PROBLEM 19.8 (Continued)
Solving for X; X – ¥120,000,000 = ¥325,000,000; X = ¥445,000,000 pretax
financial income.
Book Depreciation
Tax Depreciation
bDifferenceb
2018
¥120,000,000
¥240,000,000*
(¥(120,000,000)
2019
120,000,000
144,000,000
(24,000,000)
2020
2021
2022
64,800,000
¥600,000,000
¥600,000,000
(d)
Temporary
Difference
Future Taxable
(Deductible)
Amounts
Tax
Rate
Deferred Tax
(Asset)
Depreciation
¥144,000,000
40%
40%
¥ (6,000,000)
Temporary
Difference
Resulting Deferred Tax
(Asset)
Liability
Depreciation
¥57,600,000
Unearned rent
Unearned rent
¥57,600,000
PROBLEM 19.8 (Continued)
(e) Income Tax Expense ………………………………. 53,600,000
Deferred Tax Asset …………………………………. 60,000,000
Income Taxes Payable ……………………… 104,000,000
Deferred Tax Liability ……………………….. 9,600,000
Deferred tax asset at the end of 2019 ………………………… ¥ 60,000,000
Deferred tax asset at the beginning of 2019 ………………. 0
Deferred tax benefit for 2019 (increase in
deferred tax asset) ……………………………………………….. ¥ (60,000,000)
(f) Income before income taxes ………………. ¥134,000,000c
Income tax expense
Current ………………………………………. ¥104,000,000
Deferred …………………………………….. (50,400,000) 53,600,000
Net income ……………………………………….. ¥ 80,400,000
cPretax financial income……………………………………………. ¥ Y
PROBLEM 19.9
(a) Pretax financial income …………………………………………………. €100,000
Permanent differences:
Fine for pollution …………………………..……………………….. 3,500
Tax-exempt interest ……………………………………………….. (1,500)
(b)
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Warranty costs
€ (5,000)
40%
€(2,000)
Construction profits
40%
Depreciation
40%
Totals
€(2,000)
(c) Income Tax Expense …………………………………………. 40,800
Deferred Tax Asset ……………………………………………. 2,000
Deferred Tax Liability ………………………………….. 18,000
Income Taxes Payable ………………………………… 24,800
PROBLEM 19.9 (Continued)
Deferred tax asset at the end of 2019 ……………………………… € 2,000
Deferred tax asset at the beginning of 2019 ……………………. 0
Deferred tax benefit for 2019 ………………………………………….. € (2,000)
Deferred tax expense for 2019 ……………………………………….. € 18,000
(d) Income before income taxes ……………………………. €100,000
Income tax expense
Current ……………………………………………………. €24,800
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 19.1 (Time 15–20 minutes)
Purpose—to provide the student an opportunity to explain the objectives in accounting for income taxes
CA 19.2 (Time 20–25 minutes)
Purpose—to provide the student an opportunity to discuss the principles of the asset-liability method,
CA 19.3 (Time 20–25 minutes)
Purpose—to develop an understanding of temporary and permanent differences. The student is
CA 19.4 (Time 20–25 minutes)
Purpose—to develop an understanding of deferred taxes. The student is required to indicate whether
deferred income taxes should be recognized for each of four items.
CA 19.5 (Time 20–25 minutes)
CA 19.6 (Time 20–25 minutes)
Purpose—to develop an understanding of the concept of future taxable amounts and future deductible
CA 19.7 (Time 20–25 minutes)
Purpose—to provide the student an opportunity to examine the income effects of deferred taxes, including
ethical issues.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 19.1
(a) The objectives in accounting for income taxes are:
1. To recognize the amount of taxes payable or refundable for the current year.
(b) To implement the objectives, the following basic principles are applied in accounting for income
taxes at the date of the financial statements:
1. A current tax liability or asset is recognized for the estimated taxes payable or refundable
on the tax return for the current year.
(c) The procedures for the annual computation of deferred income taxes are as follows:
1. Identify: (1) the types and amounts of existing temporary differences and (2) the nature and
amount of each type of operating loss and tax credit carryforward and the remaining length
of the carryforward period.
CA 19.2
(a) The following basic principles are applied in accounting for income taxes at the date of the
financial statements:
1. A current tax liability or asset is recognized for the estimated taxes payable or refundable
on the tax return for the current year.
2. A deferred tax liability or asset is recognized for the estimated future tax effects attributable
(b) Dexter should do the following in accounting for the temporary differences.
1. Identify the types and amounts of existing temporary differences. The depreciation policies
give rise to a temporary difference that will result in net future taxable amounts (because
CA 19.2 (Continued)
3. Measure the total deferred tax asset for the deductible temporary difference using the
enacted tax rate.
(c) Deferred tax accounts are reported on the statement of financial position as assets or liabilities.
They should be classified in a net non-current amount.
Dexter’s deferred tax liability from the depreciation difference and deferred tax asset from the
CA 19.3
(a) 1. Temporary difference. The full estimated three years of warranty costs reduce the current
year’s pretax financial income, but will reduce taxable income in varying amounts each
respective year, as paid. Assuming the estimate as to each warranty is valid, the total
2. Temporary difference. The difference between the tax basis and the reported amount (book
basis) of the depreciable property will result in taxable or deductible amounts in future years
when the reported amount of the asset is recovered (through use or sale of the asset);
hence, it is a temporary difference.
3. Temporary difference and permanent difference. The investor’s share of earnings of an
investee (other than subsidiaries and corporate joint ventures) accounted for by the equity
method is included in pretax financial income. In some countries dividends from one
4. Temporary difference. For financial reporting purposes, any gain experienced in an involun–
tary conversion of a non-monetary asset to a monetary asset must be recognized in the
CA 19.3 (Continued)
(b) Deferred tax assets and deferred tax liabilities are separately recognized and measured but are
CA 19.4
(a) Deferred income taxes are reported in the financial statements when temporary differences exist
at the statement of financial position date. Deferred taxes are never reported for permanent
differences.
The tax consequences of most events recognized in the financial statements for a year are
included in determining income taxes currently payable. However, tax laws often differ from the
recognition and measurement requirements of financial accounting standards, and differences
can arise between: (1) the amount of taxable income and pretax financial income for a year and
A deferred tax liability is reported for the increase in taxes payable in future years as a result of
taxable temporary differences existing at the statement of financial position date. A deferred tax
asset is reported for the increase in taxes refundable in future years as a result of deductible
temporary differences existing at the statement of financial position date. The most common
temporary differences arise from including revenues or expenses in taxable income in a period
later or earlier than the period in which they are included in pretax financial income.
(b) 1. Income on installment sales—Deferred income taxes would be recognized when income on
installment sales is included in pretax financial income in the year of sale and included in
taxable income when later collected.
2. Revenues on long-term construction contracts—Deferred income taxes would be recog-
CA 19.5
(a) The 45% tax rate would be used in computing the deferred tax liability at December 31, 2018, if a
tax rate is 45% in 2018). (See discussion on the next page.)
(b) The 40% tax rate would be used in computing the deferred tax liability at December 31, 2018, if
which the future taxable amount is expected to occur). (See discussion on the next page.)
CA 19.5 (Continued)
(c) The 34% tax rate would be used in computing the deferred tax liability at December 31, 2018, if a
net operating loss (an NOL) is expected in 2019 that is to be carried forward to 2020 (the tax rate
enacted for 2016 is 34%). (See discussion below.)
Discussion:
In determining the future tax consequences of temporary differences, it is helpful to prepare a schedule
which shows in which future years existing temporary differences will result in taxable or deductible
amounts. The appropriate enacted tax rate is applied to these future taxable and deductible amounts.
For future taxable amounts:
1. If taxable income is expected in the year that a future taxable amount is scheduled, use the
enacted rate for that future year to calculate the related deferred tax liability.
For future deductible amounts:
1. If taxable income is expected in the year that a future deductible amount is scheduled, use the
enacted rate for that future year to calculate the related deferred tax asset.
CA 19.6
(a) Future taxable amounts increase taxable income relative to pretax financial income in the future
due to temporary differences existing at the statement of financial position date. Future deductible
(b) The carryback and carryforward provisions will affect the amounts to be reported for the resulting
deferred tax asset and deferred tax liability.
In computing deferred tax account balances to be reported at a statement of financial position
CA 19.6 (Continued)
For future taxable amounts:
1. If taxable income is expected in the year that a future taxable amount is scheduled, use the
enacted rate for that future year to calculate the related deferred tax liability.
For future deductible amounts:
1. If taxable income is expected in the year that a future deductible amount is scheduled, use
the enacted rate for that future year to calculate the related deferred tax asset.
CA 19.7
(a) To realize a sizable deferred tax liability, Acme must have used an accelerated depreciation
method for tax purposes while using straight-line depreciation for its financial statements. Once
(b) The deferral of income taxes means that due to temporary differences caused by the difference
in financial accounting principles and tax laws, a company will be able to defer paying its income
(c) The primary stakeholders who could be harmed by Acme’s income tax practice are the federal
government, which receives fewer taxes as a result of this practice. Ultimately, other taxpayers
have to pay more. In addition, if replacement plant assets are very costly to acquire, positive cash flow
is reduced. Though the impact should not be great, investors and creditors are affected negatively.
FINANCIAL REPORTING PROBLEM
(a) 1. Per M&S’s 2016 income statement:
“Total income tax expense ……………………….. £84.4 million”
2. Per M&S’s 2 April, 2016 statement of
financial position:
(b) M&S’s effective tax rates per note 7:
2016: (17.3%), 2015: (19.7%)
(c) Income tax expense per note 7:
Current ………………………………………………………….. £117.9
Deferred Tax Assets/(Liabilities)
Land and buildings temporary differences ……………………… £ (46.8)
COMPARATIVE ANALYSIS CASE
(a) 2015 provision for income taxes (In Millions):
adidas: Current portion (€ 439)
(b) 2015 income tax payments (In Millions):
adidas € 386
Puma € 38.4
(d)
(In Millions)
adidas
Puma
1.
Gross deferred tax assets
€731
€251.0
Gross deferred tax liabilities
462
95.4
(e) Net operating loss carryforwards at year-end 2015:
adidas discloses (note 34) that it recognizes a deferred tax asset
related to loss carryforwards in the amount of €56 million. However, it
FINANCIAL STATEMENT ANALYSIS CASE
(a) Of the total provision for income taxes (reported in the income
statement) the “current taxes” portion represents the taxes payable in
(b) Future taxable amounts increase taxable income relative to pretax
financial income in the future due to temporary differences existing at
the statement of financial position date. Future deductible amounts
(c) The carryback and carryforward provisions will affect the amounts to
be reported for the resulting deferred tax asset and deferred tax liability.
In computing deferred tax account balances to be reported at a state–
For future taxable amounts:
1. If taxable income is expected in the year that a future taxable
amount is scheduled, use the enacted rate for that future year to
calculate the related deferred tax liability.
FINANCIAL STATEMENT ANALYSIS CASE (Continued)
2. If an NOL is expected in the year that a future taxable amount is
scheduled, use the enacted rate of what would be the prior year
1. If taxable income is expected in the year that a future deductible
2. If an NOL is expected in the year that a future deductible amount is
scheduled, use the enacted rate of what would be the prior year
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
Taxable income for 2019:
Pretax financial income for 2019 ……………………… €500,000
Permanent differences:
498,000
Temporary differences:
Excess gross profit per books
Adler has future taxable amounts arising from temporary differences as
follows:
Year
Future taxable amount
Tax rate
Deferred tax
The €179,200 is a deferred tax liability because the temporary difference
is from future taxable amounts. The total deferred tax liability is
$219,200 ($40,000 + $179,200).
Additional deferred tax liability needed = €219,200 – €40,000 = €179,200
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
ANALYSIS
The €179,200 deferred tax liability would be classified as a non-current
liability. Income taxes payable would be classified as a current liability.
The income tax expense portion of the income statement could look as
follows:
Income before income taxes …………………………... €500,000
Income tax expense:
PRINCIPLES
We can use the Conceptual Framework to determine that deferred taxes
RESEARCH CASE
(a) According to IAS 12, paragraph 34, “A deferred tax asset shall be
recognised for the carryforward of unused tax losses and unused tax
balance.
(b) This question relates to the information found in paragraph 36, which
states “An entity considers the following criteria in assessing the
probability that taxable profit will be available against which the
unused tax losses or unused tax credits can be utilised:
(1) whether the entity has sufficient taxable temporary differences
relating to the same taxation authority and the same taxable
(2) whether it is probable that the entity will have taxable profits
before the unused tax losses or unused tax credits expire;
(3) whether the unused tax losses result from identifiable causes
which are unlikely to recur; and
RESEARCH CASE (Continued)
(c) Paragraph 30 discusses tax planning opportunities: “Tax planning
opportunities are actions that the entity would take in order to create
or increase taxable income in a particular period before the expiry of a
tax loss or tax credit carryforward. For example, in some jurisdictions,
taxable profit may be created or increased by:
(1) electing to have interest income taxed on either a received or
receivable basis;
(2) deferring the claim for certain deductions from taxable profit;
(3) selling, and perhaps leasing back, assets that have appreciated
GAAP CONCEPTS and APPLICATION
GAAP 19.1 Both IFRS and U.S. GAAP use the asset and liability approach for
recording deferred tax assets and liabilities. In general, the
differences between IFRS and U.S. GAAP involve limited differences
in the exceptions to the asset-liability approach, some minor
differences in the recognition, measurement and disclosure criteria,
and differences in implementation guidance. The classification of
deferred taxes under GAAP and IFRS is always non-current.
Following are some key elements for comparison.
• Under IFRS, an affirmative judgment approach is used by which a
deferred tax asset is recognized up to the amount that is probable
• IFRS uses the enacted tax rate or substantially enacted tax rate
(Substantially enacted means virtually certain). For U.S. GAAP,
the enacted tax rate must be used.
• The tax effects related to certain items are reported in equity
under IFRS. That is not the case under U.S. GAAP, which charges
or credits the tax effects to income.
GAAP CONCEPTS and APPLICATION (Continued)
GAAP19.2 The IASB and the FASB have been working to address some of
the differences in the accounting for income taxes. Some of the
issues under discussion are the term “probable” under IFRS for
recognition of a deferred tax asset, which might be interpreted to
mean “more likely than not”. If changed, the reporting for
impairments of deferred tax assets will be essentially the same
between U.S. GAAP and IFRS. In addition, the IASB is considering
adoption of the classification approach used in U.S. GAAP for