In: Accounting
Using PwC’s Guide to Accounting for Income Taxes,
a. Identify one potential complexity that can arise in determining the applicable tax rate for recognizing and measuring deferred taxes.
b. How might PwC’s coverage of this issue be useful to a researcher?
c. Next, briefly summarize one of the examples PwC uses in its guide to illustrate this (or another) potential complexity in determining the applicable tax rate.
1. a. Complexities in determining the applicable tax rate for recognizing and measuring deferredtaxes.
There are several situations that create additional complexities when determining the appropriate rate at which temporary differences should be measured. Several of the more common circumstances are discussed in the sections that follow.
Ordering Effects, Undistributed earnings, Special deducations, Tax Holidays
B. Coverages of the PwC is very useful to a researcher, being PwCs takes very practical examples of bussiness and detailed explaination provide to researchers
C. one of the examples PwC uses in its guide to illustrate this (or another) potential complexity in determining the applicable tax rate.
Tax holiday
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Scheduling temporary differences
A foreign government grants a company a tax holiday. During the holiday, the company will be 100% exempt from taxation. Upon expiration of the holiday, the company will be subject to taxation at the statutory rate. The company is scheduling the reversal of existing temporary differences related to depreciable assets to determine whether any are expected to reverse after the tax holiday for which deferred taxes should be provided.
Should the company consider future originating differences related to its existing fixed assets when scheduling the reversal of existing temporary differences?
Analysis
ASC 740-10-55-22 provides some ground rules for scheduling temporary differences.
Among those ground rules are:
(i) The method used should be systematic and logical;
(ii) Minimizing complexity is an appropriate consideration in selecting a method; and
(iii) The same method should be used for all temporary differences within a particular
Category
When scheduling the reversal of depreciable asset temporary differences to determine whether any are expected to reverse (and in what amount) after the expiration of a tax holiday, we believe that it is acceptable to either consider or exclude future originating differences. We believe that both methods are systematic and logical and can be reasonably supported.
A method that considers originating differences is based upon the view that future originating differences are inherent in the asset that exists at the balance sheet date and, therefore, should not be ignored.
A method that does not consider originating differences is based upon the view that only differences that exist at the balance sheet date should be considered. This method is consistent with the guidance in ASC 740-10 -55-14, which indicates that future originations and their reversals are a factor to be considered when assessing the likelihood of future taxable income. By implication, they would not be considered part of the reversal of the temporary difference existing at the balance sheet date. A method that does not consider originating differences may also minimize the complexity of the calculation