FINANCIAL REPORTING PROBLEM
(a) 1. Per P&G’s 2011 income statement:
Income taxes …………………………………………… $ 3,392 million
3. Per P&G’s 2011 statement of cash flows:
In cash flows provided by operating
(b) P&G’s effective tax rates:
2009: (25.9%), 2010: (27.3%), 2011: (22.3%)
FINANCIAL REPORTING PROBLEM (Continued)
Deferred tax assets
Pension and postretirement benefits ……………………………… $ 1,406
Stock-based compensation …………………………………………… 1,284
Loss and other carryforwards………………………………………… 874
Deferred tax liabilities
Goodwill and other intangible assets ……………………………… $12,206
COMPARATIVE ANALYSIS CASE
(a) 2011 provision for income taxes (In Millions):
(b) 2011 income tax payments (In Millions):
Coca-Cola ……………………………………………………………………. $1,612
PepsiCo (Note 14) ………………………………………………………… $2,218
(c) The 2011 U.S. Federal statutory tax rate was 35.0%.
(d)
(In Millions)
Coca-Cola
PepsiCo
1.
Gross deferred tax assets
$5,128
$4,930
Gross deferred tax liabilities
8,512
7,816
(e) Net operating loss carryforwards at year-end 2011:
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 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 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
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.
Accounting
Taxable income for 2014:
Pretax financial income …………………………………………………. $500,000
Income taxes payable for 2014:
Taxable income …………………………………………………………….. $ 50,000
De John has future taxable amounts arising from temporary differences as
follows:
Future Years
2015
2016
2017
2018
Total
Enacted tax rate
Deferred tax liability (asset)
$ 44,800
Future taxable (deductible)
The $179,200 is a deferred tax liability because the temporary difference is
from future taxable amounts. The deferred tax liability needed is $179,200.
Journal entry:
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Analysis
The temporary difference in this case is due to the installment receivable.
Because the installment receivable would likely be classified as current
(despite collection over four subsequent years; see Chapter 18), the $179,200
deferred tax liability would also be classified as current. Income taxes
payable would also be classified as current.
The income tax expense portion of the income statement would look as
follows:
Principles
We can use the conceptual framework to determine that deferred taxes
PROFESSIONAL RESEARCH
(a) According to FASB ASC 740-10–30-18 (Income Taxes, Overall, Initial
(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
temporary differences and carryforwards:
a. Future reversals of existing taxable temporary differences
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
PROFESSIONAL RESEARCH (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.
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:
a. Existing contracts or firm sales backlog that will produce
PROFESSIONAL RESEARCH (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-
PROFESSIONAL SIMULATION
Note: This assignment is available on the Kieso website.
Journal Entries
Income Tax Expense …………………………………………… 40,840
Calculation of Deferred Taxes
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Warranty costs
$ (3,000)
40%
$(1,200)
40%
40%
Calculation of Taxable Income
Pretax financial income …………………………………………………. $100,000
Permanent differences
PROFESSIONAL SIMULATION (Continued)
Deferred tax liability at the end of 2014 …………………………... $ 20,000
Financial Statements
Income before income taxes …………………………….. $100,000
Income tax expense
IFRS CONCEPTS AND APPLICATION
IFRS19-1
The accounting for income taxes in IFRS is covered in IAS 12 “Income
Taxes”.
IFRS19-2
Both IFRS and GAAP use the asset and liability approach for recording
• Under IFRS, an affirmative judgment approach is used by which a
deferred tax asset is recognized up to the amount that is probable to
be realized. GAAP uses an impairment approach. In this situation, the
• The tax effects related to certain items are reported in equity under
IFRS. That is not the case under GAAP, which charges or credits the
tax effects to income.
• GAAP requires companies to assess the likelihood of uncertain tax
IFRS19-3
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
IFRS19-4
Deferred tax accounts are reported on the statement of financial position
as assets and liabilities. They should be classified in a net non-current
amount.
IFRS19-5
Deferred tax assets and deferred tax liabilities are separately recognized
IFRS19-6
Income Tax Expense ………………………………………………. 60,000
Deferred Tax Asset ………………………………………….. 60,000
IFRS19-7
Income Tax Refund Receivable ($350,000 X .40) .. 140,000
Benefit Due to Loss Carryback ………………….. 140,000
IFRS19-9
Non-current liabilities
Deferred tax liability ($69,000 – $24,000) …….. $45,000
IFRS19–10
Date
Cumulative Future Taxable
(Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
12/31/15
$(500,000)
40%
$(200,000)
IFRS19-11 (Continued)
Deferred tax asset at the end of 2015 …………………………….. $200,000
(b) The journal entry at the end of 2015:
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)
(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 entity,
which will result in taxable amounts against which the unused tax
(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;
IFRS19-13
(a) 1. Per M&S’s 2012 consolidated income statement:
Total income tax expense …………………………. £168.4 million
2. Per M&S’s 31 March, 2012 statement of financial position:
(b) M&S’s effective tax rates:
2012: (25.6%), 2011: (23.3%)
(c) Income tax expense:
Deferred Tax Assets
Other short-term temporary differences ………………… £ 6.5
Deferred Tax Liabilities
Non-current assets temporary differences …………….. £ 58.2