Accounting for Deferred Income Taxes, 2nd Edition

Chapter 3FASB ASC 740: Identifying Tax Differences and Deferred Tax Worksheet

Learning objectives

• Recognize treatment of carrybacks and carryforwards of net operating losses, regular tax credit, and alternative minimum tax (AMT) tax credit carryforwards.
• Identify the need for a valuation allowance.
• Identify the determination of the applicable tax rate.

Deferred tax assets

The following tax differences have specific treatment when calculating deferred tax assets (DTAs).

Operating loss carryforwards

The benefit of net operating loss (NOL) carryforwards is recognized by recording a DTA in the period the NOLs are realized. A valuation allowance is recognized if it is more likely than not that some portion, or all of the DTA will not be realized.¹ The recording of a valuation allowance will delay recognition of a tax benefit for that portion of the DTA recorded. Any tax benefits realized in the current year, or in a future year by the reversal of a valuation allowance, are generally classified based on the source of the offsetting income in that year.² As a result, they are generally included in income from continuing operations. The only exception is for the tax effects of deductible temporary differences and carryforwards that are allocated to other comprehensive income or shareholders’ equity.³ Any NOL tax benefits should be disclosed, either with a footnote in a net presentation ...