sometimes significantly.
Sometimes, instead of reclassifying deferred liabilities as stockholders’ equity, the analyst
might just ignore deferred taxes altogether. This is done if nonreversal is uncertain or financial
statement depreciation is deemed inadequate and is therefore difficult to justify an increase in
stockholders’ equity. Some creditors, notably banks, simply ignore deferred taxes. The analyst
must decide on the appropriate treatment of deferred taxes on a case by case basis.
e: Distinguish between temporary and permanent differences.
Permanent differences are differences in taxable and pretax incomes that are never
reversed. Tax exempt interest expense, premiums paid on life insurance of key employees,
and goodwill amortization are examples of expenses on the financial statements, but they are
not deductions on the tax returns. These differences are never deferred but are considered
decreases or increases in the effective tax rate. If the only difference between taxable and
pretax incomes were a permanent difference, then tax expense would be simply taxes
payable.
Temporary differences are differences in taxable and pretax incomes that will reverse in
future years. That is, current lower (higher) taxes payable will be a future higher (lower) taxes
payable. These differences result in deferred tax assets or liabilities. An example would be
with liabilities: The temporary difference that results by using the installment sales method for
taxes and the sales method for pretax income. Long-term liabilities: The long-term tax liability
that results by using the declining balance depreciation for the tax returns and straight-line
depreciation for the financial statements.
f: Compute income tax expense, income tax payable, deferred tax assets, and
deferred tax liabilities.
If a change in the tax rate is enacted, then under the liability method, all deferred tax assets
and liabilities are revalued using the new tax rate. If the tax rate increases, then the increase
in deferred tax liabilities increases the current tax expense. If tax rates decrease, the
decrease in deferred tax liabilities will decrease the current tax expense.
Example: Deferred taxes and a change in tax rates:
•
During year one, the tax rate is 40%
•
Starting in year two, the tax rate will fall to 35%
•
Assume taxable income is $20,000
•
Pretax income is $30,000 (the difference occurred because DDB depreciation is used
on tax returns and SL depreciation is used on the financial statements).
•
The $10,000 difference is temporary (reverses in the future)
•
The deferred tax liability is determined by the tax rate that will exist when the reversal
occurs (35%).
找金融资料，就到一览金融文库