International Financial Statement Analysis

CHAPTER 12

INCOME TAXES

Elbie Antonites, CFA University of Pretoria Pretoria, South Africa

 

Michael A. Broihahn, CFA Barry University Miami, Florida

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Explain the differences between accounting profit and taxable income, and define key terms including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense.

• Explain how deferred tax liabilities and assets are created and the factors that determine how a company’s deferred tax liabilities and assets should be treated for the purposes of financial analysis.

• Determine the tax base of a company’s assets and liabilities.

• Calculate income tax expense, income taxes payable, deferred tax assets and deferred tax liabilities, and calculate and interpret the adjustment to the financial statements related to a change in the income tax rate.

• Evaluate the impact of tax rate changes on a company’s financial statements and ratios.

• Distinguish between temporary and permanent items in pretax financial income and taxable income.

• Discuss the implications of a valuation allowance for deferred tax assets (i.e., when it is required, what impact it has on financial statements, and how it might affect an analyst’s view of a company).

• Compare and contrast a company’s deferred tax items and effective tax rate reconciliation between reporting periods.

• Analyze disclosures relating to deferred tax items and the effective ...