2. Deferred Tax Assets and Liabilities
b. explain how deferred tax liabilities and assets are created and the factors that determine how a company's deferred tax liabilities and assets should be treated for the purposes of financial analysis;
d. calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the financial statements related to a change in the income tax rate;
Why is it often true that the taxes payable for the period are often different from the tax expenses recognized in the financial statements?
Tax reporting and financial reporting are based on two different sets of assumptions. Numerous items create differences between accounting profit and taxable income.
In the US, what controls tax reporting and financial reporting, respectively?
- Tax reporting = IRS tax code
- Financial reporting = GAAP rules
What are some ways that the IRS tax code and GAAP are different for the purposes of financial reporting?
- IRS uses a cash basis of accounting, GAAP uses accrual.
- The firm chooses the revenue and expense recognition methods for financial reporting, often in the interests of reducing tax exposure
What are deferred tax liabilities?
Deferred tax liabilities generally arise when tax relief is provided in advance of an accounting expense, or when income is accrued but not taxed until received. Deferred tax liabilities on an individual transaction are expected to be reversed when these liabilities are settled, causing future cash outflows.
What are deferred tax assets?
Deferred tax assets generally arise when tax relief is provided after an expense is deducted for accounting purposes. Deferred tax assets on an individual transaction are expected to be reversed when these assets are recovered, causing future cash inflows.
Given pretax income, what is the formula to calculate taxable income?
Taxable Income = Pretax income + Accounting depreciation - Tax depreciation
Given taxable income, what is the formula to calculate pretax income?
Pretax Income = Taxable Income + Tax depreciation - Accounting depreciation
If you have pretax income, how do you determine the tax expense on the income statement?
Pretax income x tax rate = tax expense in the income statement, or
Taxes payable + deferred tax effect on income statement = tax expense in the income statement
If you have taxable income, how do you determine the taxes payable?
Taxable income x tax rate = taxes payable