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Most accountants agree that corporate income tax is an expense. Treating income
tax as an expense is required under current generally accepted accounting
principles (GAAP).
Permanent differences
There are three types of permanent difference :
Temporary difference
Temporary difference between pretax financial accounting income and
taxable income raise because the timing of revenues, gains, expenses, or losses in
financial accounting income occurs in different period from taxable income. This
timing diffirences result in assets and liabilities having different bases for
financial accounting purpose than for income tax purposes at the end of a given
accounting period.
a. Revenues or gains are included in taxable income prior to the time they
are included in financial accounting income.
Allocation vs nonallocation
Advocates of nonallocation argue as follow:
3. Income tax are levied on total taxable income, not on individual items of
revenue and expenses.
2. Income taxes are an expense of doing busnisses and should involved the
same accrual, defferal, and estimation concepts that are applied to other
expenses.
6. A company is a going concern and income taxes that are currently deffered
will eventually be paid.
1. All groups of income tax temporary difference are not similiar to certain
other groups of accounting items, such as accounts payable.
- The entity must be able to obtain the benefit and control other entities
acces to it.
- The transaction or other event resulting in the entity right to or control the
benefit must already have occurred.
SFAS no 109
The FASB was convinced by the critics of SFAS no 96 thet deferred tax
assets should be treated similarly to deferred tax liability and that the scheduling
requirements of SFAS no 96 were often too complex and costly. However, the
board did not want ti return to the deferred method and remained commited to
asset / liability method. SFAS no 109 respond to these concern by allowing the
separete recognition and measurement of deferred tax assets and liabilities without
regard to future income considerations, using the average enacted tax rates for
future years.
These requirements result in the following more simplified series of steps for
determining deferred tacx liability and asset balances :
2. Measure the total deferred tas asset tax liability by applying the expected
tax rate ang future taxable amounts.
3. Measure the total deferred tax asset by applying the expected future tax
rate to futuredeductible amounts and NOL carryfowards.
4. Measure deferred tax assets for each type of unused tax credit.
5. Measure the valuation allowance based on tha above more likely than not
criterion.
b. Recognition of a deferred tax asset unless the likehood of not realizing the
future tax benefit is more than 50 percent (the impairment approach).
This type of negative evidence shoula be weighed against poitive evidence such
as:
The Characteristic of Deferred Tax Liability and Deferred Tax Asset Based
on SFAS no 109.
3. the transaction or event that resulted in the enterprise obtaining the right to
control the benefit has already occurred.
SFAS no 109 also requires disclosure of the significant components of income tax
attribute to income from continuing operations. These components included :
4. Goverment grants (to the extent taht they reduce income tax expense).
6. Tax expense that result from allocations of tax benefit to balance sheets in
a business combination.
7. Adjustment to theh deferred tal liability or asset for enacted changes in tax
laws or change in the tax status of the reporting entity.
1. The quality of earnings can be assessed because special situation that give
rise to one time earnings or highlighted.
2. Future cash flow can be more easly assessed because reversals of defrred
tax asset and liability are highlighted.
a. Information on the amount of tax that would be paid atthe federal satutory
raid and the amount acctualy paid.
b. Changes in the defrred tax asset and liability accounts.