Question

a.discuss the criteria for recognizing deferred tax assets and deferred tax liabilities under the provisions of fasb asc 740

b. compare and contrast the asset-liability method and the deferred method

Answer 1

A) -
Deferred tax assets and liabilities are often overlooked in a company’s financial reporting. In this issue of the Tax Insight, we look at ASC 740 requirements for accounting for income taxes and deferred taxes, and factors to consider when determining whether a valuation allowance should be established.

FASB Accounting Standards Codification (ASC) 740, Accounting for Income Taxes (previously FASB Statement No. 109) outlines the following requirements:

1. Recognition of the estimated taxes payable or refundable on tax returns for the current year as a tax liability or asset.
2. Recognition of a deferred tax liability or asset for the estimated future tax effects attributable to temporary differences and carry forwards.

ASC 740 provides the following formula for calculating the income tax provision.

Current Income Tax Provision + Deferred Income Tax Provision = Total Income Tax Provision

The current tax expense or benefit is defined in ASC 740-20-20 as, “The amount of income taxes paid or payable (or refundable) for a year as determined by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues for that year.” Generally, the current provision calculation is the same as completing a current year tax return for the entity, with a few modifications.

B) -
Deferred Method
It is an income-statement-oriented approach that emphasize matching of expenses with revenues in the period when a temporary difference created. It is not acceptable under GAAP.
The amount of deferred income tax is based on tax rates in effect when temporary differences originate.

Asset-liability Method
The amount of deferred income tax is based on the tax rates expected to be in effect during the periods in which the temporary differences reverse. It is a balance-sheet-oriented approach that emphasizes the usefulness of financial statements in evaluating financial position and predicting future cash flows. It is the only method accepted by GAAP.