FINANCIAL REPORTING PROBLEM (Continued)
Deferred tax assets
Pension and postretirement benefits ……………………………… $ 1,775
Loss and other carryforwards………………………………………… 1,516
Stock-based compensation …………………………………………… 732
Advance Payments ……………………………………………………….. 121
Deferred tax liabilities
Goodwill and other intangible assets ……………………………… $ 9,403
Fixed assets …………………………………………………………………. 1,495
COMPARATIVE ANALYSIS CASE
(a) 2017 provision for income taxes (In Millions):
(b) 2017 income tax payments (In Millions):
Coca-Cola ……………………………………………………………………. $1,904
PepsiCo (Note 13) ………………………………………………………… $1,962
(c) The 2017 U.S. Federal statutory tax rate was 35.0%.
(d)
(In Millions)
Coca-Cola
PepsiCo
1.
Gross deferred tax assets
$3,405
$3,115
Gross deferred tax liabilities
5,095
5,194
(e) At December 31, 2017 Coca-Cola had a $520 million NOL carryforward.
COMPARATIVE ANALYSIS CASE (Continued)
At December 31, 2017 PepsiCo had operating loss carryforwards
totaling $12.6 billion at year-end 2017 and they are being carried
FINANCIAL STATEMENT ANALYSIS CASE
(a) Of the total provision for income taxes (reported in the income
(b) Future taxable amounts increase taxable income relative to pretax
financial income in the future due to temporary differences existing at
(c) The 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 balance
sheet date, the appropriate enacted tax rate is applied to future taxable
For future taxable amounts:
1. If taxable income is expected in the year that a future taxable
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 the future year to which the
For future deductible amounts:
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 the future year to which the
Accounting
Taxable income for 2020:
Pretax financial income …………………………………………………. $500,000
Permanent differences:
Income taxes payable for 2020:
Taxable income …………………………………………………………….. $ 50,000
DeJohn has future taxable amounts arising from temporary differences as
follows:
Future Years
2021
2022
2023
2024
Total
Enacted tax rate
Deferred tax liability (asset)
$ 22,400
Future taxable (deductible)
The $89,600 is a deferred tax liability because the temporary difference is
from future taxable amounts. The deferred tax liability needed is $89,600.
Journal entry:
Analysis
The $89,600d deferred tax liability is classified as noncurrent. Income tax
payable is classified as a current liability.
The income tax expense portion of the income statement would look as
follows:
Income before income taxes ………………………………….
$500,000
Income tax expense:
Deferred ……………………………………………………….
Net income …………………………..……………………………….
DeJohn’s 2020 effective tax rate is 20.92% ($104,600 ÷ $500,000).
Principles
We can use the conceptual framework to determine that deferred taxes
CODIFICATION EXERCISES
CE19.1
Master Glossary
(a) The deferred tax consequences attributable to deductible temporary differences and carryforwards.
A deferred tax asset is measured using the applicable enacted tax rate and provisions of the
enacted tax law. A deferred tax asset is reduced by a valuation allowance if, based on the weight
CE19.2
According to FASB ASC 740-10–30-2 (Income Taxes—Initial Measurement):
The following basic requirements are applied to the measurement of current and deferred income taxes
at the date of the financial statements:
CE19.3
According to FASB ASC 740-10-S99-2 (Income Taxes—SEC Materials):
CE19.4
According to FASB ASC 740-10–25-6 (Income Taxes—Recognition):
An entity shall initially recognize the financial statement effects of a tax position when it is more likely
than not, based on the technical merits, that the position will be sustained upon examination. The term
CODIFICATION RESEARCH CASE
(a) According to FASB ASC 740-10–30-18 (Income Taxes, Overall, Initial
Measurement), future realization of the tax benefit of an existing
(b) According to FASB ASC 740-10–30-18 (Income Taxes, Overall, Initial
Measurement):
The following four possible sources of taxable income may be
available under the tax law to realize a tax benefit for deductible
d. Tax-planning strategies (see paragraph 740-10–30–19) that would, if
necessary, be implemented to, for example:
(1) Accelerate taxable amounts to utilize expiring carryforwards
Evidence available about each of those possible sources of taxable
income will vary for different tax jurisdictions and, possibly, from year
CODIFICATION RESEARCH CASE (Continued)
(c) According to FASB ASC 740-10-30 (Income Taxes, Overall, Initial
Measurement):
30–19 In some circumstances, there are actions (including elections
for tax purposes) that:
a. Are prudent and feasible.
c. Would result in realization of deferred tax assets.
This Subtopic refers to those actions as tax-planning strategies.
An entity shall consider tax-planning strategies in determining
the amount of valuation allowance required. Significant expenses
30–22 Examples (not prerequisites) of positive evidence that might
support a conclusion that a valuation allowance is not needed
when there is negative evidence include, but are not limited to,
the following:
CODIFICATION RESEARCH CASE (Continued)
c. A strong earnings history exclusive of the loss that created
30–23 An entity shall use judgment in considering the relative impact
of negative and positive evidence. The weight given to the poten–
tial effect of negative and positive evidence shall be commensu–
30–24 Future realization of a tax benefit sometimes will be expected for
a portion but not all of a deferred tax asset, and the dividing line
between the two portions may be unclear. In those circum–
IFRS19.1
The accounting for income taxes in IFRS is covered in IAS 12 “Income
IFRS19.2
Both IFRS and GAAP use the asset and liability approach for recording
deferred tax assets and classify deferred taxes as non-current items. In
general, the differences between IFRS and GAAP involve limited
differences in the exceptions to the asset-liability approach, some minor
IFRS19.3
The IASB and the FASB have worked 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,
IFRS19.4
Deferred tax accounts are reported on the statement of financial position
IFRS19.5
Deferred tax assets and deferred tax liabilities are separately recognized
IFRS19.6
Income Tax Expense ………………………………………………. 60,000
IFRS19.7
Deferred Tax Asset ($500,000 X .20) …………………. 100,000
IFRS19.8
IFRS19.9
Non-current liabilities
IFRS19.10
Non-current liabilities
IFRS19.11
(a) Income Tax Expense ………………………………… 217,500
IFRS19.11 (Continued)
Date
Cumulative Future Taxable
(Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
12/31/21
$(500,000)
30%
$(150,000)
Deferred tax asset at the end of 2021 …………………………….. $150,000
(b) The journal entry at the end of 2021:
Income Tax Expense ………………………………………. 30,000
Deferred Tax Asset ………………………………….. 30,000
Note to instructor: Although not requested by the instructions, the pretax
financial income can be computed by completing the following
reconciliation:
IFRS19.12
(a) According to IAS 12, paragraph 34, “A deferred tax asset shall be
IFRS19.12 (Continued)
will help increase the amount recognized in the deferred-tax asset 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 utilized:
(1) whether the entity has sufficient taxable temporary differences
relating to the same taxation authority and the same taxable entity,
(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
IFRS19.12 (Continued)
Where tax planning opportunities advance taxable profit from a later period
IFRS19.13
(a) 1. Per M&S’s 2017 consolidated income statement:
Total income tax expense …………………………. £60.7 million
(b) M&S’s effective tax rates:
2017: (34.4%) 2016: (17.3%)
(c) Income tax expense:
Deferred Tax Liabilities (Assets)
Land and buildings temporary differences …………….. £ 43.3
Capital allowances in excess of depreciation ………… 62.4