Defend the Asset/Liability Approach of Accounting for Inter-Period Income Tax Allocation.

In: Business and Management

Submitted By runlinda83
Words 642
Pages 3
Team 2: Defend the asset/liability approach of accounting for inter-period income tax allocation.
The asset/liability method of income tax allocation is balance sheet oriented. The intent is to accrue and report the total tax benefit or taxes payable that will actually be realized or assessed on temporary differences when their respective future taxable or deductible amounts are expected to occur.
The book states 5 arguments:
1. The balance sheet is becoming more important financial statement. Reporting deferred taxes based on the expected tax rates when the temporary differences reverse increases the predictive value of future cash flows, liquidity, and financial flexibility.
2. Reporting deferred taxes based on the expected tax rates is conceptually more sound because the reported amount represents either the likely future economic sacrifice (future tax payment) or economic benefit (future reduction in taxes).
3. Deferred taxes may be the result of historical transactions, but, by definition, they are taxes that are postponed and will be paid (or will reduce taxes) in the future at the future tax rates.
4. Estimates are used extensively in accounting. The use of estimated future tax rates for deferred taxes poses no more of a problem regarding verifiability and reliability than using, say, estimated lives for depreciation.
5. Because the tax expense results from changes in balance sheet values, its measurement is consistent with the SFAC No. 6 and SFAS No. 130 definitions of comprehensive income.
Others may include:
- Under the International Accounting Standards No. 12 “Accounting for Taxes on Income” only the liability method is allowed.
- If, after being established, and before reversal, the statutory tax rate for those years change, then the deferred tax account will need to be adjusted to reflect the new rate(s).
- Under this…...

Similar Documents

Income Taxes and Financial Accounting

...Income taxes and financial accounting Abstract: The paper discusses the basic elements of tax allocation, analyzes extensively the principal timing difference: accelerated depreciation for tax purposes and straight-line depreciation for published financial reporting, looks into the major aspects of SFAS No. 109, and explores the difference of GAAP and IFRS on tax allocation. 1. Income tax allocation In order to comply with IRS tax code and make sense of the tax expands for income statement analysis, income tax allocation involves with high level of complexity for financial statement. This paper tries to explain how income tax allocation works by comparing of accelerated tax depreciation versus straight-line for financial reporting. The paper will focus on the change from SFAS No. 109 from SFAS No. 96. The discounting of deferred tax liabilities is also mentioned and analyzed. Because of the timing difference between time of the tax return and the time of the publication of the financial statement, different taxable results incur from the IRS tax basis and the financial reporting basis. Although the different exist, the difference will be smooth out in the cumulated ways for years and years. Income tax expense and income tax liability are always differ from each other in figures, but with the difference deferred in next year. 1.1 History In 1967, APB Opinion No.11 replaced ARBs 43 and 44 under the requirement of comprehensive allocation. If there is any......

Words: 3592 - Pages: 15

Income Tax Accounting

...1040 Form Department of the Treasury—Internal Revenue Service U.S. Individual Income Tax Return Last name (99) 2011 , 2011, ending OMB No. 1545-0074 , 20 IRS Use Only—Do not write or staple in this space. For the year Jan. 1–Dec. 31, 2011, or other tax year beginning Your first name and initial See separate instructions. Your social security number Spouse’s social security number Apt. no. Beth R If a joint return, spouse’s first name and initial Jordan Last name Home address (number and street). If you have a P.O. box, see instructions. City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions). Foreign country name Foreign province/county ▲ Make sure the SSN(s) above and on line 6c are correct. Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 to go to this fund. Checking Foreign postal code a box below will not change your tax or refund. You Spouse Filing Status Check only one box. 1 2 3 6a b c Single Married filing jointly (even if only one had income) Married filing separately. Enter spouse’s SSN above and full name here. ▶ Spouse . Dependents: . . . . . . . . . . . . 4 Head of household (with qualifying person). (See instructions.) If the qualifying person is a child but not your dependent, enter this child’s name here. ▶ 5 . . . Qualifying widow(er) with dependent......

Words: 1487 - Pages: 6

Rbi Rules on Asset Liability Management

...Asset - Liability Management System in banks - Guidelines Over the last few years the Indian financial markets have witnessed wide ranging changes at fast pace. Intense competition for business involving both the assets and liabilities, together with increasing volatility in the domestic interest rates as well as foreign exchange rates, has brought pressure on the management of banks to maintain a good balance among spreads, profitability and long-term viability. These pressures call for structured and comprehensive measures and not just ad hoc action. The Management of banks has to base their business decisions on a dynamic and integrated risk management system and process, driven by corporate strategy. Banks are exposed to several major risks in the course of their business - credit risk, interest rate risk, foreign exchange risk, equity / commodity price risk, liquidity risk and operational risks. 2. This note lays down broad guidelines in respect of interest rate and liquidity risks management systems in banks which form part of the Asset-Liability Management (ALM) function. The initial focus of the ALM function would be to enforce the risk management discipline viz. managing business after assessing the risks involved. The objective of good risk management programmes should be that these programmes will evolve into a strategic tool for bank management. 3. The ALM process rests on three pillars: • ALM information systems => Management Information System => Information......

Words: 4813 - Pages: 20

Income Tax India

...Council; and Wilcox was formerly Assistant Secretary of the Treasury for Economic Policy. Table of Contents Page 1. Introduction 2. Budget Outcomes and Projections Improved Budget Picture Sources of Improvement 3. Budget Deficit Reduction: 1990 through 1997 OBRA90 OBRA93 What Did Deficit Reduction Ultimately Accomplish? The Republican-Controlled Congress BBA97 4. Entitlement Reform and Saving Social Security First Entitlement Commissions Social Security Saving Social Security First 5. Social Security Reform Options Using Projected Budget Surpluses as Part of Social Security Reform Investments in Private Financial Assets Potential Compromise Reform Proposals The 1999 State of the Union Social Security Proposal 6. Budget Surpluses: 1998 through 2000 The 1999 State of the Union Budget Framework Balancing the Budget Excluding Social Security Fiscal Policy in 2000 A National Asset 7. Conclusion References Tables Figures 1 3 9 24 40 63 78 80 84 86 1. Introduction The 1990s witnessed two fundamental changes in U.S. fiscal policy: a dramatic improvement in the current and projected budget balance, and a shift to a new political consensus in favor of balancing the budget excluding Social Security rather than the unified budget. In contrast, the 1990s did not witness significant changes in Social Security policy, although alternative visions of Social Security reform received tremendous analytic and popular attention. This paper reviews the course of fiscal policy and Social......

Words: 25267 - Pages: 102

Asset Liability Management

...ASSET-LIABILITY MANAGEMENT IN THE INDIAN BANKS: ISSUES AND IMPLICATIONS Abstract The development of the banking system is always associated with the contemporary changes in the economy. The Indian banking industry has undergone a metamorphosis in the last two decades due to changes in the political, economic, financial, social, legal and technological environments. The mind boggling advances in technology and deregulation of financial markets across the countries created new opportunities, tempting banks to enter every business that had been thrown open. The banks are now moving towards universal banking concepts, while adding new channels and a series of innovative product offerings catering to various segments at an attractive price. This makes it imperative for the banks to adopt sophisticated risk management techniques and to establish a link between risk exposures and capital. Effective management of risk has always been the focus area for banks owing to the increasing sophistication in the product range and services and the complex channels that deliver them. The challenge for the banks is to put in place a risk control system that minimizes the volatility in profit and engenders risk consciousness across the rank and file of the organization. Sound risk management will ensure a healthy bottom line for the bank as risk taken by the bank will be commensurate with return and will be within an approved risk management policy. As all transactions of the banks revolve around...

Words: 6980 - Pages: 28

Income Tax

...Accounting for Income Taxes I. Overview – Accounting for income taxes involves both intraperiod and interperiod tax allocation. Intraperiod allocation matches a portion of the provision for income tax to the applicable components of net income and retained earnings. Income for federal tax purposes and financial accounting income frequently differ. Income for federal tax purposes is computed in accordance with the prevailing tax laws, whereas financial accounting income is determined in accordance with GAAP. Therefore, a company’s income tax expense and income taxes payable may differ. The incongruity is caused by temporary differences in taxable and/or deductible amounts and requires interperiod tax allocation. II. Intraperiod Tax Allocation – Intraperiod Tax Allocation involves apportioning the total tax provision for financial accounting purposes in a period between the income or loss from: a. Income from continuing operations b. Discontinued operations c. Extraordinary items d. Cumulative effect of an accounting change e. Other comprehensive income i. Pension Adjustment ii. Unrealized gain/loss on available for sale security iii. Foreign translation adjustment f. Components of stockholders’ equity iv. Retained earnings for prior period adjustments and v. Items of accumulated (other) comprehensive income g. General Rule – Any amount not allocated to continuing......

Words: 2526 - Pages: 11

Deferred Tax Asset

...1.0 Introduction This assignment focuses on the effects of Deferred Tax Assets (DTA) on entities and how entities make justifications on DTA arise or in this case, the Product Warranty, and the recognition criteria for DTA. A Deferred Tax Asset represents the increase or decrease in taxes payable or refundable in future years as a result of ‘Temporary Differences’ and Net Operating Loss or Tax Credit carry-forwards that exist at the reporting date (Nelson, Spiceland and Sepe, 2011). This is similar to the definition of DTA stated in the Accounting Standards AASB 112 Paragraph 5. Temporary Differences arise when the events are recognized in one period in a bank’s book but are recognized in a different period on its tax return. To find Deferred Tax Assets (DTA), first find Tax Base (TB) by taking Carrying Amount (CA) less the Future Taxable Amount and adds Future Deductible Amount. Having TB larger than CA, there will be Deductible Temporary Difference (DTD), while having TB lesser than CA gives rise to Taxable Temporary Difference (TTD). By multiplying the DTD with the Tax Rate, DTA will be calculated. 2.0 Discussion 2.1 Provision for Product Warranty A Product Warranty is generally a guarantee from one party to another that a certain conditions or facts are true or will happen. A product warranty is a provision because when a product warranty is issued, there is a legal obligation and settlement is expected to result in an outflow of resources (McNicholas and...

Words: 1212 - Pages: 5

Asset Liability Management

...management as driven by risk exposure, the R in TRICl( To understand asset-liability management (ALM) as the coordinated management of a bank's on- and off-balance sheet activities driven by interest rate risk and its two components: priee risk and reinvestment risk To undersland accounting and economic measures of ALM performance To understand the duration or maturity imbalance (gap) in banks' balance sheets in terms of rate-sensitive assets (RSAs) and rate-sensitive liabilities (RSLs) To understand ALM risk profiles as pictures of banks' exposure to interest rale risk and how to hedge that risk using on- and off-balance sheet methods CHAPTER THEME The business of banking involves the measuring, managing, and accepting of risk, which means the heart of bank financial management is risk managemcnt. One of the most important risk management functions in banking is asset-liability management or ALM, broadly defined as the coordinated management of a bank's balance sheet to allow for alternative interest rate, liquidity, and prepayment scenarios. Three techniques of ALM are (1) on-balance sheet matching of the repricing o[ assets and liabilities, (2) off-balance shcet hedging of on-balance sheet risks, and (3) securitization, which removes risk from the balance sheet. The key variables of ALM inelude accounling measures such as net interest income (NIl) or its ratio form net inlerest margin (NIM = NIl/average assets) and an economic measure: the market value of a bank's......

Words: 6862 - Pages: 28

Accounting for Corporate Income Tax

...What is a liability? The answer might seem rather obvious: an amount owed from one entity to another. If the liability bears interest, how is interest expense measured? The simple answer is that interest expense is equal to interest paid. However, life can get a lot more complicated:  Does a liability exist if there is no legal liability, but the company has announced a particular commitment or plan of action?  How is a liability measured if the obligation is for services, not a set amount of money?  How can a liability be measured if the amount of cash to be paid is uncertain?  How should a liability be valued if the stated interest rate does not reflect the market interest rate?  How is interest expense measured if the stated interest rate does not reflect the market interest rate?  When is interest part of the cost of an asset instead of an expense? Liability financing is an integral part, perhaps even a dominant part, of the capital structure of many companies. For example, Shaw Communications Inc. reported total assets of $8.9 billion in 2009. Of this amount, only $2.5 billion is financed through shareholders' equity, with the balance, $6.4 billion, provided by debt in various forms. A sizeable portion of the debt is unearned revenue and deposits ($0.8 billion, or 9% of total assets) and long-term debt is 35% of total assets. Interest expense is reported at $237 million, eating up a significant portion of the reported $956 million in operating earnings.......

Words: 34356 - Pages: 138

Accounting for Income Tax

...ACCOUNTING FOR INCOME TAX Aylin Alishahi University of Houston - Victoria Abstract The main idea of this paper is to introduce the concept of Accounting for Income Tax. As part of our discussion, we will understand the meaning of Income Tax and Tax Accounting. We will also look into the different terminologies of GAAP and IRS and the differences between the two. There are two basic kinds of differences between the two – temporary and permanent. In addition to looking at the basic kinds of differences, we will also look into Net Operating Losses. Examples have been provided for all the concepts to better understand the idea behind the concept. Although, this paper does not provide the detailed explanation, it will help us understand the overview of the whole theory. Keywords: Income Tax, Tax Accounting, Accounting for Income Tax, Temporary Differences, Permanent Differences, Net Operating Losses. ACCOUNTING FOR INCOME TAX Income Tax and Tax Accounting Income Tax is defines as “A tax that governments impose on financial income generated by all entities within their jurisdiction”. It is required by the law that businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public. Tax Accounting is defined as “Accounting methods that focus on taxes rather than the appearance of public financial......

Words: 1087 - Pages: 5

Tax Environment and Personal Tax Liabilities

...Table of Contents Introduction 2 1.1 Describe the UK tax environment to Shawn 3 1.2 Analyse the role and responsibilities of you as the tax practitioner in the contexts of UK tax system. 7 1.3 Explain the tax obligations of tax payers or their agents and the implications of non-compliance 9 2.1 Calculate relevant income, expense and allowances 10 2.2 Calculate taxable amounts and tax payable, for employed and self-employed individuals, and advise on payment dates 11 2.3. Complete relevant documentation and returns 12 Conclusion 13 Reference 14 Introduction UK tax environment are many problems for a British citizen who has plans to start a new business in the UK. Being a new businessman and had no direct background about the UK tax systems rules and procedures, Based on the information in the scenario, we research in the UK tax environment according to the factors following: the environment, the role and the responsibility of the UK tax practitioners, tax system, explain the tax obligations of tax payers or their agents and the implications of non- compliance, Calculate the relevant income, expenses and allowances, Calculate taxable amounts and tax payable, for employed and self-employed individuals, and advise on payment dates for the above cases, complete the relevant documentation and tax returns. 1.1 Describe the UK tax environment to Shawn 1.1.1 UK tax legislation: The tax which is regulation set to apply for citizen in UK with the...

Words: 4775 - Pages: 20

Fixed Income: Asset Liability Management

...duration calculation 5. Asset-liability matching and immunization strategies 6. Target-date immunization and duration matching 7. Redington immunization and full immunization 8. Cases of nonflat term structure 2 8.1 Macaulay Duration and Modified Duration • Suppose an investor purchases a n-year semiannual coupon bond for P0 at time 0 and holds it until maturity. • As the amounts of the payments she receives are different at different times, one way to summarize the horizon is to consider the weighted average of the time of the cash flows. • We use the present values of the cash flows (not their nominal values) to compute the weights. • Consider an investment that generates cash flows of amount Ct at time t = 1, · · · , n, measured in payment periods. Suppose the rate of interest is i per payment period and the initial investment is P . 3 • We denote the present value of Ct by PV(Ct ), which is given by Ct . PV(Ct ) = t (1 + i) and we have P = n X (8.1) PV(Ct ). (8.2) t=1 • Using PV(Ct ) as the factor of proportion, we define the weighted average of the time of the cash flows, denoted by D, as D = = n X t=1 n X t " PV(Ct ) P twt , # (8.3) t=1 where PV(Ct ) wt = . P 4 (8.4) P • As wt ≥ 0 for all t and n wt = 1, wt are properly defined weights t=1 and D is the weighted average of t = 1, · · · , n. • We call D the Macaulay duration, which measures the average period of the......

Words: 7983 - Pages: 32

Assessment Procedure of Income Tax

...ASSESSMENT PROCEDURE OF INCOME TAX After the previous year expiry, an assessee needs to furnish the income tax return in the prescribed form by due date specified in this behalf according to section 139(1) of income tax act. Then assessing officer will determine the tax liability of the assessee on the total income assessed by him. Due dates are given for advance tax or TDS/TCS. If any tax is found due on the assessee, a demand notice is issued to him for collecting such tax. Filing the return of income u/s section 139 -: Income tax act says that an assessee should furnish the return of his total income voluntarily in accordance with the following provisions. 1- Company return: - every company should furnish its return of income voluntary even if loss occurs to the company. 2- Firm return: - every firm is required to furnish its return of income voluntary even if loss occurs to the firm. 3- Return by any other person: - any other person should voluntarily furnish the return of his total income of any other person in respect of which he is assessable, provided his gross total income claiming an exception under section 10(A) or 10(B) exceeds the maximum amount not chargeable of tax (income tax limits which is 160000, 190000, 240000) as...

Words: 7504 - Pages: 31

Income Tax

...[pic] | | |IAS 12 INCOME TAXES | |HISTORY OF IAS 12 | |April 1978 |Exposure Draft E13 Accounting for Taxes on Income | |July 1979 |IAS 12 Accounting for Taxes on Income | |January 1989 |Exposure Draft E33 Accounting for Taxes on Income | |1994 |IAS 12 (1979) was reformatted | |October 1994 |Modified and Re-exposed as Exposure Draft E49 Income Taxes | |October 1996 |IAS 12 Income Taxes | |1 January 1998 |Effective date of IAS 12 (1996) | |October 2000 |Limited Revisions to IAS 12 | |1 January 2001 |Effective date......

Words: 1692 - Pages: 7

Tax Accounting

...13 chapter TAX ACCOUNTING OBJECTIVES After completing Chapter 13, you should be able to: 1. List what are permissible tax years. 2. Explain the requirements for changing a tax year. 3. Identify the available accounting methods. 4. Understand the rules for accounting method changes. 5. Account for the capitalization of inventory costs. 6. Describe long-term contract reporting. 7. Defi ne the installment method of accounting. 13–2 CCH FEDERAL TAXATION—COMPREHENSIVE TOPICS OVERVIEW The fi rst 12 chapters are presented primarily from the individual taxpayer’s point of view (including self-employed taxpayers). This chapter provides a general discussion of the previous material as it applies to other entities and provides a discussion of accounting periods and accounting methods as they apply to all entities. Discussions of specifi c provisions as they apply to other entities (e.g., corporations, partnerships, etc.) are contained in subsequent chapters. The term “fi nancial accounting” refers to the reporting of the fi nancial data of an enterprise through fi nancial statements prepared in accordance with generally accepted accounting principles. Income tax accounting, hereafter referred to as “tax accounting,” is concerned with the reporting of fi nancial data to satisfy the requirements of the Internal Revenue Code, the Regulations which interpret the Code, rulings by the IRS which further interpret the Code and Regulations, and the decisions of the courts...

Words: 30831 - Pages: 124

School Rumble | macOS Mojave 10.14 Beta 4 (Mac App Store) | Spawn #284C - Virgin Mattina Variant (Wk14)