Wiley GAAP: Practical Implementation Guide and Workbook

Chapter 16. INCOME TAXES (ASC 740)

BACKGROUND AND INTRODUCTION

The Standard Applies to the Accounting for Income Taxes

ASC 740 uses the liability method and adopts a statement of financial position approach. Instead of accounting for the timing differences between the accounting and tax consequences of revenue and expenses, it accounts for the temporary differences between the accounting and tax bases of assets and liabilities. The accounting standard adopts a full-provision statement of financial position approach to accounting for tax.

It is assumed that the recovery of all assets and the settlement of all liabilities have tax consequences and that these consequences can be estimated reliably and will be unavoidable.

The main reason why deferred tax has to be provided is that generally accepted accounting principles (GAAP) recognition criteria often are different from those that are set forth in tax law. Thus, there will be income and expenditures in financial statements that will not be allowed for taxation purposes in the same reporting periods.

A deferred tax liability or asset is recognized for future tax consequences of past transactions. There are some limited exemptions to this general rule.

DEFINITIONS OF KEY TERMS

Deferred income tax asset. The asset recognized to reflect the expected future benefit available to be realized upon the reversal of deductible temporary differences.

Deferred income tax liability. The liability recognized to reflect the expected future income taxes ...