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1-32 Intermediate Accounting, 8/e
Dealing with Uncertainty
GAAP allows companies to recognize in the financial statements the tax
benefit of a position it takes only if it is “more likely than not” (greater than
50% chance) to be sustained if challenged. Guidance also prescribes how
to measure the amount to be recognized. The decision, then, is a “two-
step” process.
Step 1. A tax benefit may be reflected in the financial statements only
Step 2. A tax benefit should be measured as the largest amount of
benefit that is cumulatively greater than 50-percent likely to
Dealing with Uncertainty
Illustration
Derrick Company claims a deduction on its tax return that will save the
company $8 million in 2016 income taxes. Derrick knows that,
historically, the IRS has challenged many deductions of this type. Since
Likelihood Table:
T16-29
Amount of the tax benefit that
management expects to be
sustained
$8
$7
$6
$5
$4
1-34 Intermediate Accounting, 8/e
INTRAPERIOD TAX ALLOCATION
The total income tax expense for a reporting period should be
allocated among the income statement items that gave rise to
T16-30
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1. PetSmart Analysis
1. Determine the temporary difference that for PetSmart creates the largest deferred assets and
deferred tax liabilities. Given what you know about PetSmart, why do you suppose these are
the largest contributors? Is the total net deferred tax asset or liability getting larger or smaller?
Why?
2. Determine wehre deferred taxes are reported in the balance sheet.
3. Compare deferred taxes reported with those in the 2014 report that accompanied the text. Are
there any discernible trends? How might they be interpreted?
Points to note:
In the year ended 2/2/2014, the temporary difference creating the largest deferred tax asset was
capital lease obligations, which makes sense given that PetSmart likely leases many “big box”
1-36 Intermediate Accounting, 8/e
2. Professional Skills Development Activities
Communication Skills. In addition to Communication Case 16-5, Trueblood cases 16-11 and 16-
12, Real World Case 16-6, Judgment Case 16-10, Integrating Cases 16-2 and 16-4 and Problem
Research Skills. The “Broaden Your Perspective” section includes Research Cases that direct
students to locate and extract relevant information from available resource material to
determine the correct accounting practice, perhaps identifying the appropriate authoritative
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret date to provide options for making
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
3. Real World Scenario
In RadioShack’s 2013 annual report, the company reported deferred tax assets of $259.3 million,
offset by a valuation allowance of $228.8 million. Disclosure note 10 reported, in part:
Suggestion:
Ask students to consider the following questions:
1. As a potential investor, what significance would you place on the existence of operating
loss carryforwards?
2. What might contribute to RadioShack’s need to record a valuation allowance?
Points to note:
Deferred tax assets represent future tax savings. Operating loss carryforwards create deferred tax
assets that can reflect sizable potential tax deductions. RadioShack has large operating loss
1-38 Intermediate Accounting, 8/e
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Learning Est. time
Questions Objective(s) Topic (min.)
16-1
16-01, 16-02
Temporary difference
5
16-2
16-01, 16-02
Temporary difference
5
16-3
16-02
Future deductible amounts
5
16-4
16-03
Valuation allowance
5
16-5
16-04
Permanent or “permanent ” differences
5
16-6
16-04
Permanent or “permanent ” differences
5
16-7
16-05
Corporate tax rate change
5
16-8
16-05
Corporate tax rate change
5
16-9
16-07
Loss carrybacks and loss carryforwards
5
16-10
16-08
Classifying deferred taxes
5
16-11
16-08
Financial statement disclosures
5
16-12
16-08
Financial statement disclosures
5
16-13
16-09
Uncertainty
5
16-14
16-010
Intraperiod tax allocation
5
16-15
16-011
IFRS
5
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
16-1
16-01
Temporary difference
5
16-2
16-01
Temporary difference; determine taxable income;
determine prior year deferred tax amount
5
16-3
16-02
Temporary difference
5
16-4
16-02
Temporary difference; income tax payable given
5
16-5
16-02
Temporary difference; income tax payable given
5
16-6
16-02, 16-03
Valuation allowance
5
16-7
16-02, 16-03
Valuation allowance
5
16-8
16-01, 16-04
Temporary and permanent differences; determine
deferred tax consequences
5
16-9
16-01, 16-04
Calculate taxable income
5
16-10
16-05
Multiple tax rates
5
16-11
16-05
Change in tax rates
5
16-12
16-07
Operating loss carryforward
5
16-13
16-07
Operating loss carryback
5
16-14
16-09
Uncertainty
5
16-15
16-10
Intraperiod tax allocation
5
16-16
16-11
IFRS; Intraperiod tax allocation
5
Learning Est. time
Exercises Objective(s) Topic (min.)
16-1
16-01
Temporary difference; taxable income given
10
16-2
16-01
Determine taxable income;
determine prior year deferred tax amount
15
16-3
16-01
Taxable income given;
calculate deferred tax liability
15
16-4
16-02
Temporary difference;
income tax payable given
10
16-5
16-02
Temporary difference;
future deductible amounts; taxable income given
15
16-6
16-01, 16-02
Identify future taxable amounts and future deductible
amounts
25
16-7
16-01, 16-02
Identify future taxable amounts and future deductible
amounts
15
16-8
16-01, 16-02
Calculate income tax amounts under various
circumstances
35
16-9
16-01, 16-02,
16-09
Determine taxable income
20
16-10
16-03
Deferred tax asset; taxable income given; valuation
allowance
20
16-11
16-03
Deferred tax asset; income tax payable given; previous
balance in valuation allowance
20
16-12
16-03
FASB codification research; valuation allowance
15
16-13
16-01, 16-04
Multiple differences; calculate taxable income
20
16-14
16-04, 16-06
Multiple differences
25
16-15
16-02, 16-05
Multiple tax rates
25
16-16
16-01, 16-05
Change in tax rates; calculate taxable income
35
16-17
16-01, 16-05
Deferred taxes; change in tax rates
25
16-18
16-06
Multiple temporary differences; record income taxes
15
16-19
16-06
Multiple temporary differences; record income taxes
20
16-20
16-07
Operating loss carryforward
15
16-21
16-07
Operating loss carryback
15
16-22
16-07
Operating loss carryback and carryforward
20
16-23
16-01, 16-02,
16-04, 16-07
Identifying income tax deferrals
15
16-24
16-04, 16-05,
16-06, 16-08
Balance sheet classification
20
16-25
16-01, 16-04,
16-05, 16-08
Multiple tax rates; balance
sheet classification
25
16-26
16-01, 16-02,
16-04, 16-05,
16-06, 16-08
Multiple difference; multiple
tax rates; balance sheet classification
35
16-27
16-01, 16-02,
16-03, 16-04,
16-05, 16-06,
16-07, 16-08
Concepts; terminology
20
16-28
16-09
Tax credit; uncertainty regarding sustainability
15
16-29
16-10
Intraperiod tax allocation
15
16-30
16-05, 16-08,
16-10
FASB codification research
15
CPA/CMA Learning Est. time
1-40 Intermediate Accounting, 8/e
Exam Questions Objective(s) Topic (min.)
CPA-1
16-01
Deferred income tax liability
3
CPA-2
16-02
Deferred income tax asset
3
CPA-3
16-03
Valuation allowance
3
CPA-4
16-05
Change in tax rate
3
CPA-5
16-05
Change in tax rate
3
CPA-6
16-07
NOL
3
CPA-7
16-10
Intraperiod tax allocation
3
CPA-8
16-11
IFRS
3
CMA-1
16-02
Deferred income tax asset
3
CMA-2
16-01
Deferred income tax liability
3
CMA-3
16-05
Change in tax rate
3
Learning Est. time
Problems Objective(s) Topic (min.)
16-1
16-01
Single temporary difference originates each year
for four years
30
16-2
16-02, 16-08
Temporary difference; determine deferred tax
amount for three years; balance sheet
classification
25
16-3
16-01, 16-05
Change in tax rates; single temporary difference
25
16-4
16-01, 16-05
Change in tax rates; record taxes for four years
30
16-5
16-01,16-04, 16-05
Change in tax rates; record taxes for four years
45
16-6
16-05, 16-06, 16-08
Multiple temporary differences; temporary
difference yet to originate; multiple tax rates;
classification
45
16-7
16-04, 16-06, 16-08
Multiple differences; calculate taxable income;
balance sheet classification
50
16-8
16-04, 16-06, 16-08
Multiple differences; taxable income given; two
years; balance sheet classification; change in tax
rates
60
16-9
16-06
Determine deferred tax assets and liabilities
45
16-10
16-02, 16-04, 16-07
Operating loss carryback and carryforward;
multiple differences
20
16-11
16-03, 16-08
Valuation allowance; Sonic Solutions
60
16-12
16-01, 16-05, 16-08
Integrating problem - bonds, leases, taxes
60
16-13
16-03, 16-04, 16-06, 16-09
Multiple differences; uncertain tax position
60
Star Problems
1-42 Intermediate Accounting, 8/e
Learning Est. time
Cases Objective(s) Topic (min.)
Analysis Case 16-1
16-01 - 16-08
Basic concepts
20
Integrating Case 16-2
16-02
Postretirement benefits
15
Real World Case 16-3
16-01, 16-02,
16-08
Income taxes and investment securities; Dominion
Resources
20
Integrating Case 16-4
16-01, 16-02,
16-08
Accounting changes and error correction; six situations
75
Communication Case 16-5
16-01, 16-04,
16-05
Deferred taxes, changing rates; write a memo
30
Real World Case 16-6
16-01, 16-02,
16-08
Disclosure issues; balance sheet classifications; Wal-
Mart
30
Research Case 16-7
16-01, 16-02,
16-03, 16-08
Researching the way tax deductions are reported on a
corporation tax return; retrieving a tax form from the
Internet
45
Analysis Case 16-8
16-01, 16-02,
16-03, 16-07,
16-08
Reporting deferred taxes; Ford Motor Co.
25
Analysis Case 16-9
16-01, 16-02,
16-03, 16-07,
16-08
Reporting deferred taxes; Kroger
35
Judgment Case 16-10
16-08
Analyzing the effect of deferred tax liabilities on firm
risk; Macy’s
45
Trueblood Case 16-11
16-09
Uncertain tax positions
40
Judgment Case 16-12
16-10
Intraperiod tax allocation
25
Air France/KLM Case
16-11
IFRS; accounting for income taxes; Air France/KLM
30
CPA Simulation 16-1 Judgment; temporary and permanent differences;
communication; research
