SFAS No. 109, “Accounting for Income Taxes,” requires interperiod income tax allocation for temporary differences. Required:...

SFAS No. 109, “Accounting for Income Taxes,” requires interperiod income tax allocation for temporary differences.

Required:

a. Define the term temporary difference.
b. List the examples of temporary differences contained in SFAS No. 109.
c. Defend interperiod income tax allocation.

Solutions

Expert Solution

a. As the name goes, temporary differences are capable of reversal in the near future. So, the company needs to pay tax or create deferred asset in such scenario. Basically, temporary differences are created due to items of revenue or expenses recognized in one period but should in different periods. This create timing difference between the books temporarily needs to be managed. The difference when arises initially is called origination of timing difference while reversal entry is called reversal of timing difference.

b. The below are examples of temporary differences as contained in SFAS 109 :

· A reduction in the tax basis of depreciable assets because of tax credits.

· Foreign operations for which the reporting currency is the functional currency.

· Revenues or gains that are taxable after they are recognized in financial accounting income.

· Expenses or losses that are deductible after they are recognized in financial accounting income

· Adjustment for inflation creating increasing in tax basis of assets.

c. Interperiod tax allocation are the basis of temporary differences resulting in future tax collection. Temporary differences results in deferred tax assets and liabilities which impacts the reported income tax expense. Interperiod tax allocation comes into loop and complies with matching concept of accounting. If temporary differences results in tax payable in future, deferred tax asset is created and if it results tax refund, deferred tax asset is created.This is how SFAS 109 has defended interperiod tax allocation.

However, there may be changes in tax rates in future due to change in laws. These will be treated as changes in accounting estimate and relevant adjustments in interperiod tax allocation will be made.

ekkarill92 answered 1 year ago

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