Tài chính doanh nghiệp - Chapter 13: Income taxes

Chapter 13Income TaxesPresenter’s namePresenter’s titledd Month yyyyaccounting profits and taxable incomeCopyright © 2013 CFA Institute2Accounting Profit: Amount reported in accordance with accounting standards (also known as pretax income).Taxable Income: Portion of income subject to income taxes under jurisdiction.Because of different guidelines for how income is reported on financial statements and how it is measured for income tax purposes, accounting profits and taxable income may differ.accounting profits and taxable incomeWhen taxable income is greater than accounting profit: Actual income taxes payable will exceed the financial accounting income tax expense.Deferred tax assets arise.When accounting profit is greater than taxable income:Financial accounting income tax expense exceeds income taxes payable.Deferred tax liabilities arise.Tax base: Amount at which the asset or liability is valued for tax purposes.Carrying amount: Amount at which the asset or liability is valued according to accounting principles.Copyright © 2013 CFA Institute3accounting profits and taxable incomeCopyright © 2013 CFA Institute4Differences between accounting profit and taxable income can occur in several ways:Revenues and expenses being recognized in one period for accounting purposes and a different period for tax purposesSpecific revenues and expenses being recognized for accounting purposes and not for tax purposes, or not recognized for accounting purposes but recognized for tax purposesThe carrying amount and tax base of assets and/or liabilities differDeductibility of gains and losses varying for accounting and income tax purposesTax loss carry-forwardsAdjustments of reported financial data from prior years not being recognized equally for accounting and tax purposes or recognized in different periodsaccounting profits and taxable income: exampleAssume a company owns equipment purchased at the beginning of the 2004 fiscal year for £20,000. For simplicity, assume a salvage value of £0 at the end of the equipment’s useful life. Assume a tax rate of 30%.Accounting standards permit equipment to be depreciated on a straight-line basis over a 10-year period; annual depreciation will be £2,000 (£20,000 ÷ 10).Tax standards in the jurisdiction specify that equipment should be depreciated on a straight-line basis over a 7-year period; annual depreciation will be £2,857 (£20,000 ÷ 7).Copyright © 2013 CFA Institute5accounting profits and taxable income: exampleCopyright © 2013 CFA Institute6Period Ending 31 March (£ millions)200620052004Accounting profit prior to depreciation expense£28,700£17,280£6,700Depreciation expense– 2,000– 2,000– 2,000Profit before tax26,70015,2804,700Income taxes based on accounting profit before tax£8,010£4,584£1,410Taxable income prior to depreciation expense£28,700£17,280£6,700Depreciation expense– 2,857– 2,857– 2,857Taxable income25,84314,4233,843Income taxes payable7,7534,3271,153Difference£257£257£257accounting profits and taxable income: example (continued) (£ millions)200620052004Income tax payable (based on tax accounting)£7,753£4,327£1,153Change in deferred tax liability257257257Income tax (based on financial accounting)£8,010£4,584£1,410Copyright © 2013 CFA Institute7 (£ millions)200620052004Equipment value for accounting purposes (carrying amount)£14,000£16,000£18,000Equipment value for tax purposes (tax base)11,42914,28617,143Difference£2,571£1,714£857£857 × 30% = £257£1,714× 30% = £514£2,571× 30% = £771Amount of deferred tax liabilityTax base of asset: example solutionCopyright © 2013 CFA Institute8Company ABC capitalized development costs of €3 million and amortized €500,000 of this amount during the year. For tax purposes, amortization of 25% per year is allowed.Carrying amount is (€3,000,000 – €500,000) = €2,500,000.Tax base is [€3,000,000 – (25% × €3,000,000)] = €2,250,000.Company ABC incurred €500,000 in research costs, all of which were expensed in the current fiscal year for financial reporting purposes. Assume that applicable tax legislation requires research costs to be expensed over a four-year period rather than all in one year. Carrying amount is €0.Tax base is (€500,000 – €500,000/4) = €375,000.Tax base of liability: exampleCopyright © 2013 CFA Institute9Company ABC received in advance interest of €300,000. The applicable tax legislation requires that interest be recognized as part of taxable income on the date of receipt of payment.Company ABC recognized €10 million for rent received in advance from a lessee for an unused warehouse building. Rent received in advance is deferred for accounting purposes but taxed on a cash basis.Company ABC made donations of €100,000 in the current fiscal year. The donations were expensed for financial reporting purposes but are not tax deductible based on applicable tax legislation.Question: What are the tax base and carrying amounts for each item?Tax base of liability: example solutionCopyright © 2013 CFA Institute10Company ABC received in advance interest of €300,000. The applicable tax legislation requires that interest be recognized as part of taxable income on the date of receipt of payment. Carrying amount of the liability is €300,000.Tax base is €0.Company ABC recognized €10 million for rent received in advance from a lessee for an unused warehouse building. Rent received in advance is deferred for accounting purposes but taxed on a cash basis.Carrying amount of the liability is €10 million.Tax base is €0.Company ABC made donations of €100,000 in the current fiscal year. The donations were expensed for financial reporting purposes but are not tax deductible based on applicable tax legislation.No liability, tax base is €0, difference is permanent.tax rate changes Measurement of deferred tax assets and liabilities is based on current tax law. If there are subsequent changes in tax laws or new income tax rates, existing deferred tax assets and liabilities must be adjusted for the effects of these changes. Resulting effects of the changes are included in determining accounting profit in the period of change. Copyright © 2013 CFA Institute11tax rate changes: Example Copyright © 2013 CFA Institute12 (£ Millions)200620052004Equipment value for accounting purposes (carrying amount)£14,000£16,000£18,000Equipment value for tax purposes (tax base)11,42914,28617,143Difference£2,571£1,714£857£857 × 30% = £257£1,714 × 30% = £514£2,571× 30% = £771Amount of deferred tax liability£2,571 × 25% = £643Amount of deferred tax liabilityAssume that the taxing authority changed the income tax rate to 25% for 2006.temporary and permanent differences Creation of a deferred tax asset or liability occurs Only if the book/tax difference is temporary (i.e., if it reverses itself at some future date) and Only to such an extent that the balance sheet item is expected to create future economic benefits or costs for the company. Permanent differences between tax and financial reporting of revenue (expenses) are differences that will not be reversed at some future date.They do not give rise to deferred tax. They result in a difference between the company’s effective tax rate and statutory tax rate.Permanent differences typically includeIncome or expense items not allowed by tax legislationTax credits for some expenditures that directly reduce taxes.Copyright © 2013 CFA Institute13temporary and permanent differences: examplesReason for DifferenceType of Difference?Items of income recognized in financial reports are not taxable.PermanentExpenses recognized in financial reports are not deductible for tax purposes.PermanentRate of depreciation or amortization differs between financial reports and taxes.TemporaryTiming of expensing an expenditure differs between financial reports and taxes.TemporaryTiming of recognizing revenue differs between financial reports and taxes.TemporaryCopyright © 2013 CFA Institute14Treatment of Temporary DifferencesCopyright © 2013 CFA Institute15Balance Sheet ItemCarrying Amount vs. Tax BaseResults in Deferred Tax Asset/LiabilityAssetCarrying amount > Tax baseDeferred tax liabilityAssetCarrying amount Tax baseDeferred tax assetLiabilityCarrying amount < Tax baseDeferred tax liabilityValuation allowanceValuation allowanceA contra-asset account. A reserve created against deferred tax assets based on the likelihood of realizing the benefit of the deferred tax assets in future accounting periods.Will realize the benefit if in a tax-paying position.Deferred tax assets must be assessed at each balance sheet date If there are doubts that the benefits will be realized, then the carrying amount is reduced to the expected recoverable amount. Reduces deferred tax assetReduces incomeShould circumstances subsequently change and suggest that the future will lead to recovery of the deferral, the reduction may be reversed.Reversal increases deferred tax asset and income.Copyright © 2013 CFA Institute16Copyright © 2013 CFA Institute17Valuation allowance:example disclosureValuation allowance:example disclosure“The Company has a valuation allowance against substantially all of its U.S. net deferred tax assets. As of August 31, 2006, the Company had aggregate U.S. tax net operating loss carryforwards of $1.7 billion and unused U.S. tax credit carryforwards of $164 million. The Company also has unused state tax net operating loss carryforwards of $1.4 billion and unused state tax credits of $163 million. During 2006, the Company utilized approximately $1.1 billion of its U.S. tax net operating loss carryforwards as a result of IMFT, MP Mask and related transactions. Substantially all of the net operating loss carryforwards expire in 2022 to 2025 and substantially all of the tax credit carryforwards expire in 2013 to 2026.”Excerpt from notes to financial statementsMicron Technology (2006), 10-KCopyright © 2013 CFA Institute18Valuation allowance:example disclosureCopyright © 2013 CFA Institute19income statement: ExampleCopyright © 2013 CFA Institute20Portions omittedCopyright © 2013 CFA Institute21Valuation allowance: example disclosureCopyright © 2013 CFA Institute22Valuation allowance: example disclosureCopyright © 2013 CFA Institute23balance sheet: ExampleCopyright © 2013 CFA Institute24balance sheet: example(CONTINUED)Comparison of IFRS and U.S. GAAPCopyright © 2013 CFA Institute25TopicIFRSU.S. GAAPRevaluation of plant, property, and equipment and intangible assetsDeferred tax recognized in equityNot applicable because revaluation is prohibited.Measurement of deferred taxesTax rates and tax laws that have been enacted or substantively enactedUse of substantively enacted rates is not permitted. Tax rate and tax laws used must have been enactedComparison of IFRS and U.S. GAAPCopyright © 2013 CFA Institute26TopicIFRSU.S. GAAPRecognition of deferred tax assetsRecognized if it is probable (more likely than not) that sufficient taxable profit will be available against which the temporary difference can be utilizedRecognized in full but is then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realizedPresentation of deferred tax assets and liabilities: Current vs. noncurrentClassified net as noncurrent on the balance sheet, with supplemental note disclosureClassified as either current or noncurrent, based on the classification of the related nontax asset or liability for financial reportingSummary Differences between the recognition of revenue and expenses for tax and accounting purposes may result in taxable income differing from accounting profit. Temporary differences between accounting profit and taxable income (i.e., differences that will reverse over time) give rise to deferred tax assets and/or liabilities. Permanent differences between accounting profit and taxable income (i.e., differences that will not be reversed at some future date) do not give rise to a deferred tax asset or liability. Deferred tax assets must be assessed for their prospective recoverability. If it is probable that they will not be recovered at all or partly, the carrying amount is reduced. Under U.S. GAAP, reduction of deferred tax assets is done through the use of a valuation allowance (a contra-account), with potential for subsequent reversal.Copyright © 2013 CFA Institute27