19-4
6. Describe various temporary and
permanent differences.
7. Explain the effect of various tax rates and
tax rate changes on deferred income taxes.
8. Apply accounting procedures for a loss
carryback and a loss carryforward.
9. Describe the presentation of income taxes
in financial statements.
10. Indicate the basic principles of the asset-
liability method.
After studying this chapter, you should be able to:
LEARNING OBJECTIVES
1. Identify differences between pretax
financial income and taxable income.
2. Describe a temporary difference that
results in future taxable amounts.
3. Describe a temporary difference that
results in future deductible amounts.
4. Explain the non-recognition of a deferred
tax asset.
5. Describe the presentation of income tax
expense in the income statement.
19-5
Corporations must file income tax returns following the guidelines developed by the appropriate tax authority.
Because IFRS and tax regulations differ in a number of ways, frequently the amounts reported for the following will differ:
Income tax expense IFRS
Income taxes payable Tax Authority
LO 1
19-6
Tax Code
Financial Statements
Pretax Financial Income IFRS
Income Tax Expense Taxable Income
Income Taxes Payable
Tax Return
vs.
LO 1
19-7
Illustration: Chelsea, Inc. reported revenues of 130,000 and expenses of 60,000 in each of its first three years of
operations. For tax purposes, Chelsea reported the same expenses to the IRS in each of the years. Chelsea reported
taxable revenues of 100,000 in 2015, 150,000 in 2016, and 140,000 in 2017. What is the effect on the accounts of
reporting different amounts of revenue for IFRS versus tax?
LO 1
19-8
Revenues Expenses
Pretax financial income
Income tax expense 40
130,000 60,000
70,000
28,000 130,000
2016
60,000 70,000
28,000 130,000
2017
60,000 70,000
28,000 390,000
Total
180,000 210,000
84,000
IFRS Reporting
Revenues Expenses
Taxable income
Income taxes payable 40
100,000
2015
60,000 40,000
16,000 150,000
2016
60,000 90,000
36,000 140,000
2017
60,000 80,000
32,000 390,000
Total
180,000 210,000
84,000
Tax Reporting
2015
ILLUSTRATION 19-3
LO 1
ILLUSTRATION 19-2
Financial Reporting Income
19-9
Income tax expense IFRS Income tax payable TA
Difference
Income tax expense 40
28,000 16,000
12,000
28,000 28,000
2016
36,000 8,000
28,000 28,000
2017
32,000 4,000
28,000 84,000
Total
84,000
84,000
Comparison
2015
Are the differences accounted for in the financial statements?
Year Reporting Requirement
2015 2016
2017 Deferred tax liability account
increased to 12,000
Deferred tax liability account reduced
by 8,000 Deferred tax liability account
reduced by 4,000
Yes
LO 1
ILLUSTRATION 19-4
Comparison of Income Tax Expense to Income
Taxes Payable
19-10
Statement of Financial Position
Assets:
Liabilities:
Equity:
Income tax expense 28,000
Income Statement
Revenues:
Expenses:
Net income loss
2015 2015
Deferred taxes 12,000
Where does the “deferred tax liability” get reported in the financial statements?
Income taxes payable 16,000
LO 1
19-11
6. Describe various temporary and
permanent differences.
7. Explain the effect of various tax rates and
tax rate changes on deferred income taxes.
8. Apply accounting procedures for a loss
carryback and a loss carryforward.
9. Describe the presentation of income taxes
in financial statements.
10. Indicate the basic principles of the asset-
liability method.
After studying this chapter, you should be able to:
LEARNING OBJECTIVES
1. Identify differences between pretax
financial income and taxable income.
2. Describe a temporary difference that
