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Future Tax Liability ExampleFuture Tax Liability ExampleChelsea Inc. - 2010Chelsea Inc. - 2010

Accounting Tax

Revenue $130,000 $100,000

Expenses 60,000 60,000

Income $ 70,000 $ 40,000

Tax @ 40% $ 28,000 $ 16,000

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Future Tax Liability ExampleFuture Tax Liability ExampleChelsea Inc. Chelsea Inc.

2010 2011

Accounting Income $70,000 $70,000

Adjust for revenue taxable in future period

(30,000) 20,000

Taxable Income $ 40,000 $ 90,000

Tax payable @ 40% $ 16,000 $ 36,000

2012

$70,000

10,000

$ 80,000

$ 32,000

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Future Tax Liability Example Future Tax Liability Example Chelsea Inc. - 2010Chelsea Inc. - 2010

Books TaxAccounts receivable $30,000 0Income reported in 2010 $70,000 $40,000

Tax rate = 40%Future Income tax liability (30,000 x 40%) 12,000Income tax payable(40,000 x 40%) 16,000Income Tax Expense (total) 28,000

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Chelsea Inc. – example Chelsea Inc. – example continuedcontinued

Total

$30,000

40%

$ 12,000$ 12,000

2011 2012

Future taxable amounts $20,000 $10,000

Future tax rate 40% 40%

Future income tax liability $ 8,000 $ 4,000

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Recording Journal Entries Recording Journal Entries – e.g. Chelsea Inc. -2010– e.g. Chelsea Inc. -2010

Journal Entries:

Current Income Tax Expense 16,000 Income Tax Payable 16,000

Future Income Tax Expense 12,000Future Income Tax Liability 12,000

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Future Income Tax LiabilityFuture Income Tax Liability

Net Assets reported End of 2010

End of 2011

Accounts receivable (in assets) $30,000 $10,000

Future income tax liability (in liabilities) 12,000 4,000

Net assets reported $ 18,000 $ 6,000

Note: Balance sheet reflects eventual cash impact of recovering the A/R

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Future Tax Asset – ExampleFuture Tax Asset – Example

• Cunningham Inc. sells microwave ovens with a 2 year warranty

• In 2011, estimated warranty expense is $500,000

• Actual warranty costs are $300,000 in 2012 and $200,000 in 2013

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Future Income Tax Asset: Future Income Tax Asset: ExampleExample

Books TaxWarranty liability $500,000 0

Tax rate = 40%Future Income tax asset (500,000 x 40%) 200,000Income tax payable (assumed)(Taxable Income x 40%) 600,000Income Tax Expense (total) 400,000

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Future Income Tax Asset: Future Income Tax Asset: ExampleExample

Journal Entries:Current Income Tax Expense 600,000

Income Tax Payable 600,000

Future Income Tax Asset 200,000Future Income Tax Expense 200,000

The total income tax expense of $400,000 is made up of a current tax expense of $600,000 and a future income tax benefit of $200,000

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Future Income Tax Future Income Tax Asset: ExampleAsset: Example

In subsequent years (2012 and 2013):- warranty expense of $500,000 deducted for tax,

but not for books- Income taxes payable reduced by $500,000 × 40%

= $200,000- Entry in future, therefore:

Income tax expense $xFuture income tax asset $ 200,000Income taxes payable $x − 200,000

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Future Tax Rate - exampleFuture Tax Rate - example

Hostel Corp. had the following at end of 2009:Property, plant, and equipment:

Net book value (NBV) = $4,000,000Tax value (Undepreciated capital cost, UCC) = 1,000,000

Taxable temporary difference = 3,000,000(to reverse by $1,000,000 each year in 2011,

2012 and 2013)Tax rate 40%Future tax liability 1,200,000

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Future Tax Rate - exampleFuture Tax Rate - exampleAssume a new income tax rate is enacted from40% to 35%, effective January 1, 2012• Recalculate Future tax liability as follows:

2011 $1,000,000 x 40% = $400,0002012 $1,000,000 x 35% = $350,0002013 $1,000,000 x 35% = $350,000Total $1,100,000

Required Adjusting Entry: Future Income Tax Liability 100,000

Future Income Tax Benefit 100,000(1,200,000 - 1,100,000)

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• Under IFRS– All deferred tax assets and liabilities are recorded as

noncurrent

• Under PE GAAP– Future tax asset or liability is classified as current or

noncurrent based on the classification of the underlying asset or liability giving rise to the specific temporary difference

– If 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 realized

Balance Sheet PresentationBalance Sheet Presentation

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Intraperiod Tax AllocationIntraperiod Tax Allocation

• Income tax expense is reported with its related item, such as discontinued operations, other comprehensive income, adjustments to RE, etc.

• Intraperiod Tax Allocation– Tax expense is allocated within the

financial statements of the current period• Interperiod Tax Allocation

– Tax expense is allocated between years, and results in the recognition of future income taxes

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Intraperiod Tax Allocation: Intraperiod Tax Allocation: ExampleExample

• Assume the following information for Copy Doctor Inc.:– Tax rate of 35%– A loss from continuing operations of $500,000– Income from discontinued operations of– Unrealized holding gain of $25,000 on investment

accounted for at FV-OCI • Prepare the journal entries to record current and

future tax expenses

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Intraperiod Tax Allocation: Intraperiod Tax Allocation: ExampleExample

Current Income Tax Expense (discontinued operations) 241,500

Current Income Tax Benefit(continuing operations) 175,000Income Tax Payable 66,500

Calculations: • income of 690,000 x 35% = 241,500 expense• loss of 500,000 x 35% = 175,000 benefit

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Intraperiod Tax Allocation: Intraperiod Tax Allocation: ExampleExample

Future Income Tax Expense (OCI) 8,750Future Income Tax Liability 8,750

Calculations: • 25,000 x 35% = 8,750

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Disclosure RequirementsDisclosure Requirements

• IFRS has more extensive disclosure requirements than PE GAAP, including: – Major components of income tax expense or benefits– Sources of both current and future taxes– Amount of current and future tax recognized in equity– Reconciliation of effective and statutory tax rates– Information about unrecognized future tax assets– Information about each type of temporary difference and

future tax asset or liability recognized on statement of financial position

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AnalysisAnalysis

• Extensive disclosure help users asses quality of earnings, as well as assist in better prediction of future cash flows

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Outstanding Conceptual Outstanding Conceptual IssuesIssues

• Asset-liability method (or balance sheet liability approach) is considered most conceptually sound method of income tax accounting

• Significant conceptual questions remain about: – Lack of discounting (and therefore, no difference

between short-term deferral and long-term deferral)– Recognition of future tax assets

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Income TaxesIncome Taxes

Current Current Income Income TaxesTaxes•Accounting income and taxable income

•Calculation of taxable income

•Calculation of current income taxes

Income Tax Loss Income Tax Loss Carryover BenefitsCarryover Benefits•Introduction to tax losses

•Loss carryback illustrated

•Loss carryforward illustrated

•Carryforward with valuation allowance

•Review of future income tax asset account

Future/Deferred Future/Deferred Income TaxesIncome Taxes•Tax basis

•Future income tax liabilities

•Future income tax assets

•Income tax accounting objectives

•Multiple differences illustrated

•Tax rate considerations

Presentation, Presentation, Disclosure, and Disclosure, and Analysis Analysis •Balance sheet presentation

•Income and other statement presentation

•Disclosure requirements

•Analysis

•Outstanding conceptual questions

IFRS / IFRS / Private Private Entity GAAP Entity GAAP ComparisonComparison•Comparison chart

•Looking ahead

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Looking AheadLooking Ahead

• Additional changes are expected as IASB and FASB revisit the income tax standard

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