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Embed code for: Income Taxes IAS 12
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Income Taxes (IAS 12)
During the ordinary course of business, taxes are paid to tax authorities such as the federal government, state agencies, and local institutions. An analyst must recognise that “income tax expense” in the income statement in different from “income tax payable” on the tax return. In addition, “financial income” on the income statement differs from the “taxable income” on the tax returns. These differences arise mainly because the method used for recording certain transactions e.g. such as method of depreciation and treatment of period rents depends on the time frame considered, which is dictated by IFRS for financial statements and by tax regulators i.e. the federal or state government for the tax returns.
Because of the timing differences, future tax liability (deferred tax liabilities) and future tax benefit (deferred tax assets) are incurred and must be accounted for appropriately in the financial statements. The recording of these calculations affects the analysis of the financial statements.
Example of Timing Differences and the Effect of Deferred Tax Asset/Liability
Choice of depreciation method: example of deferred tax liability
Straight line method, $100 per month of depreciation expense
Double-declining method (accelerated method),$ 250 per month of depreciation expense
Current taxable income would be $250 lower. In the future, however, tax liability would be incurred. Because accelerated depreciation method leads to deferral of taxes, the taxes on the income reported in financial statements will generally be much greater than the actual tax paid. Deferred tax liability is recorded.
Prepaid rent for $200 for example deferred tax assets
No entry in the income statement; balance sheet entry as a prepaid asset
$200 is included in the taxable income.
Because of $200 taxable income, current income tax would be higher this period. In the future, however, tax benefit (asset) would be incurred. The corporation’s earnings in the future will be greater; the firm is given credit for the deferred taxes. Deferred tax asset is recorded.
Installment sales of $200 for example deferred tax liability
$200 is recognised as income
$200 is not included in the taxable income
Because financial income is $200 higher, income tax expense is higher. However, future tax liability would be incurred. Deferred tax liability is recorded.
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