Advanced Income Tax Accounting - Including Practical Application Exercises

• Chapter 0 - Overview
• Chapter 1 - Overview of Theoretical Concepts of FASB ASC 740, Income Taxes (SFAS No. 109 and FIN 48)
  • Learning Objectives
  • FASB ASC 740-10 (SFAS No. 109)
    • Objectives and Basic Principles
  • Deductible and Taxable Differences
    • Recognition and Measurement
    • Financial Statement Classification
    • Financial Statement Disclosure
  • FASB ASC 740-10-25 to 60 - Accounting for Uncertainty in Income Taxes - FIN 48, An Interpretation of FASB Statement No. 109
    • Objective and Rationale
    • Scope
    • Initial Recognition
    • Subsequent Recognition and Measurement and Changes in Judgment
    • Measurement
    • Interest and Penalties
    • Classification
    • Uncertain Tax Position Disclosures
  • Uncertain Tax Position Liability versus Deferred Tax Asset or Liability
  • Questions
• Chapter 2 - FASB ASC 740-20 (SFAS No. 109) - Intraperiod Tax Allocation
  • Learning Objectives
  • Introduction
  • Interperiod Tax Allocations versus Intraperiod Tax Allocations
  • Allocation to Continuing Operations
  • Direct Adjustments to Shareholders' Equity
  • Tax Benefit of Operating Loss Carryforward or Carryback
  • Interest and Penalties
  • Intraperiod Tax Allocation under FASB ASC 740-20 (SFAS No. 109) - General Considerations
    • Items Requiring Intraperiod Tax Allocation
    • Total Tax Expense - Intraperiod Tax Allocation
    • Graduated Tax Rates
    • Deferred Tax Expense - Intraperiod Tax Allocation
  • Steps to Allocate Total Tax Expense
    • Examples of Intraperiod Tax Allocation
  • Summary
  • Cases
    • Case 2-1
    • Case 2-2
• Chapter 3 - Application Issues in Applying FASB ASC 740 (SFAS No. 109)
  • Learning Objectives
  • Applicable Tax Rate
  • Average Tax Rate
  • Alternative Minimum Tax Considerations in Selecting the Applicable Tax Rate
  • Scheduling Certain Temporary Differences
    • Offset of Taxable and Deductible Amounts
    • Pattern of Taxable or Deductible Amounts
    • Change in Tax Status
    • Change in Tax Rates
  • Questions and Cases
    • Case 3-1
    • Case 3-2
• Chapter 4 - Applications of FASB ASC 740 (SFAS No. 109) to Recent Pronouncements
  • Learning Objectives
  • Worksheet Adapted to Track Four Deferred Tax Accounts
    • Steps to Complete the Worksheet for FASB ASC 740 (SFAS No. 109)
    • Worksheet for FASB ASC 740 (SFAS No. 109) - Four Deferred Tax Accounts
    • Application of FASB ASC 740 (SFAS No. 109) with Four Deferred Tax Accounts
  • Recent and Commonly Applied SFAS Pronouncements with Deferred Tax Implications
    • Accounting for Asset Retirement Obligations
    • Impairment of Long-Lived Assets
    • Accounting for Costs Associated with Exit or Disposal Activities
    • Inventory Costs
    • Exchanges of Nonmonetary Assets
    • Accounting Changes and Error Corrections
    • Fair Value Measurements
    • Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans
    • Fair Value Option for Financial Assets and Financial Liabilities
  • Questions and Cases
  • Case 4-1
• Chapter 5 - Share-Based Payments FASB ASC 718 [SFAS No. 123(R)]
  • Learning Objectives
  • Accounting for Share-Based Payment
    • Deferred Tax Implications
    • Complexities in Accounting for - Share-Based Payment
    • Issues Not Addressed by FASB ASC 718 [SFAS No. 123(R)]
    • Accounting for Options That are Forfeited or Expire Unused
    • Employee Elections under IRC §83(b)
  • Questions and Cases
    • Case 5-1
    • Case 5-2
• Chapter 6 - IFRS Compared to FASB ASC 740 (SFAS No. 109) and Application for Specialized Issues
  • Learning Objectives
  • IAS and GAAP Convergence Project
    • IFRS Today and Tomorrow
    • Private Companies and IFRS
    • Deliberations Suspended
    • Short-Term Income Tax Convergence Project
    • Summary of Major Decisions Reached to Date
    • SEC Final Rule to Eliminate Reconciliation Requirement for IFRS Financial Statements
  • Regulated Enterprises
  • Leveraged Leases
  • Quasi-Reorganizations
  • Foreign Assets and Liabilities
    • Foreign Nonmonetary Assets - Remeasurement Gain or Loss
    • Reporting for - Remeasurement Gain or Loss
    • Foreign Nonmonetary Assets - Restated for General Price-Level Changes
    • Foreign Nonmonetary Assets - Translation Adjustment Allocation of Income Taxes Directly to Equity
  • Emerging Issues Task Force Consensus Opinions
    • EITF Issue 92-8 (FASB ASC 830-740) - Accounting for the Income Tax Effects under FASB ASC 740 (SFAS No. 109) of - Change in Functional Currency When an Economy Ceases to Be Considered Highly Inflationary
    • EITF Issue No. 93-16 (FASB ASC 830-740-25) - Application of FASB ASC 740 (SFAS No. 109) to Basis Differences within Foreign Subsidiaries That Meet the Indefinite Reversal Criterion of APB Opinion No. 23
    • EITF Issue No. 95-9 (FASB ASC 740-10-15-4)- Accounting for Tax Effects of Dividends in France in Accordance with FASB ASC 740 (SFAS No. 109)
    • EITF Issue No. 95-10 (FASB ASC 740-10-25) - Accounting for Tax Credits Related to Dividend Payments in Accordance with FASB ASC 740 (SFAS No. 109)
    • EITF Issue No. 95-20 (FASB ASC 740-10-25-41) - Measurement in the Consolidated Financial Statements of - Parent of the Tax Effects Related to the Operations of - Foreign Subsidiary That Receives Tax Credits Related to the Dividend Payments
  • Questions
• Chapter 7 - Accounting for Acquired Temporary Differences in Business Combinations and Other Purchase Transactions
  • Learning Objectives
  • Business Combinations and Noncontrolling Interests Statements Issued
    • Business Combinations
  • Intercompany Transfer of Assets Subsequent to Acquisition
    • Temporary Difference Not Recognized
  • Deferred Tax Accounting and Business Combinations
    • Nontaxable Business Combinations
    • Taxable Business Combinations
    • Nontaxable or Taxable Acquisition Business Combinations
  • Tax Deductible Goodwill
  • Operating Loss and Tax Credit Carryforwards for Business Combinations
    • Criteria for Recognition of - Carryforward
    • Subsequent Recognition of Carryforward Benefits
  • Deferred Tax Recognition for Discontinued Subsidiaries
    • Emerging Issue Task Force Consensus Opinion
  • Acquired Temporary Differences for Purchase Transactions Not Accounted for as Business Combinations
  • Cases
    • Case 7-1
    • Case 7-2
    • Case 7-3
    • Case 7-4
    • Case 7-5
    • Case 7-6
• Chapter 8 - Theoretical Concepts and Initial Recognition Criteria of FIN 48
  • Learning Objectives
  • Accounting for Uncertainty in Income Taxes
    • Scope
    • Tax Position
    • FIN 48 Liability versus Deferred Tax Asset or Liability
    • Initial Recognition
    • Equity and Partnership Investments
    • Unit of Account
  • Subsequent Recognition
    • Derecognition
    • Classification
  • Disclosures under FIN 48
    • SEC Disclosures - Issue/Question
    • What Are Companies Disclosing?
    • Uncertain Tax Position (FIN 48) Disclosures Considered Tax Accrual Workpapers
    • Interest and Penalties
    • Transition and Effective Date
    • Deferral of Effective Date for Nonpublic Entities
  • Questions and Cases
    • Case 8-1
    • Case 8-2
    • Case 8-3
  • Appendix
• Chapter 9 - Interim-Period Reporting and State and Local Issues in Applying FASB ASC 740 (SFAS No. 109 and FIN 48)
  • Learning Objectives
  • Interim-Period Reporting Issues
    • Overview
    • Recognition Approach
  • State and Local Income Taxes
    • State Applied vs. Enacted Tax Rates
    • Applicable Tax Rate
    • Definition of an Income Tax
  • Questions
• Chapter 10 - Latest Developments

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Chapter 1 - Overview of Theoretical Concepts of FASB ASC 740, Income Taxes (SFAS No. 109 and FIN 48)

Learning Objectives

• Understand the objectives and basic principles of FASB ASC 740 (SFAS No. 109).

• Understand the concept of taxable and deductible differences.

• Review recognition and measurement of deferred taxes under FASB ASC 740 (SFAS No. 109 and FIN 48).

• Understand financial statement classification.

• Understand accounting for uncertainty in income taxes:

- Objective and scope of FASB ASC 740-10 (FIN 48)
- Tax position - Initial recognition of a tax benefit
- Subsequent recognition and measurement and changes in judgment
- Measurement of a tax benefit
- Interest and penalties that must be recognized
- Classification of uncertain tax position (FIN 48) liabilities
- Disclosures required by FASB ASC 740 (FIN 48)
- Uncertain tax position (FIN 48) liability versus deferred tax asset or liability

FASB ASC 740-10 (SFAS No. 109)

Objectives and Basic Principles

The objectives of this Statement are to

• Recognize the amount of taxes payable or refundable for the current year.
• Recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns.

The basic principles are as follows:

• A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year.

• A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The currently enacted marginal tax rate will be used to estimate the tax effects unless graduated tax rates are a significant factor. If graduated tax rates are a significant factor, then the average tax rate will be used.

• The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.

• The measurement of deferred tax assets is adjusted to the amount that is expected to be realized based on available evidence at the measurement date.

- There are several exceptions to these principles which are not included here.

Deductible and Taxable Differences

The tax consequences of most events affect taxable income for the year that the events are recognized in the financial statements. The tax consequences of some events are deferred and will affect taxable income in future years. Events that have deferred tax consequences give rise to temporary differences.

After all temporary differences have been identified, it becomes necessary to determine if these differences are taxable or deductible temporary differences. A taxable temporary difference will create a deferred tax liability and a deductible temporary difference will create a deferred tax asset. The determination is made by examining the tax consequences of each specific temporary difference on future taxable income versus book income as follows:

• Tax income < book income - If future taxable income will be less than future book income, the difference is a deductible difference.
• Tax income > book income - If the future taxable income will be more than future book income, the difference is a taxable difference.

Some events do not have tax consequences (for example, state and local interest income). Under SFAS No. 96 and APB Opinion No. 11, these were called "permanent" differences. FASB ASC 740-10 (SFAS No. 109) deals only with the events that do have tax consequences and refers to these old "permanent" differences only as events that do not have tax consequences.

Recognition and Measurement

A company should recognize a deferred tax liability or asset for all temporary differences and operating loss and tax credit carryforwards in accordance with the provisions outlined below. The basic adjusting entry would be as follows:

Current tax expense - Tax return
Deferred tax expense - Plug
Deferred tax asset - Calculated
Valuation allowance - Calculated
Deferred tax liability - Calculated
Current taxes payable - Tax return

The balancing entry may also be a credit to deferred tax benefit:

• The deferred tax asset and/or liability balance is computed directly at the end of each accounting period.
• The ending deferred tax account balances are compared to the beginning of the period balances, and the difference is the amount each account must be adjusted to change them to the required balances. The deferred tax expense (DR) or benefit (CR) entry is the net change in the deferred tax account(s) for the year.
• Current income tax expense or benefit for the accounting period is equal to the taxes currently payable.

Financial Statement Classification

In a classified statement of financial position, a company should separate deferred tax liabilities and assets into a current amount and a noncurrent amount. They should be classified

• Related to a Financial Asset or Liability - Deferred tax assets and liabilities should be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting.
• Not Related to a Financial Asset or Liability - A deferred tax asset or liability that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, should be classified according to the expected reversal date of the temporary difference (e.g., contractor accounting and organizational costs).

Financial Statement Disclosure

The components of the net deferred tax liability or asset recognized in a company's statement of financial position should be disclosed as follows:

• The total of all deferred tax liabilities
• The total of all deferred tax assets
• The total valuation allowance recognized for deferred tax assets and the net change to the valuation allowance during the year

Further disclosure requirements will be discussed in a later chapter.

FASB ASC 740-10-25 to 60 - Accounting for Uncertainty in Income Taxes - FIN 48, An Interpretation of FASB Statement No. 109

Objective and Rationale

This interpretation was issued in June of 2006, to clarify the accounting for uncertain tax positions under FASB Statement No. 109. This interpretation provides for consistent criteria in recognition, derecognition, and measurement to enhance comparability.

Scope

The interpretation applies to all income tax positions for which FASB ASC 740 (Statement 109) applies. This refers to a position on a previously filed tax return or a position that is expected to be taken on a future return that is reflected in measurement of the current or deferred taxes. This would also include classification of a transaction, entity, or other position as tax-exempt; a decision not to file a tax return; allocation of income or shifting income between jurisdictions; and exclusion of income from a return or the characterization of reported income.

Initial Recognition

The Board has adopted the Asset Approach to the initial recognition process in a two-step process with a recognition threshold and then a step to measure the benefit. A tax benefit is recognized when it is more likely than not of being sustained on audit based on the merits of the position. The second step is to measure the appropriate amount of the benefit to be recognized based on a best-estimate measurement of the maximum amount which is more likely than not to be realized.

The recognition of a tax benefit is required in the first interim period in which one of the following events occurs: (1) the more-likely-than-not recognition threshold is subsequently met; (2) the tax matter is effectively settled favorably; (3) the applicable statutes of limitations have expired.

This process would require the presumption that the tax position would be evaluated during an audit and the possibility of an offset or aggregation with other positions should not be considered. Individual tax positions that fail to meet the more-likely-than-not recognition criteria will generally result in either (a) a reduction in a deferred tax asset or increase in deferred tax liability or (b) an increase in the liability for income taxes payable or reduction of an income tax refund receivable. It could also be a combination of both of these. The classification of the deferred liability as either current or noncurrent would be based on the one-year cycle or operating cycle criterion that is used for classifying other liabilities.

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