TAXATION & FINANCIAL STATEMENTS ADVANCED FINANCIAL ACCOUNTING SESSION 7.

TAXATION & FINANCIAL STATEMENTS

ADVANCED FINANCIAL ACCOUNTING

SESSION 7

PRETAX FINANCIAL INCOMEVS TAXABLE INCOME

PRETAX FINANCIAL INCOME FINANCIAL ACCOUNTING INCOME BEFORE INCOME TAXES INCOME FOR FINANCIAL REPORTING PURPOSES DEFINED BY GAAP

TAXABLE INCOME TAX ACCOUNTING INCOME FOR TAX PURPOSES TO COMPUTE INCOME TAX PAYABLE DEFINED BY TAX LAW

THEY OFTEN DIFFER: FRENCH CONTEXT

TEMPORARY DIFFERENCE DEPRECIATION: STRAIGHT LINE

VS«DEGRESSIF» DEFERRED EXPENSES «CHARGES A REPARTIR»

(CONCEPTION AND MARKETING EXPENSES)

PERMANENT NON TAXABLE REVENUES: DIVIDENDS NON DEDUCTIBLE EXPENSES: TAX ON

VEHICLES

THEY OFTEN DIFFER: AMERICAN CONTEXT

TEMPORARY DIFFERENCES DEPRECIATION: STRAIGHT LINE VS MACRS INCOME MAY BE COMPUTED ON A CASH BASIS FOR

TAX PURPOSES WARRANTY COSTS DEDUCTIBLE WHEN PAID

PERMANENT DIFFERENCES INTEREST RECEIVED ON STATE & MUNICIPAL

BONDS FINES AND EXPENSES RESULTING FROM A

VIOLATION OF LAW DEDUCTION FOR DIVIDENDS RECEIVED FROM

AMERICAN CORPORATIONS

EXAMPLE

C. INC. IN 20X0, ITS FIRST YEAR OF OPERATIONS HAS REVENUES OF 130,000 € FOR BOOK PURPOSES AND 100,000 € FOR TAX PURPOSES. IT HAS ALSO EXPENSES OF 60,000 € FOR BOTH BOOK & TAX PURPOSES.

THE 30,000 € DIFFERENCE IN REVENUES RESULTS BECAUSE C. RECOGNISES REVENUE ON ACCRUAL BASIS FOR BOOK PURPOSES, BUT REPORTS REVENUES AS CASH IS COLLECTED FOR TAX PURPOSES

COMPUTE INCOME TAX PAYABLE COMPUTE NET INCOME

FUTURE TAXABLE AMOUNTS & DEFERRED TAXES

SHOULD WE RECOGNIZE ANY OTHER INCOME TAXES FOR BOOK PURPOSES? THE ANSWER DEPENDS ON THE EXISTENCE OF

TEMPORARY DIFFERENCES DIFFERENCE BETWEEN THE TAX BASIS OF AN

ASSET OR LIABILITY ANS ITS BOOK AMOUNT: RESULTING IN TAXABLE OR DEDUCTIBLE AMOUNTS IN FUTURE YEARS

TAXABLE AMOUNTS INCREASE TAXABLE INCOME DEDUCTIBLE AMOUNTS DECREASE TAXABLE

INCOME SEE C. INC. EXAMPLE

ASSUMPTION

WE ASSUME THAT ASSETS & LIABILITIES WILL BE RECOVERED AND SETTLED AT THEIR REPORTED AMOUNTS THIS ASSUMPTION CREATES A REQUIREMENT

UNDER ACCRUAL ACCOUNTING TO RECOGNIZE CURRENTLY DEFERRED TAX CONSEQUENCES OF TEMPORARY DIFFERENCES

THAT IS THE AMOUNT OF INCOME TAXES THAT WOULD BE PAYABLE OR REFUNDABLE WHEN THE REPORTED AMOUNTS OF ASSETS ARE RECOVERED AND THE LIABILITIES ARE SETTLED

DEFERRED TAX LIABILITY

A DEFERRED TAX LIABILITY IS THE DEFERRED TAX CONSEQUENCES

ATTIBUTABLE TO TAXABLE TEMPORARY DIFFERENCES

IT REPRESENTS THE INCREASE IN TAXES PAYABLE IN FUTURE YEARS AS A RESULT OF TAXABLE TEMPORARY DIFFERENCES EXISTING AT THE END OF THE CURRENT YEAR

IT IS A LIABILITY !

IT RESULTS FROM A PAST TRANSACTION

IT IS A PRESENT OBLIGATION

IT REPRESENTS A FUTURE SACRIFICE

INCOME TAX OBJECTIVES

TO RECOGNIZE THE AMOUNT OF TAXES PAYABLE OR REFUNDABLE FOR THE CURRENT YEAR

TO RECOGNIZE DEFERRED TAX LIABILITIES AND ASSETS FOR THE FUTURE TAX CONSEQUENCES OF EVENTS THAT HAVE ALREADY BEEN RECOGNIZED IN THE FINANCIAL STATEMENTS OR TAX RETURNS

FUTURE DEDUCTIBLE AMOUNTS & DEFERRED TAXES

EXAMPLE DURING 20X1 C. INC. ESTIMATED ITS WARRANTY

COSTS RELATED TO THE SALE OF ITS PRODUCTS TO BE 500,000 EUROS PAID EVENLY OVER THE NEXT 2 YEARS

FOR BOOK PURPOSES, IT REPORTED WARRANTY EXPENSE & A RELATED LIABILITY FOR WARRANTIES OF 500,000

FOR TAX PURPOSES, THE WARRANTY TAX DEDUCTION IS NOT ALLOWED UNTIL PAID (NO WARRANTY LIABILITY IS RECOGNIZED ON A TAX BASIS BALANCE SHEET)

DEFERRED TAX ASSET

A DEFERRED TAX ASSET: IS THE DEFERRED TAX CONSEQUENCE

ATTRIBUTABLE TO DEDUCTIBLE TEMPORARY DIFFERENCES

REPRESENTS THE INCREASE IN TAXES REFUNDABLE (OR SAVED) IN FUTURE YEARS AS A RESULT OF DEDUCTIBLE TEMPORARY DIFFERENCES EXISTING AT THE END OF THE CURRENT YEAR

IT IS AN ASSET !

IT RESULTS FROM A PAST TRANSACTION

IT GIVES RISE TO A PROBABLE BENEFIT IN THE FUTURE

IT CONTROLS ACCESS TO THE BENEFITS

TAX RATE CONSIDERATIONS

FUTURE TAX RATES USE CURRENT TAX RATE UNLESS NEW RATES ARE ENACTED INTO

LAW FOR FUTURE YEARSREVISION OF TAX RATES

THE EFFECT OF A CHANGE IN THE TAX RATE IS REPORTED AS AN ADJUSTMENT TO INCOME TAX EXPENSE IN THE PERIOD OF THE CHANGE

ACCOUNTING FOR NET OPERATING LOSSES

A NET OPERATING LOSS OCCURS FOR TAX PURPOSES WHEN TAX-DEDUCTIBLE EXPENSES EXCEED TAXABLE REVENUES

GENERALLY GOVERNMENTS PERMIT TAXPAYERS TO USE THE LOSSES OF ONE YEAR TO OFFSET THE PROFITS OF OTHER YEARS

CARRYBACK AND CARRYFORWARD OF NET OPERATING LOSSES

LOSS CARRYFORWARD

DEFINITION: OFFSETTING THE LOSS WITH FUTURE TAXABLE INCOME

France: IT IS THE NORMAL CHOICE (UNLIMITED)

USA: IT IS AN OPTION (UP TO 15 YEARS)

EXAMPLE

IN 20X0 LOSS 150,000 NO INCOME TAX PAYABLE A DEFERRED TAX ASSET = 150,000*TAX RATE

(33.33%) = 50,000. ARE WE SURE TO RECOVER IT?

IN 20X1 INCOME BEFORE INCOME TAX = 120,000 OFFSETTING: 120,000 - 150,000 = - 30,000 ; THEN NO

INCOME TAX PAYABLE REDUCTION OF THE DEFERRED TAX ASSET BY

120,000*TAX RATE (33.33%)= 40,000

LOSS CARRYBACK

DEFINITON: OFFSETTING THE LOSS WITH PAST PROFITS

France: IT IS AN OPTION (3 YEARS BACK)

USA: IT IS THE NORMAL CHOICE (3 YEARS BACK)

EXAMPLE

IN 20X0 LOSS 150,000 NO INCOME TAX PAYABLE AN IMMEDIATE BENEFIT DUE TO LOSS

CARRYBACK = 150,000*TAX RATE(33.33%)=50,000

LIKE A NEGATIVE INCOME TAX BALANCE SHEET ITEM: INCOME TAX REFUND

RECEIVABLE AS A CURRENT ASSET

BALANCE SHEET PRESENTATION

ASSETS AND LIABILITIES SHOULD BE CLASSIFIED AS A CURRENT OR

NONCURRENT ITEMS AN INDIVIDUAL DEFERRED TAX LIABILITY OR

ASSET IS CLASSIFIED BASED ON THE CLASSIFICATION OF THE RELATED ASSET OR LIABILITY

IF NO RELATION WITH AN ASSET OR A LIABILITY, CLASSIFICATION ACCORDING TO THE EXPECTED REVERSAL DATE OF THE TEMPORARY DIFFERENCE

INCOME STATEMENT PRESENTATION

NOTHING COMPULSORYCOULD BE ALLOCATED TO CONTINUING

OPERATIONS, DISCONTINUED OPERATIONS, EXTRAORDINARY ITEMS

SIGNIFICANT COMPONANTS OF INCOME TAX SHOULD BE DISCLOSED ASSESSMENT OF QUALITY OF EARNINGS BETTER PREDICTIONS OF FUTURE CASH

FLOWS