Intermediate accounting 17e by kieso ch19

Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 19 Accounting for Income Taxes This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Describe the fundamentals of accounting for income taxes Identify additional issues in accounting for income taxes Explain the accounting for loss carryforwards Describe the presentation of deferred income taxes in financial statements Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 19 Accounting for Income Taxes Fundamentals of Accounting for Income Taxes • Future taxable amounts and deferred taxes • Future deductible amounts and deferred taxes Valuation allowance Copyright â2019 John Wiley & Sons, Inc Preview of Chapter 19 Accounting for Income Taxes Additional Considerations • Income statement presentation • Specific differences Tax rate considerations Copyright â2019 John Wiley & Sons, Inc Preview of Chapter 19 Accounting for Income Taxes Accounting for Net Operating Losses • Loss carryforward • Loss carryforward example Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 19 Accounting for Income Taxes Financial Statement Presentation • Balance sheet • Note disclosure • Income statement Asset-liability method Copyright â2019 John Wiley & Sons, Inc Learning Objective Describe the Fundamentals of Accounting for Income Taxes LO Copyright ©2019 John Wiley & Sons, Inc Fundamentals of Accounting for Income Taxes Corporations must file income tax returns following the guidelines developed by the Internal Revenue Service (IRS) Because GAAP and tax regulations differ in a number of ways, the amounts reported for the following will differ: • income tax expense (GAAP) • income tax payable (Internal Revenue Code) LO Copyright ©2019 John Wiley & Sons, Inc Accounting for Income Taxes LO Copyright ©2019 John Wiley & Sons, Inc Accounting for Income Taxes Illustration Chelsea, Inc reported revenues of $130,000 and expenses of $60,000 in each of its first three years of operations For tax purposes, Chelsea reported the same expenses to the IRS in each of the years Chelsea reported taxable revenues of $100,000 in 2020, $150,000 in 2021, and $140,000 in 2022 What is the effect on the accounts of reporting different amounts of revenue for GAAP versus tax? LO Copyright ©2019 John Wiley & Sons, Inc 10 Comprehensive Example Information related to Allman’s operations for 2019 At the beginning of 2019, Allman Company purchased depreciable assets with a cost of $540,000 For financial reporting purposes, Allman depreciates these assets using the straight-line method over a six-year service life For tax purposes, the assets fall in the five-year recovery class, and Allman uses the MACRS system LO Copyright ©2019 John Wiley & Sons, Inc 90 Comprehensive Example Information related to Allman’s operations for 2019 The company warrants its product for two years from the date of completion of a contract During 2019, the product warranty liability accrued for financial reporting purposes was $200,000, and the amount paid for the satisfaction of warranty liability was $44,000 Allman expects to settle the remaining $156,000 by expenditures of $56,000 in 2020 and $100,000 in 2021 LO Copyright ©2019 John Wiley & Sons, Inc 91 Comprehensive Example In 2019 nontaxable municipal bond interest revenue was $28,000 During 2019 nondeductible fines and penalties of $26,000 were paid Pretax financial income for 2019 amounts to $412,000 Tax rates enacted before the end of 2019 were: 2019 30% 2020 and later years 20% The accounting period is the calendar year The company is expected to have taxable income in all future years LO Copyright ©2019 John Wiley & Sons, Inc 92 Taxable Income and Income Taxes Payable-2019 LO Copyright ©2019 John Wiley & Sons, Inc 93 Computing Deferred Income Taxes–2019 LO Copyright ©2019 John Wiley & Sons, Inc 94 Deferred Tax Expense (Benefit) – 2019 Computation of Net Deferred Tax Expense, 2019 LO Copyright ©2019 John Wiley & Sons, Inc 95 Deferred Tax Expense (Benefit) and Journal Entry – 2019 Computation of Total Income Tax Expense, 2019 Journal Entry for Income Tax Expense, 2019 Income Tax Expense Deferred Tax Asset Income Taxes Payable Deferred Tax Liability LO Copyright ©2019 John Wiley & Sons, Inc 92,000 31,200 30,000 93,200 96 Financial Statement Presentation – 2019 Companies should classify deferred tax assets and liabilities as noncurrent on the balance sheet Multiple categories of deferred taxes are classified into a net noncurrent amount LO Copyright ©2019 John Wiley & Sons, Inc 97 Financial Statement Presentation 2019 LO Copyright ©2019 John Wiley & Sons, Inc 98 Learning Objective Explain the Accounting for Loss Carrybacks Tax Cuts and Jobs Act of 2017 (TCJA) permits the carryforward of current net operating losses to off set future taxable income the TCJA eliminated carryback provisions for NOLs LO Copyright ©2019 John Wiley & Sons, Inc 99 Learning Objective Compare the Accounting for Income Taxes Under GAAP and IFRS LO Copyright ©2019 John Wiley & Sons, Inc 100 IFRS Insights Relevant Facts - Similarities • Similar to GAAP, IFRS uses the asset and liability approach for recording deferred taxes • The classification of deferred taxes under both IFRS and GAAP is always non-current Differences • Under IFRS, an affirmative judgment approach is used, by which a deferred tax asset is recognized up to the amount that is probable to be realized GAAP uses an impairment approach In this approach, the deferred tax asset is recognized in full It is then reduced by a valuation account if it is more likely than not that all or a portion of the deferred tax asset will not be realized LO Copyright ©2019 John Wiley & Sons, Inc 101 IFRS Insights Relevant Facts - Differences • IFRS uses the enacted tax rate or substantially enacted tax rate (“Substantially enacted” means virtually certain.) For GAAP, the enacted tax rate must be used • The tax effects related to certain items are reported in equity under IFRS That is not the case under GAAP, which charges or credits the tax effects to income • GAAP requires companies to assess the likelihood of uncertain tax positions being sustainable upon audit Potential liabilities must be accrued and disclosed if the position is “more likely than not” to be disallowed Under IFRS, all potential liabilities must be recognized With respect to measurement, IFRS uses an expected-value approach to measure the tax liability, which differs from GAAP LO Copyright ©2019 John Wiley & Sons, Inc 102 IFRS Insights On the Horizon The IASB and the FASB have worked to address some of the differences in the accounting for income taxes Some of the issues under discussion are the term “probable” under IFRS for recognition of a deferred tax asset, which might be interpreted to mean “more likely than not.” If the term is changed, the reporting for impairments of deferred tax assets will be essentially the same between GAAP and IFRS In addition, the FASB recently adopted the IFRS classification approach for deferred tax assets and liabilities Also, GAAP will likely continue to use the enacted tax rate in computing deferred taxes, except in situations where the taxing jurisdiction is not involved In that case, companies should use IFRS, which is based on enacted rates or substantially enacted tax rates Finally, the issue of allocation of deferred income taxes to equity for certain transactions under IFRS must be addressed in order to converge with GAAP, which allocates the effects to income At the time of this printing, deliberations on the income tax project have been suspended indefinitely LO Copyright ©2019 John Wiley & Sons, Inc 103 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Copyright ©2019 John Wiley & Sons, Inc 104 ... should be able to: Describe the fundamentals of accounting for income taxes Identify additional issues in accounting for income taxes Explain the accounting for loss carryforwards Describe the... Chapter 19 Accounting for Income Taxes Accounting for Net Operating Losses • Loss carryforward • Loss carryforward example Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 19 Accounting. .. financial statements Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 19 Accounting for Income Taxes Fundamentals of Accounting for Income Taxes • Future taxable amounts and deferred taxes •