Common U.S. GAAP Issues Facing Accountants, 2nd Edition

Chapter 10Accounting for Income Taxes

Learning objectives

• Identify requirements of FASB Accounting Standards Codification^® (ASC) 740, Income Taxes.
• Identify items that give rise to temporary and permanent differences between book and tax bases.

Introduction

Differences between accounting principles generally accepted in the United States (GAAP) and the tax code for the recognition and measurement of revenues and expenses (also gains and losses) create differences in taxable income and financial accounting income. The tax-affected difference between book and tax income is assumed to create a difference between the tax and book basis of the related assets and liabilities. For example, accelerated depreciation for tax purposes often causes the depreciable asset to have a tax basis that is lower than its book value for financial reporting.

Differences of this type are described as temporary differences. Because assets and liabilities reported in the financial statements will eventually be recovered or settled (through use, sale, or collection for assets and through payment or services rendered for liabilities), the temporary differences will become taxable or deductible in future periods. Temporary differences that cannot be identified with assets or liabilities (for example, differences related to long-term contracts), are also considered to be taxable or deductible temporary differences to be recovered or settled in future years.

Upon the adoption of FASB ASC 606, Revenue from ...