ACCOUNTING FOR INCOME TAXES
When a company prepares its income tax returns for a particular year, the revenues and expenses included in the returns are, by and large, the same as those reported on the company’s income statement for the current year. However, in some instances tax laws and financial accounting standards differ.
The reason they differ is that the fundamental objectives of financial reporting and those of taxing authorities are not the same.
Financial accounting standards are established to provide useful information to management, investors, and creditors.
On the other hand, Congress through the Internal Revenue Code is primarily concerned with raising public revenues in a socially acceptable manner, and frequently, with influencing the behavior of taxpayers. Congress uses tax laws to encourage activities it deems desirable, such as investment in productive assets, and to discourage activities it deems undesirable, such as violations of law.
A consequence of differences between GAAP and tax rules is that tax payments frequently occur in years different from when the revenues and expenses that cause the taxes are generated. The financial reporting issue is
the tax expense should be recognized, rather than
the tax is actually paid.
Chapter 19 explores the financial accounting and reporting standards for the effects of income taxes. We focus on
between recognition of transactions on the books of a company and the company’s income tax returns.
are the basis for recognizing
DEFERRED TAX ASSETS
DEFERRED TAX LIABILITIES
There are no tax effects for
In Chapter 19, you will learn how to adjust deferred tax assets and deferred tax liabilities when tax laws or tax rates change. You will learn about financial statement disclosures.
You will learn about the difference between
INTRA-PERIOD INCOME TAX
INTER-PERIOD INCOME TAX ALLOCATION
. Additionally, you will learn about something that is unique to the tax law called
Decision makers must be alert to options that minimize or delay payment of taxes.
Taxes may be minimized or avoided through investment strategies using investment in municipal bonds since interest on municipal bonds is not taxed for federal income tax purposes. Electing to use accelerated depreciation for tax return purposes may significantly delay payment of taxes.
Astute managers make investment decisions that consider
the tax effect
of available alternatives. Similarly, outside analysts should consider how effectively management has managed its tax exposure and monitor the current and prospect impact of taxes on their interests in the company.
This week’s mind map diagram includes five key issues. Each issue is supported by a streaming video commentary. The sixth issue provides the comparison/contract between
US GAAP and IFRS. GAAP and IFRS both provide or recognition of deferred tax consequences.
WileyPlus includes homework assignments that focus on the most important learning objectives for Chapter 19.
Self-study Quiz #3 provides broad coverage of issues discussed in Chapter 19. It should fill any gaps NOT specifically covered by WileyPlus homework assignments.
Chapter 19 is a “toughie.
” The topic is easier to understand if you have completed your study of business taxation (e.g., corporate income taxes). If you have not yet completed this course, you may need to research internet resources for more extensive explanations of “timing differences” discussed in the text.
Issue 3 on the mind map diagram should prove especially helpful to your learning about accounting for timing differences. It includes two walk-through demonstrations that explain the issues step-by-step.
Issue 4 explains how net operating losses benefit a company through the use of tax loss carrybacks and carryforwards. These techniques are included in the tax code. There are no such provisions in GAAP. The techniques simply allow a company that paid taxes in past periods to recover part or all of taxes paid. Alternatively, the technique allows a company to reduce future tax bills by carrying forward unused tax loss carrybacks. This is “social policy” in action. It is better to keep a company in business than to possibly let it go out of business.
Chapter 19 is one chapter where you
may need to allocate additional study time
in order to adequately cover the topic.
One additional reminder: This is your last study week to get yourself up and running with the FASB Codification Research System. If you have not yet reviewed the FAS
Codification Tutorial programs #1 through #6…..get with the program. Next week is your first FASB Codification Research Project #1.
As always, if you have questions or comments, please contact me.
Have a great study week.