1. Gabriela H. Schneider, CMA; Grant MacEwan College
INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK
Prepared by
Gabriela H. Schneider, CMA; Grant MacEwan College 2

2. C H A P T E R 19
Income Taxes

3. Learning Objectives
1. Explain the difference between accounting income and taxable income.
2. Explain what a taxable temporary difference is and why a future tax liability is recognized.
3. Explain what a deductible temporary difference is and why a future tax asset is recognized.
4. Differentiate between timing, temporary, and permanent differences.

4. Learning Objectives
5. Prepare analyses and related journal entries to record income tax expense when there are multiple temporary differences.
6. Explain the effect of various tax rates and tax rate changes on future income tax accounts.
7. Apply accounting procedures for a tax loss carryback.
8. Apply accounting procedures and disclosure requirements for a tax loss carryforward.

5. Learning Objectives
9. Explain why the future income tax asset account is reassessed at the balance sheet date.
10. Explain the need for and be able to apply intraperiod tax allocation.
11. Identify the reporting and disclosure requirements for corporate income taxes.
12. Describe key aspects of the asset-liability (liability) method and identify outstanding issues with this method.

6. Accounting for Income Taxes
Fundamentals of Accounting for Income Taxes
Accounting income and taxable income
Future taxable amounts and future taxes
Future deductible amounts and future taxes
Calculation of taxable income
Tax rate considerations
Accounting for Income Tax Loss Carryover Benefits
Introduction
Loss carryback illustrated
Loss carryforward illustrated
Review of future tax asset
Intraperiod Tax Allocation
Objective
Illustration
Financial Statement Presentation
Balance sheet presentation
Income statement presentation
Other disclosures
Review of Asset-Liability Method
Some conceptual questions
Comprehensive Illustration

7. Permanent vs. Timing Differences
Taxable income is determined by taking the accounting income and adjusting it for permanent and timing differences
CICA Handbook, Section 3645 refers to the accounting for future tax liabilities and future tax assets based on the tax impact of the timing differences

8. Temporary and Permanent Differences
Temporary Differences Example: Tax and book depreciation deductions may be different
These are differences in revenue and expense amounts reported on tax returns and for financial purposes
Over a given period, they reverse
Permanent Differences Example: Interest on municipal obligations is not taxed but is income for accounting purposes
Items included on the financials, but either excluded or not deducted on tax return
These differences do not reverse

9. Summary of Temporary Differences
Transaction
When recorded
in books
on tax return
Deferred
tax effect
Revenue
or Gain
Earlier
Later
Liability
Revenue
or Gain
Later
Earlier
Asset
Expense
or Loss
Earlier
Later
Asset
Expense
or Loss
Later
Earlier
Liability

10. Permanent Differences - Examples
Items, recognized for financial accounting purposes, but not for income tax purposes:
Non-tax-deductible expenses (fines, expenses relating to non-taxable revenue)
Dividends from taxable Canadian corporations
Items, recognized for tax purposes, but not for financial accounting purposes:
Depletion allowance of natural resources in excess of cost

11. Summary of Permanent Differences
Sources of PERMANENT DIFFERENCES
Some items
are recorded
in Books
but NEVER
on tax return
Other items
are NEVER
recorded in books
but recorded
on tax return
No future tax effects
for permanent differences

12. Timing Differences Relate to income
Temporary differences relate to balance sheet values
Cause the balance of a temporary difference to change from period to period
Originating timing difference
Cause of the initial difference
Reversing timing difference
Causes a temporary difference to decrease

13. Future Tax Asset and Future Tax Liability - Sources
Future taxes may be a:
Future tax liability, or
Future tax asset
Future tax liability arises due to net taxable amounts in the future
Future tax asset arises due to net deductible amounts in the future

14. Recording Future Tax Liability - Example
Book tax expense = $20,000
Tax liability = $18,000
Journal Entry: Income Tax Expense , Future Tax Liability , Tax Payable ,000

15. Recording Future Tax Asset - Example
Book tax expense = $5,000
Tax payable = $6,000
Journal Entry: Income tax expense 5,000 Future Tax Asset , Tax payable ,000
Future tax asset is recognized for all deductible differences

16. Temporary Differences - Originating & Reversing
Year Tax Expense Tax Liability Difference Nature
(per GAAP) (per CCRA) FTA / FTL
1 $17, $16, $1, FTL
2 $17, $16, $ FTL
3 $17, $18, $ FTA
4 $17, $19, $1, FTA
Net Future Tax Effect $ -0-

17. Future Taxes – Final Notes
Use separate accounts, but remember to report the net effects
A future tax asset or liability is classified as long-term if the item which originated or caused the future tax amount is long-term
Future tax amounts have no impact on the current year’s tax calculations
On the income statement, report current year’s income tax separately from future year’s income tax expense or benefit
The Future Income Tax Asset account is periodically reassessed

18. Tax Loss Carryback and Carryforward
The amount reported is the tax calculated from the loss
May be carried back three years, or forward for the next seven years
When applying the carry back, always apply to the oldest available year first
Tax loss carry forward is reported if it is likely that a profit will be earned in future periods

19. Intraperiod Tax Allocation
Income tax expense is to reported with its related item
Intraperiod Tax Allocation
Tax expense is allocated within the financial statements of the current period
Interperiod Tax Allocation
Tax expense is allocated between years

20. Basic Principles of Accounting for Income Tax
Asset-liability method (liability method) objectives
Recognize taxes payable (refundable) amount for the current year
Recognize future tax liabilities or assets for events (transactions) that have been included in the current year’s financial statements or tax returns
Basic principles to achieve these objectives

21. Basic Principles of Accounting for Income Tax
Current tax liability or asset is based on current year’s taxes payable (or refundable) and is recognized in the current year
A future tax liability or asset is recognized for future tax effects of temporary differences and carryforwards
Measurement of current and future tax liabilities and assets is based on the tax rate expected at the time the liability or asset will be settled
Future tax asset is reduced by any tax benefits not expected to be realized

22. COPYRIGHT
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