To properly account for income taxes in its financial statements, an entity must (1) recognize the amount of taxes payable or refundable for the current year and (2) recognize deferred tax liabilities and assets for the future tax consequences of events that are recognized in its current financial statements. The Income Taxes topic addresses financial accounting and reporting for the effects of income taxes that result from an entity’s activities during the current and preceding years. This special report highlights areas of consideration when experiencing changes in tax law, rates, and tax status. It gives a glimpse into checklists for auditor consideration and income tax disclosures, and will keep readers current with the issues from recent news stories. This report analyzes rules in FASB Accounting Standards Codification Topic 740 (ASC 740), Accounting for Income Taxes. Application of these standards requires a thorough understanding of their conceptual underpinnings, and significant judgment is often required in implementation of these decidedly principles-based standards.
The report defines, explains, and illustrates taxable temporary differences as well as the related concepts of deferred tax liabilities and deferred tax assets. It explains how a company initially should recognize and measure deferred tax liabilities and assets and how to adjust them to account for certain subsequent events. It further illustrates how to present and disclose deferred tax assets and liabilities in financial statements, while reviewing disclosure requirements under ASC 740.