FRF for SMEs—Deferred Income Tax Method

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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.

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