Question

how to identify FDA(future deductible amount) ,FTA(future taxable amount),Tax base,carriny amount ,fair value.cost to sell ,value in use.recoverable amount?whether fair value-cost to sell is equal to value in use?value in use=recoverable amount?thanks !

Answer 1

Temporary differences occur because financial accounting and tax accounting rules are somewhat incosistent when determining when to record some items of revenue and expense. Because of this inconsistencies , a company may have revenue and expense transactions in book income for 2013 but in taxable income in 2012 and vice-versa.

Two types of temporary differences exit. One result in a future taxable amount, such as revenue earned for financial accounting purposes but deffered for tax accounting purposes. This may happen if a company uses the cash method for tax preparation.

The second type of temporary difference is a future deductible amount. The company is reporting an expense on the current tax return but reports it for financial statement purposes in the future. Depreciation is a great example of this. Now it is more important to keep in mind that temporary differences smooth out, given enough time. Excess financial income over taxable income in one year eventually reverses as an excess of taxable income over financial income in another year (and vise-versa). Because of this, accounting geeks also refer to temporary differences as timing differences.

Measure upon which the assesment or determination of tax is based , called tax base. For example taxable income is the tax base of income tax and assesed value is the tax base for property taxes.

The carriny amount refers to the amount that the company has on it's books for an asset and a liabiliy. For example , the carriny amount of a company's truck is the cost of the truck minus the accumulated depreciation on the truck.

Fair value is the sale price agreed upon by a willing buyer or seller, assuming both parties enter the transaction freely and knowledgeably. Many investments have a fair value determined by a market where the security is traded. Fair value also represents the value of a company's asset and liabilities when a subsidary company's financial statements are consolidated with a parent company.

Recoverable amount is the higher of fair value less cost to sell and value in use. The carrying value of a fixed asset is compared with recoverable amount to find out the impairment loss if any.

Recoverable amount is the concept introduced by IAS 36 impairment of Assets. The US GAAP impairment guidence does not mentions recoverable amount.

The carrying amount (i.e. book value) of a fixed asset represent the economic benefits, i.e. future cash flows that the asset embodies. These cash flows can comes in two forms, either through sale of the asset in open market or through continued use in the operations of the business.
Fair value less cost to sell is the measure of value of net economic benefits embedded in a fixed asset that can be unlocked in event of the sale of the asset. As the name shows, it equals the fair value minus the costs that the company will incur in selling the asset such as transaction costs, irrecoverable taxes, delivery and transportation costs, etc. The fair value of the asset is the amount at which it can be sold to a knowledgeable and willing buyer in an arm's length transaction.

The value in use is the present value of the expected future net cash flows generated by the asset. It is calculated by finding out probability-weighted future cash flows of the asset and discounting those cash flows using a discount rate that reflects the risk of the cash flows. Both the cash flows and the discount rate are pre-tax inputs.

The asset or CGU is impaired if its carrying amount exceeds its recoverable amount. The recoverable amount is defined as the higher of the 'fair value less cost to sell' and the 'value in use'. Any impairment loss is recognised as an expense in profit or loss for assets carried at cost.