Accounting for Income Taxes Introduction to Accounting for Taxes

Accounting for Income

Taxes

Introduction to Accounting for Taxes

www.KPMGUniversityConnection.com

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

© 2012 Dr. Barbara M Porco. All rights reserved.

Accounting for Income Taxes www.KPMGUniversityConnection.com

2

Overview

Key Discussion Concepts

• Description of the Learning Module

• Introduction to Accounting for Income Tax

• Accounting for Income Tax Activity

• Debrief of Accounting for Income Tax Activity

• Auditing the Tax Provision

• Conclusion




3

Description: Accounting For Income Tax

This KPMG Learning Module focuses on Accounting for Income

Taxes. The Module is accompanied by a presentation that

includes group and individual activities to support the learning

objectives.

A summary of the key principles underpinning the theory of

accounting for income taxes will be presented coupled with a

group activity highlighting the concepts discussed.

After the group activity, students will asked to calculate a

deferred tax provision independently. The provision will be

debriefed to ensure the Learning Module objectives have been

meet with success!

Darrin D Schultz

I think this title "Description of the Shades of Gray" is from another presnetation - please change.

KPMG

Changed -




4

Deferred Taxes

GAAP accounting for assets, liabilities, revenue and expenses follow different rules than tax law. As a result, INCOME under GAAP is different than INCOME under tax law.

DEATH TAXES

KPMG

Changes made as suggested; however, used income for both tax law and gaap reference for consistancy.

KPMG

Accidently deleted your comment; could not restore it. My apology.




5

Differences between GAAP and Tax Reporting

The differences between GAAP and Tax reporting can be categorized as permanent

differences or temporary differences.

Temporary Differences

Permanent Differences




6






7

What are Permanent Differences?

Differences between GAAP and tax accounting that do not affect the deferred tax calculation.

Permanent tax differences affect only the current tax computation.

Permanent Differences do

NOT cause Deferred Taxes!




8


Permanent differences do not reverse!

They effect GAAP income but never taxable income

Tax Exempt Income

They effect taxable income but never

GAAP incomeFines and Penalties

Darrin D Schultz

Should "financial income" be replaced with "pre-tax financial income" since they affect income taxes.

KPMG

If you're agreeable - I would like to use GAAP instead of pre-tax financial;The term may be complicated this early on in the slide deck. However, if you're prefer, we will use the wording.




9

Sources of Permanent Differences

Some Items recordedin BOOKS

but NEVERon TAX RETURN

Other ItemsNEVER

recorded in BOOKS

but recordedon TAX RETURN

Darrin D Schultz

Should "Books" be replaced with "Pre-tax Financial Income"?

KPMG

Can we use Books and define pre-tax financial income further into the slide deck?




10






11


Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the financial statements.

• This difference will subsequently reverse.

• The future tax effects of these differences create either a deferred tax asset or a deferred tax liability.




12

What causes a DTL?

Expense/Loss

RecordedTax before Book

Deferred Tax Liability (DTL)

Revenue/Gain

RecordedBook before Tax

Deferred Tax Liability (DTL)




13

What causes a DTA?

Expense/Loss

RecordedBook before Tax

Deferred Tax Asset (DTA)

Revenue/Gain

RecordedTax before Book

Deferred Tax Asset (DTA)




14

Journal Entry Components

Income Tax Expense NOW & LATER -amount

reported on IS

Income Tax Payable NOW -current amount due on

Form1120 Tax

DTL and DTA LATER -amount reported on

B/S at current tax rate




15

Two Basic Journal Entries to Record Tax Expense?

Dr. Income Tax Expense

Cr. Income Tax Payable

Cr. Deferred Tax Liability

Dr. Deferred Tax Asset

Dr. Income Tax Expense

Cr. Income Tax Payable

Paying less tax today…

it’s a sunny day!

Paying more tax today…

it’s a rainy day!




16

Financial Statements

Tax Return Form 1120

Income Tax Expense

Income Tax Payable

Fundamental Differences between Financial and Tax Reporting




17

Deferred Tax Example

Let’s try a group activity!

Darrin D Schultz

We think we should loose the name "Klynveld" and go with a generic name. Same on slides 41 and 42 and the handouts.

KPMG

Changed name -




18

Audit Focus of Income Taxes Reporting

Auditors typically perform

substantive procedures to

assess Management’s

Assertions pertaining to Income Taxes

CompletenessExisten

ceAccurac

yValuati

onObligati

ons/Rights

Presentation




19

Common Prepared By Client (PBC) Tax Schedules

The common tax schedules prepared by clients and subject to audit include the following:

• Current tax provision*• Return-to-provision analysis (Tax return true-up)• Deferred tax rollforward**• Tax account rollforward

Remember:

Current Tax Expense* + Deferred Tax Expense** =Total Tax Expense (Income Statement)

Darrin D Schultz

change "most common" to "common"

KPMG

changed -




20

Formula: Calculation of the current tax provision

Book income before taxes+/- Permanent differences+/- Temporary differencesCurrent taxable incomeX Estimated tax rateCurrent income tax expense




21

Balance Sheet Presentation

Combine the CURRENT deferred tax assets and liabilities classified:

• If net result is an asset, report as current asset• If net result is a liability, report as current

liabilityCombine the NON-CURRENT deferred tax assets and liabilities:

• If net result is an asset, report as long-term asset

• If net result is a liability, report as long-term liability




22

SUMMARY: Four Types of Temporary Differences:

REVENUE/GAIN recognized for TAX before GAAP income

• Creates a DEFERRED TAX ASSET

• This represents a future benefit by paying taxes now.

REVENUE/GAIN recognized for GAAP before TAX income

• Creates a DEFERRED TAX LIABILITY

• This represents a future liability by postponing taxes paid.

EXPENSES/LOSS deducted for GAAP income before TAX income

• Creates a DEFERRED TAX ASSET

• This represents a future benefit by paying taxes now.

EXPENSES/LOSS deducted for TAX Income before GAAP income

• Creates a DEFERRED TAX LIABILITY

• This represents a future liability by postponing taxes paid.

www.KPMGUniversityConnection.com

23

Questions

Documents

Accounting for Income Taxes Introduction to Accounting for Taxes