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Fundamentals of Tax Accruals |
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Objectives and Principles of Accounting for Income Taxes
As a result of the objectives outlined on the previous page, SFAS 109 establishes rules for reporting the effects of income taxes resulting from an enterprise's activities in the current year (the tax liability). Deferred taxes reflect the future tax consequences of events already recognized in either the financial statements or tax returns or that result from enacted changes in tax laws or rates. Under the liability method, an enterprise recognizes a deferred tax asset or a deferred tax liability for the future income tax effects of the temporary differences.
Deferred Tax Asset
The new rules require a deferred tax asset to be recognized for deductible temporary differences, using the applicable tax rate. In essence, this occurs when the current liability for tax to be paid to the authorities exceeds the current income tax expense of the period. Deferred tax assets can also result from certain net operating loss and tax credit carryforwards.
Valuing these deferred assets requires the identification of the amount, character, and the remaining length of the carryover period for each operating loss. This process can be one of the most complex operations under the new regulations.
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An example of a situation creating a deferred tax asset would be a warranty cost. |
Deferred Tax Liability
A deferred tax liability is recognized for the income tax consequences of future taxable amounts. One example would be a situation in which future taxable income will be greater than future accounting income. Such a situation may occur due to the reversal of temporary differences.
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An example of a deferred tax asset would be tax depreciation in excess of book depreciation. |
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Copyright © 1998 Bizzer Professional Training |
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