US FAS 109 training package

*Please note the reversal process can take more than one year.
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DTAs & DTLs Based on Basis Differences

Deferred Tax Assets (DTAs) and Deferred Tax Liabilities (DTLs) are based on basis differences between the Book Basis per U.S. GAAP and the Tax Basis per the Local Income Tax Return.
Tax Deductions > Financial Statement Deductions
-ORIncome is reflected in the financial statements before being reflected in a tax return (e.g. installment sale). Financial Statement Income > Taxable Income
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Deferred Tax Assets (DTAs)

Deferred Tax Assets (DTAs) arise when deductions are reflected in the financial statements before being reflected in a tax return (e.g. Pension/OPEB)

In the year a DTL reverses* (when the impact of an expense or income item that was temporarily different for book and tax becomes the same for both), it causes taxable income to be higher than financial statement income. Taxable Income > Financial Statement Income
Financial Statement Deductions > Tax Return Deductions
-ORIncome is reflected in a tax return before being reflected in the financial statements (e.g. pre-paid services). Taxable Income > Financial Statement Income


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Temporary Differences

Another example of an item that can result in a temporary difference are accrued expenses. They may be deductible on the income tax return only when actually paid, not when recorded for financial statement purposes.
* Please note the reversal process can take more than one year.
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Deferred Tax Liabilities (DTLs)

Deferred Tax Liabilities (DTLs) arise when deductions are reflected in a tax return before being reflected in the financial statements (e.g. accelerated depreciation)
Basis Difference for Assets on the Balance Sheet: – Book Basis > Tax Basis = DTL – Tax Basis > Book Basis = DTA Basis Difference for Liabilities on the Balance Sheet: – Book Basis > Tax Basis = DTA – Tax Basis > Book Basis = DTL

In the year a DTA reverses* (when the impact of an expense or income item that was temporarily different for book and tax becomes the same for both), it causes taxable income to be lower than financial statement income. Taxable Income < Financial Statement Income
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Why Do We Need FAS 109?

Purpose of FAS 109 is to properly match income tax expense with the economic income earned.
The principles of FAS 109 follow the overall accrual principles utilized for U.S. GAAP financial statements. When an event is recognized in the financial statements, the eventual income tax consequences of the “event” should also be recognized at the same time – that is, “match” the income tax to the same financial statement period that includes the gain or loss (income or expense, etc.). The matching is accomplished through the recording of Deferred Tax Liabilities and Deferred Tax Assets

Future Taxable Income/Deduction X Statutory Tax Rate = DTA/DTL
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Deferred Income Taxes Classification

Deferred income tax assets and liabilities must be classified as either current or non-current according to the classification of the related asset or liability that the deferred income tax is derived from.
“FAS 109” “Accounting for Income Taxes” Statement of Financial Accounting Standards No. 109
November 24, 2004
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FAS 109

Issued in February 1992
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The Basics

Income Taxes Payable or Refundable are calculated on a cash basis. They reflect what is owed/(refundable) on the local income tax return for the current year. Deferred Tax Liabilities & Assets are temporary differences multiplied by the combined statutory tax rate (Federal and blended State & Local) and are booked on the balance sheet. Temporary Differences arise because the tax treatment of an item is temporarily different from its financial accounting treatment. Can cause taxable income to be higher or lower than book income in any given year
There
are a limited number of exceptions to the recognition of deferred income taxes, some of which are as follows:
– Basis differences that will not result in future taxable or deductible amounts. – Certain temporary differences addressed by APB 23, as amended by FAS 109. – Temporary differences related to goodwill when the amortization of goodwill is not deductible for tax purposes. – Certain existing accounting requirements for leveraged leases. – Temporary differences resulting from intercompany profits on assets that remain within the group.