Question

. What is the difference between the ‘income statement’ approach and the ‘balance sheet’ approach in accounting for taxes?

2. Briefly discuss two ‘conceptual concerns’ when accounting for taxes.

3. How are deferred taxes classified on the balance sheet??

4. How are changes in tax rates accounted for in the deferred tax accounts? How are they treated on the income statement?

5. List and briefly discuss two disclosure items for taxes.

Answer 1

1. The amount of deferred income tax is based on tax rates in effect when temporary differences originate. It is an income-statement-oriented approach. It emphasizes proper matching of expenses with revenues in the period when a temporary difference originates. Finally, it is not acceptableunder GAAP.

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. It emphasizes the usefulness of financial statements in evaluating financial position and predicting future cash flows. Most importantly, it is the only method accepted by GAAP.

2.

Concept#1. Going Concern

The preparer (and auditor) of the accounts should consider and check whether or not the enterprise is likely to continue in operational existence for the foreseeable future. This means in particular that there is no intention or necessity to liquidate or curtail significantly the scale of operations and thus the P & L account and balance sheet will not be materially affected. For example, if a business which manufactures a product line on specialized equipment decides to cease manufacturing the product, the equipment will very likely cease to have and hold the value it did when this part of the business was “a going concern”.

Concept#2. Accruals or Matching Concept

Revenue and costs should be accrued (that is, recognized as they are earned or incurred, not as money is received or paid), matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the P & L account of the period to which they relate; with the proviso that where the accruals concept is inconsistent with the “prudence” concept the latter will prevail.

3.To simplify presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability.

4.The deferred tax liability represents a future tax payment a company is expected to make to appropriate tax authorities in the future, and it is calculated as the company's anticipated tax rate times the difference between its taxable income and accounting earnings before taxes.

5.

1. The disclosure of some of the accounting policies followed in the preparation and presentation of the financial statements is required by law in some cases.
2. The Institute of Chartered Accountants of India has, in Standards issued by it, recommended the disclosure of certain accounting policies, e.g., translation policies in respect of foreign currency items.