Accounting for Income Taxes Slides

7/21/2019 Accounting for Income Taxes Slides

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Accounting for in



Academic Resource Center

Accounting for income taxes

Typical coverage of US GAAP

► General

►

Temporary differences:► General

► Deferred tax liabilities

► Deferred tax assets

► Tax rate considerations

► Permanent differences

► Net operating losses

► ncertain tax positions

► ndistributed profits of foreign subsidiaries

► !inancial statement prese

► Disclosure





Executive summary

► Despite t#e similar approac#es to accounting for taxation under $!R% and % Gtaxation is one of t#e most common areas '#ere differences arise( T#e reason

proportion of transactions recogni)ed in eit#er t#e statement of income or bala#a*e conse+uential effects on deferred taxes(

► % GAAP re+uires a t'o,step approac# for deferred tax assets t#at in*ol*es fit#e full asset and t#en reducing t#e asset to t#e extent t#at it is more li-ely t#andeferred tax assets 'ill not be reali)ed( T#e *aluation allo'ance account is use$!R% re+uires a one,step approac# t#at pro*ides for recognition of t#e deferredonly to t#e extent it is probable t#at t#ey 'ill be reali)ed( Alt#oug# t#ere is no *allo'ance account used under $!R%& t#ere s#ould not be any differences in t#eunder % GAAP *ersus $!R%(

► % GAAP contains extensi*e guidance on accounting for uncertain tax position A%C ./0,10( $!R% does not currently include specific guidance on t#is issue(





Executive summary

► ot# $!R% and % GAAP re+uire a numerical reconciliation to explain t#e relatbet'een tax expense 3income4 and pretax accounting profit in t#e footnote disc

5o'e*er& t#ere are differences regarding t#e particular tax rate or rates to be upreparing t#at reconciliation( % GAAP re+uires t#at t#e domestic federal statuused as t#e starting point '#ereas $!R% allo's t#is approac# and also allo's t#at aggregates domestic rates in *arious 6urisdictions to be used(

► $!R% classifies deferred tax assets and liabilities as noncurrent in a classified b'#ile % GAAP classifies t#ese items based on t#e classification of t#e relatedliability& or for tax losses and credit carryfor'ards& based on t#e expected timin$!R% offsets deferred tax assets and liabilities '#en specific conditions are me'#en an entity #as a legally enforceable rig#t to offset and '#en t#e taxes are same taxing aut#ority for t#e same taxable entity( % GAAP offsets t#ese balareports t#em net by current and noncurrent classification(


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Primary pronouncements

US GAAP► A%C./0& Income Taxes

IFRS► $A% 12& Income Taxes

► $A% ".& Provisions, Contingen

Contingent Assets




Progress on convergence

► T#e $A% released an 9xposure Draft 39D4 of an $!R% to replace $A% 12 in a'as initially begun as a con*ergence pro6ect( 5o'e*er& t#e oard #as no' deperform a fundamental re*ie' of accounting for income taxes in t#e future( T#

c#anged t#e pro6ect ob6ecti*e to resol*e problems in practice under $A% 12(► <ne of t#e primary areas t#at t#ey 'ill address is uncertain tax positions( 5o'

not do t#is until t#e re*ision of $A% ".& Provisions, Contingent Liabilities

and Contingent Assets is finali)ed( An 9D for a re*ised $A% ". 'asreleased in =anuary 2010 and t#e comment period ended in ay 2010(Discussion on t#is pro6ect 'ill not be resumed until after =une 2011(

►$n December 2010& t#e $A% issued Deferred Tax: Recovery of

Underlying Assets 3amendments to $A% 124 concerning t#e determinationof deferred tax on in*estment property measured at fair *alue( T#eamendments are to pro*ide practical solutions for 6urisdictions '#ereentities currently find it difficult and sub6ecti*e to determine t#e expectedmanner of reco*ery for in*estment property t#at is measured using t#efair *alue model in $A% /0& Investment Property




General

Ta-es an asset,liability approac# to accountingfor income taxes and t#us records deferred taxassets and liabilities(

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IFRSUS GAAP

Despite t#e similar approac#es to accounting for taxation under % GAAP and $!accounting for income taxes is one of t#e most common areas '#ere differences% GAAP and $!R%( T#e reason is t#at a #ig# proportion of business transaction#a*e anyt#ing directly to do 'it# income taxes 'ill nonet#eless #a*e conse+uentt#e accounting for income taxes(




Temporary differencesGeneral

A deferred tax liability or asset generally s#ould berecogni)ed for t#e future tax effects of all temporarydifferences and carryfor'ards(

Deferred taxes are calculated using t#e asset orliability approac#& '#ic# is intended to recogni)e& in

t#e balance s#eet& t#e future tax conse+uences ofe*ents t#at #a*e been eit#er recogni)ed in t#efinancial statements or t#e tax return(

A temporary difference is t#e difference bet'een t#eboo- and tax basis of an asset or liability multipliedby t#e appropriate tax rate(

IFRSUS GAAP

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Temporary differencesGeneral

Deferred taxes are measured on anundiscounted basis( %imi

IFRSUS GAAP




Temporary differencesDeferred tax liabilities

A deferred tax liability is recorded if t#e boo-basis of t#e underlying asset 3liability4 is greater3less4 t#an t#e tax basis of t#e underlying asset3liability4(

Precludes recognition of a deferred tax liabilityfor t#e excess of t#e boo- basis o*er t#e taxbasis of good'ill if it arises at t#e initialrecognition of good'ill(

Allo's t#e recognition of a deferred tax liabilitysubse+uently if t#e good'ill is tax deductible(

IFRSUS GAAP

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Temporary differencesDeferred tax assets

A deferred tax asset is recorded if t#e boo-basis of t#e underlying asset 3liability4 is less3greater4 t#an t#e tax basis of t#e underlyingasset 3liability4(

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IFRSUS GAAP




Temporary differencesDeferred tax assets

IFRS► Re+uires a one,step approac#

recognition of t#e deferred tax t#e extent it is probable t#at t#reali)ed(

► A difference s#ould not result iamount of net deferred tax asssince similar 6udgment s#ould bot# standards in t#e determinnet deferred tax assets s#ouldt#eir amount(

► ?Probable@ is not defined in t#estandard( Note t#at it is defineli-eli#ood greater t#an 70(

US GAAP► Re+uires a t'o,step approac# for deferred tax

assets(

► !irst& deferred taxes s#ould be recogni)ed in fullfor all temporary differences bet'een t#e boo-and tax basis of assets and liabilities(

► %econd& any net amount of a deferred tax asset

is assessed to determine '#et#er it s#ould bereduced by a *aluation allo'ance to t#e extent itis Bmore li-ely t#an notB t#at t#e deferred taxasset 'ill not be reali)ed(

?ore li-ely t#an not@ is defined as a li-eli#ood ofmore t#an 70(





9xample 1

During t#e fiscal year ended December "1& 2010& R Corporation 3R4 experienced

loss of E/70&000( %ince R #as experienced losses in t#e last se*eral years& it cannooperating loss carrybac-( 5o'e*er& since R #as entered into some ne' profitable cmanagement of R expects t#at it is more t#an 70 li-ely t#at t#ey 'ill only be able toof t#e net operating loss to offset against future taxable income( T#e tax rate for R i

Valuation alloance example

► %#o' t#e 6ournal entries for % GAAP and $!R%(





9xample 1 solution:

% GAAP:

Deferred tax asset E1>0&000

$ncome tax benefit E1>0&000

$ncome tax benefit E120&000

Faluation allo'ance E120&000

$!R%:

Deferred tax asset E80&000

$ncome tax benefit E80&000

Valuation alloance example





Temporary differencesTax rate considerations

Deferred tax liabilities and assets are measuredusing t#e applicable tax rate(

IFRSUS GAAP

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Academic Resource Center Accounting for income taxes

Temporary differencesTax rate considerations

IFRS► T#e enacted or Bsubstanti*e

tax rates and tax la's are ucurrent taxes& t#e appropriadetermined considering '#is to be reco*ered or paid( taxes& t#e rate is determine

'#en t#e asset or liability isbe reali)ed or settled(► T#e interpretation of substanti*ely

country to country( To #elp ma-e t#$A% #as publis#ed guidelines t#atime '#en a tax la' c#ange is submany of t#e 6urisdictions t#at apply

US GAAP► T#e enacted tax rate and tax la' are

applicable '#en measuring current anddeferred taxes(




9xample 2

R oo-stores 3R4 operates in t#ree countries in addition to t#e nited %tates( T#e follo'ingRs taxable income and boo- income in t#ese countries for t#e year ended December "1& 201also included in t#e table4( All differences bet'een boo- and taxable income are temporary diffe

from assets and liabilities t#at are classified as current( Note t#at t#e substanti*ely enacted tax retroacti*e pro*ision t#at 'ill apply to t#e current year tax liability(

Enacted versus su!stantively enacted tax rates ex

► Prepare t#e 6ournal entry under bot# % GAAP and $!R% to record Rsincome tax expense and liabilities(




9xample 2 % GAAP solution:

$ncome tax expense E;2.&700

Current tax liability E;1.&700

Deferred tax liability H current 10&000

T#e current tax liability is t#e taxable income multiplied by t#e enacted tax rates(

T#e deferred tax asset or liability is t#e temporary difference multiplied by t#e enacted tax rate(

T#e deferred tax liability is presented net and is classified as current as t#e assets and liabilities for '#ic# t#e temare classified as current(





9xample 2 $!R% solution:

$ncome tax expense E;"2&700

Deferred tax asset H non,current /0&000

Current tax liability E;1.&700

Deferred tax liability H non,current 77&000

T#e current tax liability is t#e taxable income multiplied by t#e enacted tax rates(

T#e deferred tax asset or liability is t#e temporary difference multiplied by t#e substanti*ely enacted tax rate(

T#e total of t#e deferred tax assets 3E1.&700 I E22&700 J E/0&0004 and t#e total of t#e deferred tax liabilities 3E10E77&0004 are presented 3no rig#t of offset and differing tax 6urisdictions4 and classified as a non,current (





Permanent differences

$f an item is included in t#e computation oftaxable income but it is ne*er included in boo-income& or if it is included in t#e computation ofboo- income but ne*er in taxable income& t#enit gi*es rise to a permanent difference(

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IFRSUS GAAP




"et operating losses

An asset 3tax recei*able or deferred tax asset4and a tax benefit are recogni)ed in t#e periodt#at a company experiences a net operatingloss t#at it 'ill carry bac- or carry for'ard(

$n t#e case of a deferred tax asset recogni)edin con6unction 'it# a net operating losscarrybac-& t#e asset needs to be measuredand& t#us& mig#t be reduced to )ero if no futurebenefit is expected(

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IFRSUS GAAP

U i i i





Uncertain tax positions

Tax contingencies are reported as a liability on t#e balance

s#eet( %imi

IFRSUS GAAP

ot# % GAAP and $!R% report tax contingencies as aliability on t#e balance s#eet( A contingent liability is createdfor an unrecogni)ed tax benefit because it represents anenterprises potential future obligation to t#e taxing aut#ority

for a tax position t#at 'as ta-en( An entity t#at presents aclassified statement of financial position classifies a liabilityassociated 'it# an unrecogni)ed tax benefit as a currentliability& to t#e extent t#e enterprise anticipates payment 3orreceipt4 of cas# 'it#in one year or t#e operating cycle& iflonger( T#e liability for unrecogni)ed tax benefits s#ould not

be combined 'it# deferred tax liabilities or assets(

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U t i t iti






IFRS

► Does not address uncertain ta

► nder $A% 12& tax assets and measured at t#e amount expepractice& t#is fre+uently resultsprinciples in $A% ".& Provision

Liabilities and Contingent Asse

►

$A% 12 clarifies t#at& '#ile $A%excludes income taxes from itsprinciples may be rele*ant to tcontingent assets and contingeis not intended to imply t#at sut#e scope of $A% ". because& assets and liabilities are a meacurrent tax(

US GAAP

► A%C ./0,10 pro*ides extensi*e guidance on

accounting for uncertain tax positions(

► A t'o,step approac# to uncertain tax positions H firstis t#e decision '#et#er to recogni)e and second ist#e determination of t#e measurement(

► A benefit is recogni)ed '#en it is more li-ely t#an

not to be sustained based on t#e tec#nical merits oft#e position( T#e amount of t#e benefit to berecogni)ed is based on t#e largest amount of taxbenefit t#at is greater t#an 70 li-ely of beingreali)ed upon ultimate settlement( Detection ris- isprecluded from being considered in t#e analysis byt#e assumption t#at t#e regulators #a*e -no'ledgeof all rele*ant facts and information(

U t i t iti






IFRS

► Does not address uncertain tax positions 3co

► $A% ". re+uires t#at a pro*ision s#ould be reco

► An entity #as a present obligation as a res

► $t is probable t#at an outflo' of resources 'settle t#e obligationK and a reliable estimatt#e amount of t#e obligation(

► $f t#ese conditions are not met& no pro*ision s#recogni)ed( !or a position already ta-en on a rt#en is '#et#er t#e entity 'ill be re+uired to pain t#e future(

US GAAP

U t i t iti






IFRS

► Does not address uncertain tax positions

► Practice *aries regarding consideration of

► $!R% guidance for recognition and measuremixed practice& muc# li-e t#e situation unde!$N />& no' found in A%C ./0( %ome entitieprinciples in $A% ". and some may not(

US GAAP

Uncertain ta positions e ample





9xample "

Nic#olas as-etballs nlimited 3N4 is a company 'it# a dual listing in5ong ong and t#e nited %tates& and t#us is re+uired to prepare its

financial reports under $!R% and % GAAP& respecti*ely( N is applyingt#e standards related to uncertain tax positions found in A%C ./0,10 for t#esecond year 3i(e(& t#ere are no transitional issues to consider4 and isdetermining '#ic# amounts s#ould be recogni)ed for income tax purposesunder bot# % GAAP and $!R%( N #as ta-en an uncertain tax positionon its return( !acts for t#is transaction are as follo's:

Uncertain tax positions example

► T#e tax position t#at N #as ta-en results in a benefit of E100(

► T#ere is limited information about #o' a taxing aut#ority 'ill *ie' t#eposition(

► After considering t#e rele*ant information& management is confidentt#at t#e tec#nical merits of t#e tax position exceed t#e more,li-ely,t#an,not t#res#old(

► anagement also belie*es& if examined& it is li-ely it 'ould settle forless t#an t#e full amount of t#e entire position(






9xample " 3continued4:

anagement belie*es t#at t#e amounts and t#e probabilities of t#e possible estimated outcomes are as fol


► L#at tax benefit and '#at tax liability 'ould N recogni)e in its financial statements rtransaction under % GAAP and $!R%M 9xplain your ans'ers(

Possi!le estimated outcome

#i$e$% t&e amount t&at ill !e alloed as a deduction' Individual pro!a!ility

of occurring #(' po

E100 27

E >0 "7

E 80 27

E 70 10

E /0 7






9xample " solution:

% GAAP:

N 'ould measure t#e associated tax benefit at t#e largest amount of benefit t#70 li-ely to be reali)ed upon ultimate settlement( T#e entity 'ould recogni)e a tabecause t#is is t#e largest benefit 'it# a cumulati*e probability of greater t#an 70E20 'ould remain a liability(







9xample " solution 3continued4:

Current $!R%:

nder t#e current $A% 12& t#ere is no explicit guidance on t#e met#od to use in determ

to be recogni)ed( $A% 12& paragrap# /8 re+uires N to recogni)e t#e amount expectGi*en t#at t#e expectation of management is t#at t#e position 'ill be supported but t#aless t#an t#e full amount& it is li-ely t#at N 'ould recogni)e some amount of benefitand some amount of liability less t#an E100( ut it is unclear '#at actual amounts 'o

Additional considerations:

<ne of t#e -ey differences bet'een % GAAP and $!R% is detection ris- by t#e tax au

10,27,. re+uires a company to assume t#at t#e tax position 'ill be disco*ered by t#e tt#at #a*e access to all t#e rele*ant facts and information( T#is re+uirement exists e*enbelie*es examination by t#e taxing aut#orities is remote( Detection ris- is not specific$!R%( $t is a matter of management 6udgment and its expectation of detection of t#e tataxing aut#orities(


Undistri!uted profits in foreign su!sidiaries






ndistributed earnings of foreign subsidiaries gi*erise to a temporary difference( 5o'e*er& anexception is made to t#is general rule if t#e earningsare rein*ested in t#e subsidiary(

A%C ./0,"0,27,1. states:?T#e presumption t#at all undistributed earnings 'ill be

transferred to t#e parent company may be o*ercome&and no income taxes s#ould be accrued by t#e parentcompany& if sufficient e*idence s#o's t#at t#esubsidiary #as in*ested or 'ill in*est t#e undistributedearnings indefinitely or t#at t#e earnings 'ill be remitted

in a tax,free li+uidation(@

%imilar H $A% 12& pstates: ?An entity s#all recogliability for all taxable tassociated 'it# in*estbranc#es and associa

6oint *entures& except

bot# of t#e follo'ing cosatisfied: 3a4 t#e paren*enturer is able to conre*ersal of t#e tempora3b4 it is probable t#at t#difference 'ill not re*eforeseeable future(@

IFRSUS GAAP






IFRS

► ndistributed earnings musfor t#e ?foreseeable future@(

► ?!oreseeable future@ is typicinterpreted as a muc# s#ortsuc# as one year(

US GAAP

► ndistributed earnings must be rein*estedin t#e foreign subsidiary ?indefinitely@(

► ?$ndefinite@ is typically interpreted aspermanent(


L#ile t#e general exception to t#e rule is t#e same for % GAAP and $!R%& t#e i

t#e t'o standards typically differ in practice:






9xample /

!<R%& $nc( is a fully,o'ned foreign subsidiary of %PAR Company( !<R% operates

'it# a tax rate of 20( %PAR operates in a 6urisdiction 'it# a tax rate of "7( !<R% #year of E100 million and does not distribute t#is to %PAR( %PAR is able to control t#e timdistribution and it is probable t#at !<R% 'ill not ma-e a distribution to %PAR in t#e ne


%PAR and !<R% do not #a*e e*idence t#at 'ouldindicate t#at t#e earnings 'ill not be returned to %PARafter 7 years( T#ey 'ould li-e to report as little taxexpense as possible(

►Pro*ide t#e 6ournal entries under bot# % GAAP and$!R%(






9xample / solution:

% GAAP:

%PAR cannot ta-e ad*antage of t#e exception to t#e general re+uirement t#at foreearnings create a temporary difference( T#us& t#e tax,related 6ournal entry 'ould b

Tax expense E"7&000&000

Tax payable E20&000&000

Deferred tax liability 17&000&000

$!R%:%PAR can ta-e ad*antage of t#e exception since t#ey are rein*esting t#e earnings?foreseeable future(@ T#us& t#e tax,related 6ournal entry 'ould be:

Tax expense E20&000&000

Tax payable E20&000&000


Financial statement presentation






T#e total income tax expense reported on t#estatement of income is t#e sum of t#e current taxexpense and t#e deferred tax expense( ot# t#ecurrent and deferred tax expenses do not include anytax expense t#at is recogni)ed directly in e+uity(

Certain items may be accounted for directly in e+uity

instead of going t#roug# t#e statement of income3e(g(& excess tax benefits arising from stoc-compensation arrangements& a*ailable,for,salein*estments and certain transactions 'it#s#are#olders4( T#e tax effects of t#ose items also arerecogni)ed directly in e+uity in t#e period t#ey arise(

IFRSUS GAAP

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IFRS

► T#is effect is recogni)ed dire+uity 3t#is is referred to astracing4(

US GAAP

► T#e effect of tax rate c#anges andc#anges in t#e assessment ofreco*erability of deferred tax assets onitems t#at 'ere pre*iously recogni)ed ine+uity is recogni)ed t#roug# net income(

*ac+ard tracing example





9xample 7

ad $n*estments $ncorporated 3$$4 #olds e+uity in*estments at a cost basis

of E270&000( $t accounts for t#ese in*estments as a*ailable,for,salesecurities( At t#e end of 2010& t#e mar-et *alue of t#ese in*estments #asdeclined to E220&000( Conse+uently& $$ reports an unreali)ed loss forfinancial reporting purposes of E"0&000 t#roug# <C$ '#ic# creates atemporary tax difference(

As of December "1& 2010& $$ determines t#at it is more li-ely t#an not t#at it'ill be able to deduct t#ese capital losses for tax purposes if t#ey arereali)ed( As of December "1& 2011& $$ c#anges its assessment as to'#et#er it can utili)e t#is deduction and determines t#at it is more li-ely t#annot t#at it 'ill not be able to ta-e t#e deduction for t#e capital loss( $$s taxrate is /0(


► %#o' t#e necessary 6ournal entries for 2010 and 2011 under bot# %GAAP and $!R%(






9xample 7 solution:

% GAAP:

T#e entry for 2010 is as follo's:

nreali)ed loss H <C$ E"0&000

Allo'ance to reduce A!% securities to mar-et E"0&000


$ncome tax expense H <C$ E12&000


$ncome tax expense E12&000

Faluation allo'ance E12&000







9xample 7 solution 3continued4:

$!R%:


nreali)ed loss H <C$ E"0&000

Allo'ance to reduce A!% securities to mar-et E"0&000






g p






pClassification and netting of deferred tax assets and liabilities

IFRS

► $n a classified balance s#eeassets and liabilities are onnon,current(

► Deferred tax assets and lia'#en specific conditions arincludes '#en an entity #asenforceable rig#t to offset ataxes are le*ied by t#e samaut#ority for t#e same taxab

US GAAP

► $n a classified balance s#eet& deferred taxassets and liabilities are generallyclassified based on t#e classification of t#erelated asset or liability& or for tax lossesand credit carryfor'ards& based on t#eexpected timing of reali)ation(

► T#e net deferred current tax amount isreported on t#e face of t#e balance s#eetand t#e net deferred non,current taxamount is reported on t#e face of t#ebalance s#eet(






p

)lassification and netting of deferred tax assets an





glia!ilities example

!!C #as t#e legal rig#t of offset for t#e deferred tax assets and liabilities applicableto t#e % taxing 6urisdiction( ►Pro*ide t#e financial presentation for t#e deferred tax assets and liabilities for !!$under % GAAP and $!R%(

9xample 8!un !lo'ers Consolidated 3!!C4& #as t#e follo'ing deferred tax assets and liabilities:






9xample 8 % GAAP solution:

nder % GAAP& deferred tax assets and liabilities are generally classified based on t#t#e related asset or liability& or for tax losses and credit carryfor'ards& based on t#e expreali)ation( Additionally& t#e balances determined as current are offset and t#e balancenon,current are offset( T#erefore& for !!C& a E7&000 current deferred tax asset is repornon,current deferred tax asset is also reported(

glia!ilities example






9xample 8 $!R% solution:

nder $!R%& deferred tax assets and liabilities are only classified as noncurrent and aspecific conditions are met '#ic# includes '#en an entity #as a legally enforceable rig'#en t#e taxes are le*ied by t#e same taxing aut#ority for t#e same taxable entity( T#E82&000 non,current deferred tax asset is reported and a E27&000 non,current deferre

lia!ilities example

,isclosures





Re+uires disclosure of:

► T#e components of t#e deferred tax liabilities and

deferred tax assets(

► T#e components of tax expense(

► T#e amounts and expiration dates of operating

loss and tax credit carryfor'ards for '#ic# taxbenefits #a*e not been recogni)ed(

► T#e amounts of temporary differences t#at arentrecorded due to t#e permanent rein*estment ofundistributed foreign earnings(

%imi

IFRSUS GAAP

,isclosures





IFRS

► $A% 12& paragrap# >7& states t#at: ?<ften& meaningful rate is t#e domestic rate of tax'#ic# t#e enterprise is domiciled& aggrega

applied for national taxes 'it# t#e rates aplocal taxes '#ic# are computed on a subsle*el of taxable profit 3tax loss4( 5o'e*er& operating in se*eral 6urisdictions& it may bemeaningful to aggregate separate reconci

using t#e domestic rate in eac# indi*idual

US GAAP

► A%C ./0,10,70,12 re+uires use ofBdomestic federal statutory tax ratesBbased on t#e premise t#at t#ose

rates pro*ide t#e most meaningfulinformation for domestic users of anenterprises financial statements( Anaggregation of separatereconciliations using foreign tax ratesis not permitted(

ot# % GAAP and $!R% re+uire a numerical reconciliation to explain t#e relations#ip bet'expense 3income4 and pretax accounting profit( 5o'e*er& t#ere are differences regarding trate or rates to be used for preparing t#at reconciliation(

Rate reconciliation example





9xample 8

R oo-stores 3R4 operates in t'o countries in addition to t#e nited %tates( T#e follo'ing table reports Rstaxable income and t#e applicable tax rate in t#ese countries for t#e year ended December "1& 2010( R does not#a*e any temporary boo-,to,tax differences( $t #as t'o permanent differences:

1( Non,taxable municipal bond interest of E20&000 in t#e nited %tates(

2( Non,deductible expenses of E7&000 in t#e nited %tates(

%ee t#e c#art on t#e follo'ing slide for more information(

► Prepare t#e portion of t#e income tax footnote t#at details t#e ratereconciliation under bot# % GAAP and $!R%( Assume t#at R usesan aggregated statutory rate for $!R% purposes( Also assume t#atR declares t#e earnings from t#e foreign countries to bepermanently rein*ested( T#us& t#ey 'ill record tax expense related toforeign income at t#e lo'er tax rates of 20 and 27(






)ountry Taxa!le income Applica!le tax rate

nited %tates E 1&/70&000 "7

Country t'o 700&000 20

Country t#ree 800&000 27

Total 2&770&000

Permanent differences 17&000

oo- income E2&787&000

9xample 8 3continued4:






9xample 8 solution:

% GAAP:

% federal tax& based on statutory rate E>;.&.70314

unicipal bond interest 3.&0004 324

Non,deductible expenses 1&.70 3"4

!oreign tax rate differential 31"7&0004 3/4

Total income tax expense E.7.&700 374

$!R%:

$ncome tax based on aggregate statutory rateE.82&.70 384

unicipal bond interest 3.&0004 324

Non,deductible expenses 1&.70 3"4

Total income tax expense E.7.&700 374






9xample 8 solution 3continued4:

314 E2&787&000 x "7

324 E20&000 x "7

3"4 E7&000 x "7

3/4 33E700&000 x 320 , "04 H 3E800&000 x 327 , "744

374 3E1&/70&000 x "74 I 3E700&000 x 204 I 3E800&000 x 274

384 33E1&/70&000 I E17&0004 x "74 I 3E700&000 x 204 I 3E800&000 x 274

,isclosures





IFRS

► Re+uires& in certain circumstanof Bt#e nature of t#e e*idenceBrecognition of certain deferred %c#eduling t#e future re*ersalsdifferences and carryfor'ards necessary to de*elop t#e inforto comply 'it# t#at disclosure

► Also re+uires considerable disregarding unrecogni)ed tax bere+uirements are found in $A% >/ t#roug# ;2(

US GAAP

► Does not #a*e t#is re+uirement(

► Re+uires considerable disclosures regardingany unrecogni)ed tax benefits( T#e specificre+uirements *ary from t#ose under $!R%( T#ere+uirements for % GAAP can be found in

paragrap#s 17 and 17A of A%C ./0,10,70(





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Accounting for Income Taxes Slides