Understand the importance of income taxes from a business perspective Explain the difference between accounting income and taxable income and calculate taxable income and current income taxes ID: 258693
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After studying this chapter, you should be able to:Understand the importance of income taxes from a business perspective.Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes.Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities.Explain what a deductible temporary difference is, determine its amount, and calculate deferred tax assets.Prepare analyses of deferred tax balances and record deferred tax expense.Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates.Account for a tax loss carryback.Account for a tax loss carryforward, including any note disclosures.Explain why the Deferred Tax Asset account is reassessed at the statement of financial position date, and account for the deferred tax asset with and without a valuation allowance account.Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation.Identify the major differences between ASPE and IFRS for income taxes.
INCOME TAXES
2Slide3
Income Taxes
3Income Taxes from a Business PerspectiveIncome Tax Loss Carryover BenefitsLoss carryback illustratedLoss carryforward
illustrated
Review of deferred tax asset account
Deferred/Future Income Taxes
Deferred tax liabilities
Deferred tax assets
Income tax accounting
objectives
and analyses of temporary deductible differences
Tax rate considerations
Presentation, Disclosure, and Analysis
Statement of financial position presentation
Income and other statement presentation
Disclosure requirementsAnalysisOutstanding conceptual questions
IFRS/ASPE ComparisonComparison of IFRS and ASPELooking ahead
Current Income TaxesAccounting income and taxable incomeCalculation of taxable incomeCalculation of current income taxesSlide4
Income Taxes from a Business Perspective
A major consideration for new companies is the tax rate that will be paid on its profitsCorporations file income tax returns that are administered by the Canada Revenue Agency (CRA)The purpose is to raise money to support government operationsSlide5
Income Taxes
5Income Taxes from a Business PerspectiveIncome Tax Loss Carryover BenefitsLoss carryback illustratedLoss carryforward illustrated
Review of deferred tax asset account
Deferred/Future Income Taxes
Deferred tax liabilities
Deferred tax assets
Income tax accounting objectives and analyses of temporary deductible differences
Tax rate considerations
Presentation, Disclosure, and Analysis
Statement of financial position presentation
Income and other statement presentation
Disclosure requirements
Analysis
Outstanding conceptual questions
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead
Current Income TaxesAccounting income and taxable incomeCalculation of taxable incomeCalculation of current income taxesSlide6
Accounting and Taxable Income
Accounting income (or profit) is a pre-tax conceptDetermined according to IFRS or ASPEObjective is to provide useful information to users of the financial statementsTaxable income is a tax accounting termDetermined according to the Income Tax Act and RegulationsUsed to determine income tax payableTherefore, accounting income ≠ taxable income6Slide7
Accounting Income and
Taxable IncomeTo determine taxable income, companies prepare a reconciliation of accounting income to taxable income: Accounting income ± differences Taxable incomeTaxable income × current tax rate = taxes payable and current income tax expense 7Slide8
Accounting and Taxable Income - Example
2014AccountingTaxRevenue$130,000
$100,000
Expenses
60,000
60,000
Income
$ 70,000
$ 40,000
8Slide9
Accounting and Taxable Income - Example
201420152016Accounting Income
$70,000
$70,000
$70,000
Adjust for revenue taxable in future period
(30,000)
20,000
10,000
Taxable Income
$ 40,000
$ 90,000
$ 80,000
Tax payable (25%)
$ 10,000
$ 22,500
$ 30,000
9Slide10
Reversing and Permanent Differences
Taxable income is determined by starting with accounting income and adjusting it for reversing/temporary and permanent differences in the year10Slide11
Reversing/Temporary Differences
Reversing differences are treated the same for books and tax but in different periodsRelate to income statement differencesThe balance of a temporary difference changes from period to periodOriginating timing differenceCause of the initial difference (e.g. the $30,000 non taxable revenue in 2014 in Chelsea example)Reversing timing differenceCauses a temporary difference to decrease (e.g. the $20,000 and $10,000 amounts taxed in 2015 and 2016 in Chelsea example)11Slide12
Permanent Differences
12Some itemsare recordedin booksbut neveron tax returnOther itemsare neverrecorded in booksbut recordedon tax return
No future tax effects
for permanent differencesSlide13
Permanent Differences
Items recognized for financial accounting purposes but never for income tax purposes:Non-tax-deductible expenses (e.g. fines, golf dues, expenses related to non-taxable revenue)Dividends from taxable Canadian corporationsItems recognized for tax purposes but not for financial accounting purposes:Depletion allowance of natural resources in excess of cost 13Slide14
Calculation of Current Income Taxes
Two methods:Taxes payable methodAllowed under ASPECurrent Income Taxes = Taxable income x Tax rateAsset and liability approachRequired by IFRS and option under ASPEStarts with Current Income Taxes and - Adjusts for future/deferred income tax assets and liabilities - Recognizes a future/deferred income tax expense14Slide15
Terminology
ASPE and IFRS use different terminology for the asset and liability approach to income taxesUnder ASPEThis method is called the future income taxes methodRelated tax accounts are called future income tax assets, future income tax liabilities, and future income tax expenseUnder IFRSThis method is called the temporary difference approachRelated tax accounts are called deferred tax assets, deferred tax liabilities, and deferred tax expenseAs a result, you will see the terms future and deferred used interchangeably15Slide16
Income Taxes
16Income Taxes from a Business PerspectiveIncome Tax Loss Carryover BenefitsLoss carryback illustratedLoss carryforward illustrated
Review of deferred tax asset account
Deferred/Future Income Taxes
Deferred tax liabilities
Deferred tax assets
Income tax accounting objectives and analyses of temporary deductible differences
Tax rate considerations
Presentation, Disclosure, and Analysis
Statement of financial position presentation
Income and other statement presentation
Disclosure requirements
Analysis
Outstanding conceptual questions
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead
Current Income TaxesAccounting income and taxable incomeCalculation of taxable incomeCalculation of current income taxesSlide17
Temporary Differences
Temporary differences are: Accumulated timing differencesThe difference between book value of an asset or liability and its tax base or basisThe tax base of an asset or liability is similar to a measurement attribute 17Slide18
Temporary Differences
There are two types of temporary differences:Taxable temporary differences (i.e. will be added to accounting income in calculating taxable income in the future) Deductible temporary differences (i.e. will be deducted from accounting income in calculating taxable income in the future)18Slide19
Deferred Tax Liabilities and Deferred Tax Assets
Deferred tax liabilitiesFuture tax consequences of a taxable temporary differencesDeferred tax assetsFuture tax consequences of a deductible temporary difference19Slide20
Deferred Tax Liabilities - Example
Carrying Value Tax BaseAccounts receivable $30,000 -0-Tax rate = 25%Income tax payable = $10,000Deferred tax liability at the end of 2014: $7,500**(30,000 x 25%) 20Slide21
Deferred Tax Liabilities - Example
2120152016TotalFuture taxable amounts
$20,000
$10,000
$30,000
Future tax rate
25%
25%
25%
Future income tax liability
$ 5,000
$ 2,500
$7,500Slide22
Deferred Tax Liabilities - Example
Journal Entries in 2014: Current Income Tax Expense 10,000 Income Tax Payable 10,000 Deferred Tax Expense 7,500 Deferred Tax Liability 7,50022Slide23
Deferred Tax Assets – Example
Cunningham Inc. sells microwave ovens with a 2 year warrantyIn 2015, estimated warranty expense is $500,000Actual warranty costs are $300,000 in 2016 and $200,000 in 2017Income tax payable for 2015 is $600,00023Slide24
Deferred Tax Assets – Example
Carrying Amount Tax BaseWarranty liability $500,000 -0-Tax rate = 25%Deferred tax asset at the end of 2015: $125,000**(500,000 x 25%) 24Slide25
Deferred Tax Assets – Example
Journal Entries for 2015:Current Income Tax Expense 600,000 Income Tax Payable 600,000 Deferred Tax Asset 125,000 Deferred Tax Expense/Benefit 125,000The total income tax expense of $475,000 is made up of a current tax expense of $600,000 and a deferred tax benefit of $125,00025Slide26
Income Tax Accounting Objectives
Recognize the amount of tax that is payable or refundable for the current yearRecognize tax effects in the same accounting period as the related transactions and eventsReferred to as interperiod tax allocationSlide27
Future Tax Rates
Should use the rates that are expected to apply when the tax assets are realized or the tax liabilities are settledi.e., the enacted rate or substantively enacted rate27Slide28
Revision of Future Tax Rates
The effect of future tax rate changes should be immediately recognized on all deferred tax accountsRecorded as an adjustment to the deferred tax expense/benefitIFRS requires separate disclosure of future tax expense or benefit due to a change in tax rates28Slide29
Revision of Future Tax Rate - Example
Given:Hostel Corp. had the following at end of 2014:$3,000,000 of excess capital cost allowance (CCA)Deferred tax liability of $900,000 ($3,000,000 x 30%)Temporary difference is expected to reverse equally in 2015, 2016 and 2017 ($1,000,000 per year)Assume a new income tax rate is enacted from 30% to 25%, effective January 1, 2016Calculate the adjustment to the deferred tax liability and provide the required journal entry29Slide30
Revision of Future Tax Rate - Example
Adjustment to the deferred tax liability: 2015 $1,000,000 x 30% = $300,000 2016 $1,000,000 x 25% = $250,000 2017 $1,000,000 x 25% = $250,000 Total $800,000Journal entry: Deferred Tax Liability 100,000* Deferred Tax Benefit 100,000*($900,000 - $800,000)30Slide31
Income Taxes
31Income Taxes from a Business PerspectiveIncome Tax Loss Carryover BenefitsLoss carryback illustratedLoss carryforward
illustrated
Review of deferred tax asset account
Deferred/Future Income Taxes
Deferred tax liabilities
Deferred tax assets
Income tax accounting objectives and analyses of temporary deductible differences
Tax rate considerations
Presentation, Disclosure, and Analysis
Statement of financial position presentation
Income and other statement presentation
Disclosure requirements
Analysis
Outstanding conceptual questions
IFRS/ASPE Comparison
Comparison of IFRS and ASPELooking ahead
Current Income TaxesAccounting income and taxable incomeCalculation of taxable incomeCalculation of current income taxesSlide32
Income Tax Loss Carryover Benefits
Tax law permits the use tax losses to offset taxable income in other yearsMay be carried back three years (loss carryback) or forward for the next twenty years (loss carryforward)32Slide33
Tax Loss Carryback
When applying the loss carryback, it is usually applied to the oldest available year firstPrior year’s tax returns are refiled, reducing prior taxable income with the current year’s lossTo record the tax loss carryback: Income Tax Receivable xx Current Tax Benefit xxIf a tax loss still remains, carry it forward33Slide34
Tax Loss Carryforward
A tax loss carryforward can only be recognized if:It is more likely than not (i.e., probable) that benefit will be realized (i.e. company will generate taxable income in the future to apply loss against)To record the tax loss carryforward: Deferred Tax Asset xx Deferred Tax Benefit xxTo record the use of a recognized tax loss carryforward: Deferred tax expense xx Deferred tax asset xx34Slide35
Tax Loss Carryforward
If future taxable income not likely (i.e. not likely that benefit will be realized), then do not record the tax benefitInstead, report existence of loss carryforward in notes to the financial statementsDisclose the amounts and expiry dates of unrecognized income tax assets related to the carryforward of unused tax losses 35Slide36
Tax Loss Carryforward (Cont’d)
If the tax loss carryforward was not recognized but the company does generate taxable income in the future and uses the unrecognized losses:Taxable income, current tax expense and income tax payable are reduced in the year that the tax loss carryforward is usedSeparate disclosure of the tax benefit from realization of unrecorded loss carryforward is not required under ASPE, but is required under IFRS if it makes up a major component of tax expense36Slide37
Carryforward with Valuation Allowance
This approach permitted under ASPE (but not permitted under IFRS)Assuming a 20% tax rate and a $150,000 loss carryforward where it is unlikely that benefit will be realized in the future: Deferred Tax Asset 30,000* Deferred Tax Benefit 30,000 Deferred Tax Expense 30,000 Allowance to Reduce Future Income Tax Asset to Expected Realizable Value 30,000 *(150,000 x 20%)37Slide38
Carryforward with Valuation Allowance
The second entry indicates that the company cannot conclude that it is more likely than not that the company will benefit from the tax loss in the futureThe financial statements would be the same whether the allowance method is used or the future income tax asset is not recognized at all38Slide39
Review of Deferred Tax Asset Account
Like all assets, deferred tax assets must be reviewed at year end to ensure that the carrying amounts are appropriateThis depends on whether taxable income will be earned in the future against which temporary differences can be deducted39Slide40
Income Taxes
40Income Taxes from a Business PerspectiveIncome Tax Loss Carryover BenefitsLoss carryback illustratedLoss carryforward illustrated
Review of deferred tax asset account
Deferred/Future Income Taxes
Deferred tax liabilities
Deferred tax assets
Income tax accounting objectives and analyses of temporary deductible differences
Tax rate considerations
Presentation, Disclosure, and Analysis
Statement of financial position presentation
Income and other statement presentation
Disclosure requirements
Analysis
Outstanding conceptual questions
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead
Current Income TaxesAccounting income and taxable incomeCalculation of taxable incomeCalculation of current income taxesSlide41
Statement of Financial Position Presentation
Current income tax receivable or payable are reported separately from deferred/future income tax assets and liabilitiesThey are reported as current Shown on a gross basis unless there is a legal right to offsetSlide42
Statement of Financial Position Presentation
Deferred Tax Assets and Liabilities: IFRSAll deferred tax assets and liabilities are recorded as non-currentDeferred Tax Assets and Liabilities: ASPEFuture tax asset or liability is classified as current or non-current based on the classification of the underlying asset or liability giving rise to the specific temporary differenceIf 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 realized42Slide43
Income and Other Statement Presentation
Income tax expense is reported with its related item such as discontinued operations, other comprehensive income, adjustments to Retained Earnings etc.This is referred to as Intraperiod Tax AllocationResults in the tax expense being allocated within the financial statements of the current period43Slide44
Intraperiod Tax Allocation - Example
Assume the following information for Copy Doctor Inc.:Tax rate of 25%A loss from continuing operations of $500,000Income from discontinued operations of $900,000 ($210,000 is not taxable)Unrealized holding gain of $25,000 on investment accounted for at FV-OCI Prepare the journal entries to record current and future tax expenses44Slide45
Intraperiod Tax Allocation - Example
Current Income Tax Expense (discontinued operations) 172,500* Current Income Tax Benefit (continuing operations) 125,000** Income Tax Payable 47,500*income of 690,000 x 25% = 172,500 expense**loss of 500,000 x 25% = 125,000 benefit45Slide46
Intraperiod Tax Allocation - Example
Deferred Tax Expense (OCI) 6,250 Deferred Tax Liability 6,250Calculations: 25,000 x 25% = 6,25046Slide47
Disclosure Requirements
IFRS has more extensive disclosure requirements than ASPE, including: Major components of income tax expense or benefitsSources of both current and future taxesAmount of current and future tax recognized in equityReconciliation of effective and statutory tax ratesInformation about unrecognized future tax assetsInformation about each type of temporary difference and future tax asset or liability recognized on statement of financial position47Slide48
Analysis
Extensive disclosure help users assess quality of earnings as well as assist in better prediction of future cash flows48Slide49
Outstanding Conceptual Issues
Asset-liability method (or temporary difference approach) is considered most conceptually sound method of income tax accountingSignificant conceptual questions remain about: Lack of discounting (and therefore, no difference between short-term deferral and long-term deferral)Recognition of deferred tax assets49Slide50
Income Taxes
50Income Taxes from a Business PerspectiveIncome Tax Loss Carryover BenefitsLoss carryback illustratedLoss carryforward illustrated
Review of deferred tax asset account
Deferred/Future Income Taxes
Deferred tax liabilities
Deferred tax assets
Income tax accounting objectives and analyses of temporary deductible differences
Tax rate considerations
Presentation, Disclosure, and Analysis
Statement of financial position presentation
Income and other statement presentation
Disclosure requirements
Analysis
Outstanding conceptual questions
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead
Current Income TaxesAccounting income and taxable incomeCalculation of taxable incomeCalculation of current income taxesSlide51
Looking Ahead
Additional changes are expected as the result of current and future IASB projects51Slide52
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