1. Accounting for Income Taxes Introduction to Accounting for Taxes www.KPMGUniversityConnection.com

2. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 2 Overview Key Discussion Concepts Description of the Learning Module Introduction to Accounting for Income Tax Accounting for Income Tax Activity Debrief of Accounting for Income Tax Activity Auditing the Tax Provision Conclusion

3. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 3 Description: Accounting For Income Tax This KPMG Learning Module focuses on Accounting for Income Taxes. The Module is accompanied by a presentation that includes group and individual activities to support the learning objectives. A summary of the key principles underpinning the theory of accounting for income taxes will be presented coupled with a group activity highlighting the concepts discussed. After the group activity, students will asked to calculate a deferred tax provision independently. The provision will be debriefed to ensure the Learning Module objectives have been meet with success!

4. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 4 Deferred Taxes GAAP accounting for assets, liabilities, revenue and expenses follow different rules than tax law. As a result, INCOME under GAAP is different than INCOME under tax law. DEATH TAXES

5. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 5 Differences between GAAP and Tax Reporting The differences between GAAP and Tax reporting can be categorized as permanent differences or temporary differences. Temporary Differences Permanent Differences

6. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 6 Temporary Differences Permanent Differences

7. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 7 What are Permanent Differences?  Differences between GAAP and tax accounting that do not affect the deferred tax calculation.  Permanent tax differences affect only the current tax computation. Permanent Differences do NOT cause Deferred Taxes!

8. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 8 Permanent Differences Permanent differences do not reverse! They effect GAAP income but never taxable income Tax Exempt Income They effect taxable income but never GAAP income Fines and Penalties

9. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 9 Sources of Permanent Differences Some Items recorded in BOOKS recorded in BOOKS but NEVER on TAX RETURN but NEVER on TAX RETURN Other Items NEVER recorded in BOOKS NEVER recorded in BOOKS but recorded on TAX RETURN but recorded on TAX RETURN

10. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 10 Temporary Differences Permanent Differences

11. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 11 Temporary Differences Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the financial statements. This difference will subsequently reverse. The future tax effects of these differences create either a deferred tax asset or a deferred tax liability.

12. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 12 What causes a DTL? Expense/ Loss Recorded Tax before Book Deferred Tax Liability (DTL) Revenue/ Gain Recorded Book before Tax Deferred Tax Liability (DTL)

13. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 13 What causes a DTA? Expense/ Loss Recorded Book before Tax Deferred Tax Asset (DTA) Revenue/ Gain Recorded Tax before Book Deferred Tax Asset (DTA)

14. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 14 Journal Entry Components Income Tax Expense  NOW & LATER -amount reported on IS Income Tax Payable  NOW -current amount due on Form1120 Tax DTL and DTA  LATER -amount reported on B/S at current tax rate

15. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 15 Two Basic Journal Entries to Record Tax Expense? Dr. Income Tax Expense Cr. Income Tax Payable Cr. Deferred Tax Liability Dr. Deferred Tax Asset Dr. Income Tax Expense Cr. Income Tax Payable Paying less tax today… it’s a sunny day! Paying more tax today… it’s a rainy day!

16. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 16 Financial Statements Tax Return Form 1120 Income Tax Expense Income Tax Payable Fundamental Differences between Financial and Tax Reporting

17. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 17 Deferred Tax Example

18. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 18 Audit Focus of Income Taxes Reporting Auditors typically perform substantive procedures to assess Management’s Assertions pertaining to Income Taxes Completeness Existence Accuracy Valuation Obligations/Rights Presentation Deferred Tax Assets Income Tax Payable Income Tax Receivable Deferred Tax Liabilities Deferred Income Tax Expense Current Income Tax Expense

19. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 19 Common Prepared By Client (PBC) Tax Schedules The common tax schedules prepared by clients and subject to audit include the following: Current tax provision* Return-to-provision analysis (Tax return true-up) Deferred tax rollforward** Tax account rollforward Remember: Current Tax Expense* + Deferred Tax Expense** = Total Tax Expense (Income Statement)

20. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 20 Formula: Calculation of the current tax provision Book income before taxes +/- Permanent differences +/- Temporary differences Current taxable income X Estimated tax rate Current income tax expense

21. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 21 Balance Sheet Presentation Combine the CURRENT deferred tax assets and liabilities classified: If net result is an asset, report as current asset If net result is a liability, report as current liability Combine the NON-CURRENT deferred tax assets and liabilities: If net result is an asset, report as long-term asset If net result is a liability, report as long-term liability

22. © 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. © 2012 Dr. Barbara M Porco. All rights reserved. Accounting for Income Taxeswww.KPMGUniversityConnection.com 22 SUMMARY: Four Types of Temporary Differences: REVENUE/GAIN recognized for TAX before GAAP income Creates a DEFERRED TAX ASSET This represents a future benefit by paying taxes now. REVENUE/GAIN recognized for GAAP before TAX income Creates a DEFERRED TAX LIABILITY This represents a future liability by postponing taxes paid. EXPENSES/LOSS deducted for GAAP income before TAX income Creates a DEFERRED TAX ASSET This represents a future benefit by paying taxes now. EXPENSES/LOSS deducted for TAX Income before GAAP income Creates a DEFERRED TAX LIABILITY This represents a future liability by postponing taxes paid.

23. www.KPMGUniversityConnection.com 23 Questions