FRF for SMEs—Deferred Income Tax Method

As I mentioned in my last blog, either the taxes payable method or the deferred income taxes method are accounting policy choices under the AICPA’s FRF for SMEs.  This blog contains a summary of the deferred income taxes method which, as you will see, is similar to U.S. GAAP.

Temporary Differences

Differences in the tax bases of assets and liabilities compared to carrying amounts in financial statements give rise to temporary differences, i.e., differences that will reverse and/or be recovered in future periods.  The temporary difference determines the amounts of deferred tax assets or liabilities.

When the carrying amount of an asset is greater than its tax basis, the recovery of the carrying amount for accounting purposes will result in an amount greater than the future amount deductible for tax reporting.  This is a temporary difference that will result in a deferred tax liability.

When the carrying amount of an asset is less than its tax basis, the future deductible amount for tax reporting will be greater.  This temporary difference results in a deferred tax asset that will be recoverable in future periods.

If the carrying amount of a liability is equal to its tax basis, there is not temporary difference.  Amounts related to liabilities that are deductible for future tax reporting have a tax basis of zero and are deductible when settled.  This book/tax difference results in a deferred tax asset.

Future realization of a deferred tax asset, unused tax losses and unused income tax deductions will result in a tax benefit.  The amount recognized as a deferred tax asset should be limited to the amount that is more likely than not to be realized.  The potential realization of a deferred tax asset will be based on an evaluation of the sufficiency of future expected taxable income.  A valuation allowance should be recognized to the extent that it is more likely than not that some or all of the deferred tax asset will not be realized.

Measurement, Presentation and Disclosure

Income tax assets or liabilities should be measured based on enacted income tax rates and income tax laws.  Deferred tax assets and liabilities are not discounted to present value.

Intraperiod allocation of income tax expense or benefit, both current and deferred, should be made to income or loss before discontinued operations, discontinued operations, certain capital and other transactions.

The provision for income tax expense and income tax benefit, current and deferred, included in the determination of net income or loss before discontinued operations should be presented on the face of the statement of operations.

Disclosures should include the choice of method for accounting for income taxes.  Under the taxes payable method, disclosures include:

  • The expense or benefit included in income or loss before discontinued operations.
  • A discussion of differences between current period tax rates or expense and statutory rates.
  • Amount of unused tax loss carryforwards and tax credits.
  • Any portion of tax expense or benefit applying to transactions charged to equity.

These disclosures are necessary for the deferred income tax method alternative:

  • Current and deferred income tax expense or benefit included in net income or loss before discontinued operations.
  • Any portion of tax expense or benefit applying to transaction charged to equity.
  • Any portion of unused tax losses, income tax reductions or deductible temporary differences not recognized as a deferred tax asset.
  • A discussion of differences between current period tax rates or expense and statutory rates.
  • Amount of unused tax loss carryforwards and tax credits.

Watch for my webcasts later this fall covering the FRF for SMEs.

This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

45451

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

78151

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

50503

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

92004
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
22219

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

57738

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

83007

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

26337

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

66313

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

35863
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
105299
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
27580

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

54661
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
29512
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
33906

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

103399

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

35211

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

114489

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

63285

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

41186
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
68369

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

94492

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

55549