Income Tax Accounting
Income Tax Accounting
According to IAS 12, deferred tax asset is used to describe an asset that will minimize the amount of tax that a firm wishes to pay in a future accounting period. In the future, it can be used as a write off element when the next tax period is projected to produce increased earnings. The IAS 12 offers that the difference in tax bases for an asset and deductible temporary difference is what creates a deferred tax asset. It implies that the future cash flows are significant. The taxes are usually plowed back into the business as tax relief and the payment in excess is taken as the company’s asset (Shackelford, Slemrod, & Sallee, 2011).
For accounting purposes, it is important to note that the temporary difference may result in the difference in timing as to when the tax is paid, and tax relief is expected to recognize a deferred tax asset rather than tax liability. Hence, deferred tax asset is derived when the temporary difference is negative (Whittington, 2014). The GAAP disclosures require that deferred tax assets are to classify as either current or non-current assets in the statement of financial position. Here, a deferred tax asset is recognized while addressing the classification of a particular primary item that gave rise to tax asset. And where the deferred tax asset does not correlate to a current or non-current asset, the GAAP proposes an estimation of when the deferred tax will be regained (FASB, 2009). On the other hand, IFRS holds that the deferred tax assets be classified as a non-current asset.
Deferred Tax Liability
The FAS 109 principle defines deferred tax liability as an item in the balance sheet that is affected by the temporary difference between the expected and the already enacted tax rate for the current year (FASB, 2009). The tax liability is recognized during the year, hence making the deferred position suitable. In simple terms, the difference that rests between the book value and that of the tax base of either an asset or liability promotes the development of the deferred tax liability for some future period (Whittington, 2014). Because of the difference in taxable income and the earnings before deducting taxes, the deferred tax liability may find that the company will be required to pay more taxes in the near futures as a result of the events that arose during the existing accounting period (Shackelford, Slemrod, & Sallee, 2011). The IAS 12 (FASB, 2009) principle further proposes that the deferred tax liability ought to be recognized as a temporary difference that is taxable. The net difference of the deferred tax liability is calculated and deducted in the income statement which is comprehensive and where the balance is ascertained in the financial position document. Just like in the accounting standards disclosure for deferred tax asset, the current GAAP offers that, deferred tax liability be recognized as either a current or non-current liability on financial statement while identifying the particular item that constituted the deferred tax liability (Shackelford, Slemrod, & Sallee, 2011). Similarly, IFRS offers a more practical outlook in that it requires that deferred tax liabilities be recognized as a non-current liability on the financial position statement.
Based on the above discussion, IAS 12 proposes that the calculation of both deferred tax liabilities and assets are to be calculated while focusing on the tax rates which are to be applied when a tax asset is ascertained, and the tax liability is paid. Thus deferred tax assets and liabilities are discounted for the determination of the time value of money that may be steady with the way in which liabilities are to be measured (Whittington, 2014). The principle also recognizes deferred tax by considering timing differences concerning the difference that exists between the carrying values and the tax liabilities and assets. As a result, it promotes consistency with the IAS guidelines to facilitate appropriate classifications in the financial statement.
Tax Carrybacks and Tax Carry forwards
Where in a given tax year period a business reports losses in its operating activities due to various business challenges, say, fraud or theft or a weak economy, the revenue authorities will then allow the company to use losses alongside earnings in the past or future periods for tax and accounting purposes. As a result, it contributes to a reduction in the tax liability hence prompting tax refund for all or portion of the company taxes paid in previous years (Shackelford, Slemrod, & Sallee, 2011). According to IAS 12 - income taxes, where the losses incurred exceeds the overall earnings during the year, a net operating loss is created. In this case, the company is allowed to apply for net operating loss to the previous years. This occurrence is referred to as a loss in tax carry back. The prevalent carryback time is two years, although three years carryback period is allowed where the loss is as a result of a robbery. For accounting purposes, the first step is to use the loss against the tax return submitted two years prior (Whittington, 2014). If a portion of the net operating loss is left, it can be used to apply to the former year's tax return. If there are any remainders of the loss, it must be carried forward and used to apply to the impending year's tax return.
Rather than taking the net operating loss back, there is an option of carrying the operating loss forward to future tax return periods. FAS 109 offers, to carry forward net operating loss are usually for up to 20 years. Offsetting the loss of taxable income tends to decrease the total taxable income over the years. After the lapse of twenty years, any remainder of the net operating loss is terminated and cannot be used any more (Whittington, 2014). A company might opt to carry forward net operating loss if no taxes were paid in the previous two years. Alternatively, the company may choose to carry forward net operating loss if incomes expected are likely to increase in the future periods. For accounting purposes, the net operating profit moved forwards is treated as a deferred tax asset on the financial position document (Shackelford, Slemrod, & Sallee, 2011). The GAAP guidelines offer that a company can use the operating loss in the present year and offset it against gains in the past or future years, and the loss can be carried back to three years. The maximum number of years to carry forward tax loss is up to seven years.
References
Financial Accounting Standards Board. (2009). FASB accounting standards codification. Norwalk, Conn: Financial Accounting Standards Board of the Financial Accounting Foundation.
Shackelford, D. A., Slemrod, J., & Sallee, J. M. (2011). Financial reporting, tax, and real decisions: toward a unifying framework. International Tax and Public Finance, 18(4), 461-494.
Whittington, R. (2014). Wiley CPAexcel Exam reviews 2015.
