A snapshot of the summary - Intermediate accounting.
1 Financial Accounting Part
1.1 Accounting for income taxes
Identify temporary or permanent difference. A landlord collects some rents in advance. Rents received are taxable in the period when they are received.
This is a temporary difference that will result in future deductible amounts.
1.1.1 Book versus tax reporting
Why do companies need to provide financial information?
Companies need to provide financial information to the investment community that provides a clear picture of present and potential tax obligations and tax benefits.
Corporations must file income taxes returns following the guidelines developed by the appropriate taxing authority. So what do they calculate?
They calculate taxes payable based upon tax regulations and income tax expense based upon IFRS. The amount reported as tax expense will often differ from the amount of taxes payable to the tax authority.
Explain straight-line depreciation as well as accelerated depreciation and there connection to book/tax-reporting.
For tax purposes, company uses accelerated depreciation.
For book (IFRS) reporting purposes, company uses straight-line depreciation for fixed assets.
Straight-line depreciation: simpliest and most commonly used method.
Purchase price- salvage value/ total estimated life in years of the item --> constant depreciation expense.
Accelerated depreciation: Write off more in first years and less in last years. Biggest benefit --> tax benefit --> By writing more assets against revenue, companies report lower revenues and thus pay less taxes.
What is accrual accounting?
Records income when it is earned or expenses, when they occured --> when actual transaction completed/item sold/work done, the corresponding amount will appear in the books even though payment has not yet been received.
For financial reporting (book) purposes, companies use accrual accounting.
Why do temporary differences occur?
The difference between the amounts can happen when there are temporary differenes between the amounts reported for tax purposes and those reported for book purposes. (Including different use of accrual and cash-based accounting)
Why does management of large listed companies have a high incentive to report IFRS income as high as possible?
Positive effect on bonus
Positive effect on stock price
Positive effect on performance evaluation
At the same time, companies want the tax burden to be as low as possible: report low taxable income; but: less flexibility compared with IFRS reporting.
How would you describe tax-planning-strategy?
An action that meets certain criteria and that a company implements to realize a tax benefit for an operating loss or tax credit carryforward before it expires. Companies consider tax-planning strategies when assessing the need for and amount of a valuation allowance for deferred tax assets.
Identify differences between pretax financial income and taxable income.
Companies compute pretax financial income (or income for book purposes) in accordance with generally accepted accounting principles. They compute taxable income (or income for tax purposes) in accordance with prescribed tax regulations.
Differences may exist for example, in the timing of revenue recognition and the timing of expense recognition.
1.1.3 Temporary differences and deferred taxes
What are future deductible amounts?
Deferred tax asset.
An asset on a company's balance sheet that may be used to reduce any subsequent period's income tax expense as a result of deductible temporary differences.
Often associated with a loss carryforward:
These future deductible amounts cause taxable income to be less than pretax financial income as result of temporary differences.
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