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Chapter 19: Q2IFRS (page 1114)

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to income tax accounting.

Short Answer

Expert verified

Both IFRS and GAAP use the asset and liability approach for recording deferred tax assets. As per the IFRS, tax consequence are reported under equity, whereas as per GAAP it is reported under income.

Step by step solution

01

Meaning of IFRS

International Financial Reporting Standards describes the set of rules and procedures for accounting.

02

Explaining the difference between GAAP and IFRS.

For documenting deferred tax assets, both IFRS and GAAP adopt an asset and liability method. In general, the variations between IFRS and GAAP include modest changes in asset-liability exceptions, slight differences in recognition, measurement, and disclosure standards, and differences in implementation guidelines. For comparison, here are a few crucial aspects.

  1. Under IFRS, a deferred tax asset is recorded up to the likely amount to be realized using an affirmative judgment method. The GAAP uses the impairment techniques case; the deferred tax asset is realized entirely. If it is more likely that all or a portion of the deferred tax asset will not be realized, it is then lowered by a valuation account.
  2. Under IFRS, tax implications on specific items are reflected in equity. Under GAAP, the tax consequences are charged or credited to income.
  3. Companies must assess the possibility of uncertain tax positions being sustainable after an audit under GAAP. If the position is "more likely than not" to be prohibited, potential liabilities must be accumulated and declared. All possible liabilities must be recorded under IFRS. In terms of measurement, IFRS varies from GAAP in that it utilizes an anticipated value technique to calculate the tax liability.

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Most popular questions from this chapter

Which of the following is false? (a) Under GAAP, deferred taxes are reported based on the classification of the asset or liability to which it relates. (b) Under IFRS, all potential liabilities must be recognized. (c) Under GAAP, the enacted tax rate is used to measure deferred tax assets and liabilities. (d) Under IFRS, all deferred tax assets and liabilities are classified as non-current.

At December 31, 2017, Appaloosa Corporation had a deferred tax liability of \(25,000. At December 31, 2018, the deferred tax liability is \)42,000. The corporation鈥檚 2018 current tax expense is $48,000. What amount should Appaloosa report as total 2018 income tax expense?

The following information is available for Remmers Corporation for 2017. 1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by \(120,000. This difference will reverse in equal amounts of \)30,000 over the years 2018鈥�2021. 2. Interest received on municipal bonds was \(10,000. 3. Rent collected in advance on January 1, 2017, totaled \)60,000 for a 3-year period. Of this amount, \(40,000 was reported as unearned at December 31, 2017, for book purposes. 4. The tax rates are 40% for 2017 and 35% for 2018 and subsequent years. 5. Income taxes of \)320,000 are due per the tax return for 2017. 6. No deferred taxes existed at the beginning of 2017. Instructions (a) Compute taxable income for 2017. (b) Compute pretax financial income for 2017. (c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2017 and 2018. Assume taxable income was $980,000 in 2018. (d) Prepare the income tax expense section of the income statement for 2017, beginning with 鈥淚ncome before income taxes.鈥�

Presented below are two independent situations related to future taxable and deductible amounts resulting from temporary differences existing at December 31, 2017. 1. Mooney Co. has developed the following schedule of future taxable and deductible amounts. 2018 2019 2020 2021 2022 Taxable amounts \(300 \)300 \(300 \) 300 \(300 Deductible amount 鈥� 鈥� 鈥� (1,600) 鈥� 2. Roesch Co. has the following schedule of future taxable and deductible amounts. 2018 2019 2020 2021 Taxable amounts \)300 \(300 \) 300 \(300 Deductible amount 鈥� 鈥� (2,300) 鈥� Both Mooney Co. and Roesch Co. have taxable income of \)4,000 in 2017 and expect to have taxable income in all future years. The tax rates enacted as of the beginning of 2017 are 30% for 2017鈥�2020 and 35% for years thereafter. All of the underlying temporary differences relate to noncurrent assets and liabilities. Instructions For each of these two situations, compute the net amount of deferred income taxes to be reported at the end of 2017, and indicate how it should be classified on the balance sheet.

Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year鈥檚 taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (c) How should Dexter classify the deferred tax consequences of the temporary differences on its balance sheet?
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