• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
A ccounting for income taxes
 

A ccounting for income taxes

on

  • 1,587 views

 

Statistics

Views

Total Views
1,587
Views on SlideShare
1,587
Embed Views
0

Actions

Likes
1
Downloads
24
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    A ccounting for income taxes A ccounting for income taxes Presentation Transcript

    • Accounting for Income Taxes 1
    • Accounting for Income Taxes After studying this, you should be able to:1 Identify differences between pretax financial income and taxable income.2 Describe a temporary difference that results in future taxable amounts.3 Describe a temporary difference that results in future deductible amounts.4 Explain the purpose of a deferred tax asset valuation allowance.5 Describe the presentation of income tax expense in the income statement. 2
    • Accounting for Income Tax After studying this, you should be able to:6 Describe the various temporary and permanent differences.7 Explain the effect of various tax rates and tax rate changes on deferred income8 taxes. Apply accounting procedures for a loss9 carryback and a loss carryforward. Describe the presentation of deferred10 income taxes in financial statements. Indicate the basic principles of the asset- 3 liability method.
    • Deferred Taxes: Basicsx Deferred taxes arise when income tax expense differs from income tax liabilityx The tax expense is determined under GAAPx The income tax liability is determined under the Internal Revenue Codex Some of these differences are temporary and reverse over timex Others are permanent and do not reverse 4
    • Temporary Differences: Examples Revenues and Gains, recognized in financial income, are later taxed for income tax purposes Expenses and losses, recognized in financial income, are later deducted for income tax purposes Revenues and gains are taxed for income tax purposes before they are recognized in financial income Expenses and losses are deducted for income tax purposes before they are recognized in financial income 5
    • Summary of Temporary Differences When recorded When recorded DeferredTransaction in books on tax return tax effectRev or Gain Earlier Later LiabilityRev or Gain Later Earlier AssetExp or Loss Earlier Later AssetExp or Loss Later Earlier Liability 6
    • Permanent Differences: Examples Items, recognized for financial accounting purposes, but not for income tax purposes:² interest income received on tax exempt securities² fines and expenses resulting from violations of law² Premiums paid for life insurance on key officers/ employees Items, recognized for tax purposes, but not for financial accounting purposes:² the dividends received deduction under the Code² percentage depletion of natural resources in excess of their cost 7
    • Summary of Permanent Differences Sources of PERMANENT DIFFERENCESSome items are recorded but NEVER in Books on tax return are NEVER but recordedOther items recorded in books on tax return No deferred tax effects for permanent differences 8
    • Deferred Tax Asset & Deferred Tax Liability: Sourcesy Deferred taxes may be a: Deferred tax liability, or Deferred tax assety Deferred tax liability arises due to net taxable amounts in the future.y Deferred tax asset arises due to net deductible amounts in the future. 9
    • Recording a Valuation Allowance for Doubtful Deferred Tax Assetsx If the deferred tax asset appears doubtful, a Valuation Allowance account is needed.x Journal entry: Income Tax Expense $$ Allowance to Reduce Deferred Tax Asset to Expected Realizable Value $$x The entry records a potential future tax benefit that is not expected to be realized in the future. 10
    • Deferred Taxes: Applying Tax Rates Basic Rule: Apply the yearly tax rate to calculate deferred tax effects. If future tax rates change: use the enacted tax rate expected to apply in the future year If new rates are not yet enacted into law for future years, the current rate should be used The appropriate enacted rate for a year is the average tax rate [based on graduated tax brackets]. 11
    • Revision of Future Tax Rates When a change in tax rate is enacted, its effect should be recorded immediately The effect is reported as an adjustment to tax expense in the period of change Changes in tax rates are treated just like any other change in estimate, prospectively See example following slide 12
    • Revision of Future Tax Rates: Examplex End of 2002, corporate tax rate is changed from 40% to 35%x The new rate is effective January 1, 2004x The deferred tax account (1/1/2002) is as follows:x Excess tax depreciation: $3 millionx Deferred tax liability: $1.2 million.x Related taxable amounts are expected to occur equally over 2003, 2004, and 2005.² Provide the journal entry to reflect the change. 13
    • Revision of Future Tax Rates: Examplex The deferred tax liability end of 2005 is as follows: 2003 2004 2005 Future tax inc $1,000,000 1,000,000 1,000,000 Tax rate 40% 35% 35% Deferred tax liability $400,000 350,000 350,000x Entry: Deferred Tax Liability $100,000 Income Tax Expense $100,000* *$1,200,000 - $1,100,000 14
    • Financial Statement Presentationx Balance Sheet Presentation: The deferred tax classification relates to its underlying asset or liability Classify the deferred tax amounts as current or noncurrent Sum the various deferred tax assets and liabilities classified as current Sum the various deferred tax assets and liabilities classified as noncurrent 15
    • Financial Statement Presentationx Balance Sheet Presentation: Sum the various deferred tax assets and liabilities classified as current:² If net result is an asset, report as current asset² If net result is a liability, report as current liability Sum the various deferred tax assets and liabilities classified as noncurrent² If net result is an asset, report as long-term asset² If net result is a liability, report as long-term liability 16
    • Income Statement Presentationx Income tax expense, as allocated to:2. Continuing operations3. Discontinued operations4. Extraordinary items5. Cumulative effect of an accounting change, and6. Prior period adjustmentsx Disclose other significant components, such as: current tax expense, deferred tax expense/benefit,etc. 17
    • Net Operating Losses [NOLs]: Basic Terminologyq Net operating loss is a tax terminologyq A net operating loss occurs when tax deductions for a year exceed taxable revenuesq Net loss or operating loss is a financial accounting termq NOL can be derived from net loss: but these two amounts must be kept separately 18
    • NOLs: Rules of Applicationy NOL for each tax year is computedy The NOL of one year can be applied to offset taxable income of other years, possibly resulting tax refundsy NOLs can be:· carried back 2 years and carried forward 20 years (carryback option), or· carried forward 20 years (carryforward only) 19
    • Net Operating Loss: Carryback rules. If NOLs are carried back 2 years and carried forward 20 years: NOL is applied to the earlier of the 2 year period, then to the immediately preceding year etc Remaining NOLs are applied to the following 20 year period Any tax refunds are reported in the year of the original net operating loss 20
    • NOL Carryback Rules: continued Tax years2001 2002 2003 2004 2005 2006 2007 2024 next NOL Apply first 2004 Loss carryforward 20 years forward Expect Expect tax tax refund Record all shield here tax effects here here 21
    • NOL Carryforward Rules Tax years2001 2002 2003 2004 2053 2006 2007 2024 NOL 2004 Loss carryforward Forgo 2 20 years forward year rule Expect tax Record all shield tax effects here here 22
    • Basic Principles of Asset-Liability Method A current tax liability or asset is recognized for the estimated taxes payable or refundable on the tax return for current year A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards The measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law, effects of future changes in tax law or rates are not anticipated The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that are not expected to be realized 23
    • ATTENTION COMMERCE STUDENTSACCOUNTING(FINANCIAL & COST) OF ICMAP STAGE 1,2,3,4 CA..MODULE B,C,D PIPFA (FOUNDATION,INTERMEDIATE,FINAL) ACCA-F1,F2,F3 BBA,MBA B.COM(FRESH),M.COM MA-ECONOMICS..O/A LEVELS KHALID AZIZ…..0322-3385752..kARACHI JOIN GROUPhttp://finance.groups.yahoo.com/group/cost- accountants 24