1. Key Terms

a. describe the differences between accounting profit and taxable income and define key terms, including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense;

For tax returns: What is Taxable income? Income subject to tax based on the tax code.

For tax returns: What are Taxes payable? Tax return liability resulting from current period taxable income. (U.S.) SFAS 109 calls this “current tax expense or benefit.”

For tax returns: What is Income tax paid? Actual cash flow for income taxes, including payments (refunds) for other years.

For tax returns: What is Tax loss carry forward? Tax return loss that can be used to reduce taxable income in future years.

For tax returns: What is the tax base of an asset or liability? It is the amount attributed to that asset or liability for tax purposes.

For financial reporting: What is pretax income or accounting profit? Income before income tax expense.

For financial reporting: What is the carrying amount? It is the amount at which the asset or liability is valued according to accounting principles.

For financial reporting: What is Income tax expense? It is expense resulting from current period pretax income; this includes taxes payable (from the tax return) and deferred income tax expense. It is reported in the income statement.

For financial reporting: What is deferred income tax expense? It is accrual of income tax expense expected to be paid (or recovered) in future years (difference between taxes payable and income tax expense). Under (U.S.) SAAS 109, this results from changes in deferred tax assets and liabilities.

For financial reporting: What is Deferred tax asset? A balance sheet item that results from a temporary excess of taxes payable over income taxes expense. It is expected to be recovered from future operations; it is not created if the excess is a permanent difference.

For financial reporting: What is deferred tax liability? A balance sheet item that results from a temporary excess of income taxes expense over taxes payable. It is expected to result in future cash outflows; it is not created if the excess is a permanent difference.

For financial reporting: What is valuation allowance? It is a reserve against deferred tax assets based on likelihood that those assets will be realized.

For financial reporting: What is timing difference? The result of the tax return treatment (timing or amount) of a transaction that differs from the financial reporting treatment.

For financial reporting: What is temporary difference? It is the difference between tax reporting and financial reporting that will affect taxable income when those differences reverse. This is similar to but slightly broader than timing difference. It also considers other events that result in differences between the tax bases of assets and liabilities and their carrying amounts in financial statements.

For financial reporting: What is permanent difference? It is differences between tax reporting and financial reporting that will not reverse in the future.