income taxes currently payable or receivable
Deferred tax assets/liabs
Related contra asset accounts for valuation allowance

What are the reporting requirements for tax reporting?

Responsible for current tax position
Calculated in accordance with statutory laws
Reported on tax forms

What are the goals of the tax authorities?

Collect taxes earlier rather than later
Prevent manipulation and reduce auditing costs by disallowing accounting methods requiring subjective judgement
Encourage/discourage certain economic activities

What are the reporting requirements of financial reporting?

Responsible for total tax provision (estimated)
Determined in accordance with GAAP
Reported in quarterly 10Q and annual 10K

What are the goals of financial reporting?

Ensure net income reflects the net accomplishments of the business via matching
Balance conflicting demands of judgement required to apply matching concept against earnings management
Disclose truth (neutrality)

What are some of the basic differences between book and tax (Form 1120)

Different reporting entities included in calc
Definition of taxes
Accounting methods

On the form 10K, what % of ownership leads to consolidation?

50% +

For 20 to 50% ownership, parent uses the ___ to account for earnings of sub

equity method

For less than 20% ownership, parent uses the ___ to account for earnings of sub

cost method

Differences between book and tax rules that will NEVER reverse over time. Only impact current period

permanent difference

differences between book and tax rules that are the result of timing; reverse over time

temporary

What are some examples of permanent differences?

Muni bond interest
Nondeductible meals and entertainment
Penalties
Tax credits
DRD
1% charitable deduction floor

What are some examples of temporary differences?

Depreciation on fixed assets (Book is SL, tax is MACRS)
Accrued expenses and income
Net operating losses incurred for book
Goodwill (no book amort, 15 year tax amort)

What is the ASC that covers tax expense under GAAP?

ASC 740

What are the two components of ASC 740?

Current tax expense and deferred tax expense.

Deferred tax expense is created as a result of a ___

temporary difference and future tax rates

ASC 740 adopts a ___ approach to measuring deferred taxes

balance sheet

If DTL > DTA, we have a deferred tax ___

expense

If DTL < DTA, we have a deferred tax ___

benefit

If book basis > Tax basis, we have a ___

Deferred tax liability (DTL)

If book basis < Tax basis, we have a ___

Deferred tax asset (DTA)

Under the ___ apprach, the deferred tax expense or benefit is the change from one year to the next in NET DTL and DTA

balance sheet approach

Future tax liability related to current income; represents an amount that may be paid to the government in the future (GOOD bc we pay at a later date- TVM)

DTL

Created in the following situations: expense is deductible for tax in the current period but is not deductible for book until some future period (accelerated depreciation) AND income in includable currently for book but not for tax until future peeriod (nontax acquisition)

DTL

What is the US GAAP journal entry for recognizing income tax exp

D: Income Tax Exp
C: Income tax payable and income tax liability

expected future tax benefit related to current book income (measured using enacted tax rates and rules); similar to a receivable from the govt

DTA

What are the situations in which a ___ is created? Expense is deductibel for book but not tax (warranty reserves, BDE) AND Income includable in taxable income but not book( prepaid rent, interest)

DTA

What is the GAAP entry to record a DTA?

D: Income tax expense and DTA
C: Income tax payable

TI =

Book - BTDs

What is included in the income tax footnote?

Breakdown of income between domestic and foreign
Detailed analysis of provision for income tax exp
Detailed analysis of deferred tax assets and liabilities
Effective tax rate reconciliation (dollar amount or percent)
Discussion of significant tax matters

For the income statement, special items (discontinued ops and extraordinary itmes) are presented___

net of tax

Thanks to ___, DTAs and DTLs are given a noncurrent classification

ASU 2015-17

Net together only DTAs and DTLs for the ___

same taxing jurisdiction (fed or state or country)

Corporations may net DTAs and DTLs WITHIN ___ but not ___

Within a jurisdiction but not between

Deferred Tax inventory includes

gross DTAs and DTLs

Under ASC 740, deferred tax assets are recognized only when it is:

more likely than not (a greater than 50% likelihood) that the future benefits will be realized

When the more likely than not threshold is not met, a ___ must be created to offset all or a portion of the DTA

Valuation allowance (contra asset account)

When you have an NOL, you must

state the tax benefit (estimate)

To determine if a valuation allowance is required, both positive and negative evidence must be evaluated. What are some examples of negative evidence?

History of losses
Expected future losses
Short tax credit carryforward periods
Adverse tax and legal results
history of tax credits expiring unused

To determine if a valuation allowance is required, both positive and negative evidence must be evaluated. What are some examples of positive evidence?

Strong earnings history
Existing present or future contracts
Unrealized appreciation in assets
Sales backlog of profitable orders

ETR =

Income Tax Exp / Pretax book income

tax rate reconciliation (in monetary units or percentages) reconciles between:

Amount income tax exp that would result from applying the domestic federal statutory tax rate to PTBI
Reported amount of income tax exp

Public companies must separately disclose each reconciling item that is more than ___

5% of PTBI x statutory tax rate

What authority has created new disclosure requirements

ASU 2023-09

Public business entities must follow ASU 2023-09 (for tax years beginning after 12/15/2024), which requires the income tax rate reconciliation be presented among the following eight categories, by both percentages and reporting currency amounts:

Tax credits
Foreign tax effects
Effects of changes in tax laws or rates enacted in the current period
Effects of cross border tax laws
Changes in valuation allowance
Nontaxable or nondeductible items
Changes in unrecognized tax benefits
State and local income tax, net of federal (national) income tax effect

Under ASU 2023-09, disaggregation of line items that are ___ of the federal statutory rates.

>=5%

Under ASU 2023-09, state and local taxes also have to be reported on. This entails a:

qualitative description of the state and local jurisdictions that make up the majority (greater than 50%) of the state and local income tax category

If a foreign jurisdiction meats the 5% threshold, it should be:

separately disclosed as a reconciling item in the foreign effects category

uses a two step process to determine whether tax benefits taken on a tax return have a significant amount of uncertainty which may reduce the tax expense reported in the taxpayers financial statements

ASC 740-10 (FIN 48)

Under ASC 740-10 (FIN 48), initial recognition is a: tax benefit from an UTP may be recognized only if ___

it is more likely than not (greater than 50% likelihood)

Under ASC 740-10 (FIN 48), initial measurement requires:

determining the largest benefit for which there is a greater than 50% chance of realization

Under ASC 740-10 (FIN 48), subsequent periods require :

reassess for ever reporting period

What are the required Uncertain Tax Position disclosures:

Tabular reconciliation of UTB at the beginning of tax year
Total amount of UTP
Amount of unrecognized tax benefits that it is reasonably possible might change in the next 12 months
Total amount and classification of interest and penalties
Open tax year

What adjustments do companies have to make as a result of any change in the corporate income tax rate

changes in the value of deferred tax assets and liabilities

The change in NOL rules results in

adjustments to valuation allowance

What can high foreign or state ETR rates tell you:

Association with jurisdictions that have high cost of living (expensive to conduct business)
Suggest that company is over accruing as a subtle means of managing the rate prospectively

What can a low ETR tell you?

operationally efficient company
tax planning

Swings (trends) in ETR can suggest big events like:

Changes in operations
Significant transactions
Tax Planning
Poor or complex internal control environment