Accountants' Handbook Volume One: Financial Accounting and General Topics, Eleventh Edition

Chapter 24. ACCOUNTING FOR INCOME TAXES^[357]

E. Raymond Simpson, CPA

Financial Accounting Standards Board

ACCOUNTING RECOGNITION OF INCOME TAXES

(a) THE BASIC PROBLEM.

Accounting for income taxes is one of the most complex and controversial accounting subjects in this country. The basic problem is that transactions and events may be reported in different years for financial reporting and for income tax purposes. This may be because different accounting methods are used for each purpose, for example, accrual accounting versus cash basis accounting, straight-line depreciation versus an accelerated depreciation method, the percentage-of-completion versus the completed contract methods on long-term contracts, or revenue recognition at time of sale versus the installment method. It may also be because a different estimated useful life is elected for depreciation or amortization. These differences may occur because the income tax reporting requirements and generally accepted accounting principles (GAAP) are different for a particular event or transaction or because a taxpayer is able to elect to report differently.

The accounting procedure employed to recognize the tax effects of amounts that are reported in different years for financial reporting and for income tax reporting has been known as interperiod income tax allocation or tax effect accounting. The more neutral description of "recognition" of income taxes is used in this chapter, and the other terms are not generally used.

Several different ...