Date post: | 15-Dec-2015 |
Category: |
Documents |
Upload: | ryan-medlen |
View: | 215 times |
Download: | 2 times |
1
Future Tax Liability ExampleFuture Tax Liability ExampleChelsea Inc. - 2010Chelsea Inc. - 2010
Accounting Tax
Revenue $130,000 $100,000
Expenses 60,000 60,000
Income $ 70,000 $ 40,000
Tax @ 40% $ 28,000 $ 16,000
2
Future Tax Liability ExampleFuture Tax Liability ExampleChelsea Inc. Chelsea Inc.
2010 2011
Accounting Income $70,000 $70,000
Adjust for revenue taxable in future period
(30,000) 20,000
Taxable Income $ 40,000 $ 90,000
Tax payable @ 40% $ 16,000 $ 36,000
2012
$70,000
10,000
$ 80,000
$ 32,000
3
Future Tax Liability Example Future Tax Liability Example Chelsea Inc. - 2010Chelsea Inc. - 2010
Books TaxAccounts receivable $30,000 0Income reported in 2010 $70,000 $40,000
Tax rate = 40%Future Income tax liability (30,000 x 40%) 12,000Income tax payable(40,000 x 40%) 16,000Income Tax Expense (total) 28,000
4
Chelsea Inc. – example Chelsea Inc. – example continuedcontinued
Total
$30,000
40%
$ 12,000$ 12,000
2011 2012
Future taxable amounts $20,000 $10,000
Future tax rate 40% 40%
Future income tax liability $ 8,000 $ 4,000
5
Recording Journal Entries Recording Journal Entries – e.g. Chelsea Inc. -2010– e.g. Chelsea Inc. -2010
Journal Entries:
Current Income Tax Expense 16,000 Income Tax Payable 16,000
Future Income Tax Expense 12,000Future Income Tax Liability 12,000
6
Future Income Tax LiabilityFuture Income Tax Liability
Net Assets reported End of 2010
End of 2011
Accounts receivable (in assets) $30,000 $10,000
Future income tax liability (in liabilities) 12,000 4,000
Net assets reported $ 18,000 $ 6,000
Note: Balance sheet reflects eventual cash impact of recovering the A/R
7
Future Tax Asset – ExampleFuture Tax Asset – Example
• Cunningham Inc. sells microwave ovens with a 2 year warranty
• In 2011, estimated warranty expense is $500,000
• Actual warranty costs are $300,000 in 2012 and $200,000 in 2013
8
Future Income Tax Asset: Future Income Tax Asset: ExampleExample
Books TaxWarranty liability $500,000 0
Tax rate = 40%Future Income tax asset (500,000 x 40%) 200,000Income tax payable (assumed)(Taxable Income x 40%) 600,000Income Tax Expense (total) 400,000
9
Future Income Tax Asset: Future Income Tax Asset: ExampleExample
Journal Entries:Current Income Tax Expense 600,000
Income Tax Payable 600,000
Future Income Tax Asset 200,000Future Income Tax Expense 200,000
The total income tax expense of $400,000 is made up of a current tax expense of $600,000 and a future income tax benefit of $200,000
10
Future Income Tax Future Income Tax Asset: ExampleAsset: Example
In subsequent years (2012 and 2013):- warranty expense of $500,000 deducted for tax,
but not for books- Income taxes payable reduced by $500,000 × 40%
= $200,000- Entry in future, therefore:
Income tax expense $xFuture income tax asset $ 200,000Income taxes payable $x − 200,000
11
Future Tax Rate - exampleFuture Tax Rate - example
Hostel Corp. had the following at end of 2009:Property, plant, and equipment:
Net book value (NBV) = $4,000,000Tax value (Undepreciated capital cost, UCC) = 1,000,000
Taxable temporary difference = 3,000,000(to reverse by $1,000,000 each year in 2011,
2012 and 2013)Tax rate 40%Future tax liability 1,200,000
12
Future Tax Rate - exampleFuture Tax Rate - exampleAssume a new income tax rate is enacted from40% to 35%, effective January 1, 2012• Recalculate Future tax liability as follows:
2011 $1,000,000 x 40% = $400,0002012 $1,000,000 x 35% = $350,0002013 $1,000,000 x 35% = $350,000Total $1,100,000
Required Adjusting Entry: Future Income Tax Liability 100,000
Future Income Tax Benefit 100,000(1,200,000 - 1,100,000)
13
• Under IFRS– All deferred tax assets and liabilities are recorded as
noncurrent
• Under PE GAAP– Future tax asset or liability is classified as current or
noncurrent based on the classification of the underlying asset or liability giving rise to the specific temporary difference
– If the a future asset or liability is not related to 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 expected to be realized
Balance Sheet PresentationBalance Sheet Presentation
14
Intraperiod Tax AllocationIntraperiod Tax Allocation
• Income tax expense is reported with its related item, such as discontinued operations, other comprehensive income, adjustments to RE, etc.
• Intraperiod Tax Allocation– Tax expense is allocated within the
financial statements of the current period• Interperiod Tax Allocation
– Tax expense is allocated between years, and results in the recognition of future income taxes
15
Intraperiod Tax Allocation: Intraperiod Tax Allocation: ExampleExample
• Assume the following information for Copy Doctor Inc.:– Tax rate of 35%– A loss from continuing operations of $500,000– Income from discontinued operations of– Unrealized holding gain of $25,000 on investment
accounted for at FV-OCI • Prepare the journal entries to record current and
future tax expenses
16
Intraperiod Tax Allocation: Intraperiod Tax Allocation: ExampleExample
Current Income Tax Expense (discontinued operations) 241,500
Current Income Tax Benefit(continuing operations) 175,000Income Tax Payable 66,500
Calculations: • income of 690,000 x 35% = 241,500 expense• loss of 500,000 x 35% = 175,000 benefit
17
Intraperiod Tax Allocation: Intraperiod Tax Allocation: ExampleExample
Future Income Tax Expense (OCI) 8,750Future Income Tax Liability 8,750
Calculations: • 25,000 x 35% = 8,750
18
Disclosure RequirementsDisclosure Requirements
• IFRS has more extensive disclosure requirements than PE GAAP, including: – Major components of income tax expense or benefits– Sources of both current and future taxes– Amount of current and future tax recognized in equity– Reconciliation of effective and statutory tax rates– Information about unrecognized future tax assets– Information about each type of temporary difference and
future tax asset or liability recognized on statement of financial position
19
AnalysisAnalysis
• Extensive disclosure help users asses quality of earnings, as well as assist in better prediction of future cash flows
20
Outstanding Conceptual Outstanding Conceptual IssuesIssues
• Asset-liability method (or balance sheet liability approach) is considered most conceptually sound method of income tax accounting
• Significant conceptual questions remain about: – Lack of discounting (and therefore, no difference
between short-term deferral and long-term deferral)– Recognition of future tax assets
21
Income TaxesIncome Taxes
Current Current Income Income TaxesTaxes•Accounting income and taxable income
•Calculation of taxable income
•Calculation of current income taxes
Income Tax Loss Income Tax Loss Carryover BenefitsCarryover Benefits•Introduction to tax losses
•Loss carryback illustrated
•Loss carryforward illustrated
•Carryforward with valuation allowance
•Review of future income tax asset account
Future/Deferred Future/Deferred Income TaxesIncome Taxes•Tax basis
•Future income tax liabilities
•Future income tax assets
•Income tax accounting objectives
•Multiple differences illustrated
•Tax rate considerations
Presentation, Presentation, Disclosure, and Disclosure, and Analysis Analysis •Balance sheet presentation
•Income and other statement presentation
•Disclosure requirements
•Analysis
•Outstanding conceptual questions
IFRS / IFRS / Private Private Entity GAAP Entity GAAP ComparisonComparison•Comparison chart
•Looking ahead
22
Looking AheadLooking Ahead
• Additional changes are expected as IASB and FASB revisit the income tax standard
23
Copyright © 2010 John Wiley & Sons Canada, Ltd. Copyright © 2010 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be unlawful. Requests for further information should be addressed to the Permissions Department, John addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not back-up copies for his or her own use only and not for distribution or resale. The author and the for distribution or resale. The author and the publisher assume no responsibility for errors, publisher assume no responsibility for errors, omissions, or damages caused by the use of these omissions, or damages caused by the use of these programs or from the use of the information programs or from the use of the information contained herein.contained herein.
COPYRIGHTCOPYRIGHT