ACC 377 Lecture Notes - Lecture 1: Deferred Tax, Income Tax, Deferred Income
Financial statements and tax statements have different goals and audiences
Two types of differences in financial pretax income and taxable income
•Tepoa diffeees
•Peaet diffeees
Temporary differences
•Both fiaial ad ta agee o the ilusio of a ite ut diffe i teatet o tiig
•Results i a tepoa diffeee that ust eetuall eese afte o oe eas
Permanent differences
•Fiaial ad ta hae fudaetall diffeet ules on the inclusion of an item
•Results i a peaet diffeee that ee eeses
Examples that give rise to temporary differences
•Epeses iitiall eogized oe ad ot the othe
•Asset ipaiet o ite-downs (temporary until the asset is sold)
•Diffeet ates of depeiatio tepoa util the asset is sold
•Colletig ash adaes that ae taale ioe ut ot eogized as eeue i aoutig pe-tax
income
•Iuig a epese ad auig a liailit tepoa util the epese is paid)
Examples that give rise to permanent differences
•Poeeds/ioe eogized oe ad ot the othe ie. o-taxable income)
•Eaig iteest o goeet ods hih ae o-taxable)
Expenses vs. payments and accounting vs. taxable income
•If a epese is iued ad a liailit aises to pa it i the futue, it is epesed fo aoutig
income but not taxable income
•If a epese is paid, the it is taale uless stated otheise
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Do companies incorporate financial and tax differences into their disclosures?
•Yes; opaies epot ioe ta epese ad a futue ta effets of the eets that happeed i
the current year
•Total ta epese iludes oth
Deferred tax liability (DTL)
•Aise he aoutig peta ioe > taxable income
•Taes ae postpoed to e paid late athe tha o
•Postpoes he a aout is iluded i taale ioe
Deferred tax asset (DTA)
•Aise he taale ioe > aoutig peta ioe
•Moe taes ae paid o athe tha late, ut e get a tax benefit in the future
•The aout is iluded i taale ioe iediatel
Which would a firm rather have, a DTL or a DTA
•A DLT; paig taes late saes oe oe i the peset
•Hee, liailities ae good eause the essetiall gie us a free loan we don't have to pay back until
later
Income tax expense
Tax expenses incurred during the period
Income tax benefit
Tax benefits granted during the period due to an NOL
Income tax payable
Taxes owed to the government for that period
Income tax receivable
Taxes owed to the company due to an NOL
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How does an increase/decrease in a DTL affect if tax expense is greater or less than tax payable?
•DTL iease → Ta epese > Ta paale
•DTL deease → Ta paale > Ta epese
How does an increase/decrease in a DTA affect if tax expense is greater or less than tax payable?
•DTA iease → Ta paale > Ta epese
•DTA deease → Ta epese > Ta paale
How does a permanent difference affect if tax expense is greater or less than tax payable?
It doesn't; without a temporary difference they are equal
Steps to calculate tax expense
•Ceate a tale to fid the taale ioe
•Calulate taes paale
•Fid the DTA/L EBs
•Fid the DTA/L deit/edits added i the T aout
•Sole fo the ioe tax expense
Taxable income table calculations
Pretax income
+ Accounting depreciation
- Taxable depreciation
+ Other DTAs
- Other DTLs
+/- Other expenses
= Taxable income
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Document Summary
Financial statements and tax statements have different goals and audiences. Two types of differences in financial pretax income and taxable income: te(cid:373)po(cid:396)a(cid:396)(cid:455) diffe(cid:396)e(cid:374)(cid:272)es, pe(cid:396)(cid:373)a(cid:374)e(cid:374)t diffe(cid:396)e(cid:374)(cid:272)es. Temporary differences: both fi(cid:374)a(cid:374)(cid:272)ial a(cid:374)d ta(cid:454) ag(cid:396)ee o(cid:374) the i(cid:374)(cid:272)lusio(cid:374) of a(cid:374) ite(cid:373) (cid:271)ut diffe(cid:396) i(cid:374) t(cid:396)eat(cid:373)e(cid:374)t o(cid:396) ti(cid:373)i(cid:374)g, results i(cid:374) a te(cid:373)po(cid:396)a(cid:396)(cid:455) diffe(cid:396)e(cid:374)(cid:272)e that (cid:373)ust e(cid:448)e(cid:374)tuall(cid:455) (cid:396)e(cid:448)e(cid:396)se afte(cid:396) (cid:1005) o(cid:396) (cid:373)o(cid:396)e (cid:455)ea(cid:396)s. Permanent differences: fi(cid:374)a(cid:374)(cid:272)ial a(cid:374)d ta(cid:454) ha(cid:448)e fu(cid:374)da(cid:373)e(cid:374)tall(cid:455) diffe(cid:396)e(cid:374)t (cid:396)ules on the inclusion of an item, results i(cid:374) a pe(cid:396)(cid:373)a(cid:374)e(cid:374)t diffe(cid:396)e(cid:374)(cid:272)e that (cid:374)e(cid:448)e(cid:396) (cid:396)e(cid:448)e(cid:396)ses. Examples that give rise to permanent differences: p(cid:396)o(cid:272)eeds/i(cid:374)(cid:272)o(cid:373)e (cid:396)e(cid:272)og(cid:374)ized (cid:271)(cid:455) o(cid:374)e a(cid:374)d (cid:374)ot the othe(cid:396) (cid:894)ie. (cid:374)o(cid:374)-taxable income, ea(cid:396)(cid:374)i(cid:374)g i(cid:374)te(cid:396)est o(cid:374) go(cid:448)e(cid:396)(cid:374)(cid:373)e(cid:374)t (cid:271)o(cid:374)ds (cid:894)(cid:449)hi(cid:272)h a(cid:396)e (cid:374)o(cid:374)-taxable) Do companies incorporate financial and tax differences into their disclosures: yes; (cid:272)o(cid:373)pa(cid:374)ies (cid:396)epo(cid:396)t i(cid:374)(cid:272)o(cid:373)e ta(cid:454) e(cid:454)pe(cid:374)se a(cid:374)d a(cid:374)(cid:455) futu(cid:396)e ta(cid:454) effe(cid:272)ts of the e(cid:448)e(cid:374)ts that happe(cid:374)ed i(cid:374) the current year, total ta(cid:454) e(cid:454)pe(cid:374)se i(cid:374)(cid:272)ludes (cid:271)oth.