Chapter 18

INTERMEDIATE ACCOUNTING
TENTH CANADIAN EDITION

Kieso Weygandt Warfield Young Wiecek McConomy
CHAPTER 18
Income Taxes
Prepared by:
Lisa Harvey, CPA, CA

Rotman School of Management,
University of Toronto
CHAPTER 18
INCOME TAXES
After studying this chapter, you should be able to:
Understand the importance of income taxes from a business perspective.

Explain the difference between accounting income and taxable income, and calculate taxable
income and current income taxes.
Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax
liabilities.
Explain what a deductible temporary difference is, determine its amount, and calculate deferred
tax assets.
Prepare analyses of deferred tax balances and record deferred tax expense.
Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate
current and deferred tax amounts when there is a change in substantively enacted tax rates.
Account for a tax loss carryback.
Account for a tax loss carryforward, including any note disclosures.
Explain why the Deferred Tax Asset account is reassessed at the statement of financial position
date, and account for the deferred tax asset with and without a valuation allowance account.
Identify and apply the presentation and disclosure requirements for income tax assets and
liabilities, and apply intraperiod tax allocation.
Identify the major differences between ASPE and IFRS for income taxes.
Copyright John Wiley & Sons Canada, Ltd.
Income Taxes
Income Taxes
from a
Business
Perspective
Current
Income Taxes
Deferred/Future
Income Taxes
Accounting
income and
taxable income
Deferred tax
liabilities
Calculation of
taxable income
Income tax
accounting
objectives and
analyses of
temporary
deductible
differences
Calculation of
current income
taxes
Deferred tax assets
Income Tax
Loss Carryover
Benefits
Presentation,
Disclosure,
and Analysis
Loss carryback
illustrated
Statement of
financial position
presentation
Loss carryforward
illustrated
Review of deferred
tax asset account
Tax rate
considerations
IFRS/ASPE
Comparison
Comparison of
IFRS and ASPE
Looking ahead
Income and
other statement
presentation
Disclosure
requirements
Analysis
Outstanding
conceptual
questions
Income Taxes from a Business

Perspective
A major consideration for new companies
is the tax rate that will be paid on its profits
Corporations file income tax returns that
are administered by the Canada Revenue
Agency (CRA)
The purpose is to raise money to support
government operations
Income Taxes
Income Taxes
from a
Business
Perspective
Current
Income Taxes
Deferred/Future
Income Taxes
Accounting
income and
taxable income
Deferred tax
liabilities
Calculation of
taxable income
Income tax
accounting
objectives and
analyses of
temporary
deductible
differences
Calculation of
current income
taxes
Deferred tax assets
Income Tax
Loss Carryover
Benefits
Presentation,
Disclosure,
and Analysis
Loss carryback
illustrated
Statement of
financial position
presentation
Loss carryforward
illustrated
Review of deferred
tax asset account
Tax rate
considerations
IFRS/ASPE
Comparison
Comparison of
IFRS and ASPE
Looking ahead
Income and
other statement
presentation
Disclosure
requirements
Analysis
Outstanding
conceptual
questions
Accounting and Taxable Income

Accounting income (or profit) is a pre-tax
concept
Determined according to IFRS or ASPE
Objective is to provide useful information to users of
the financial statements
Taxable income is a tax accounting term

Determined according to the Income Tax Act and
Regulations
Used to determine income tax payable
Therefore, accounting income taxable income

Accounting Income and

Taxable Income
To determine taxable income, companies
prepare a reconciliation of accounting income to
taxable income:
Accounting income
differences
Taxable income
Taxable income current tax rate = taxes

payable and current income tax expense
Accounting and Taxable Income Example

2014
Revenue
Expenses
Income
Accounting
Tax
$130,000
$100,000
60,000
60,000
$ 70,000
$ 40,000
Accounting and Taxable Income Example

2014
2015
2016
Accounting Income
$70,000
$70,000
$70,000
Adjust for revenue

taxable in future
period
(30,000)
20,000
10,000
Taxable Income
$ 40,000
$ 90,000
$ 80,000
Tax payable (25%)
$ 10,000
$ 22,500
$ 30,000
Reversing and Permanent Differences

Taxable income is determined by starting
with accounting income and adjusting it for
reversing/temporary and permanent
differences in the year
10
10
Reversing/Temporary Differences
Reversing differences are treated the same for
books and tax but in different periods
Relate to income statement differences
The balance of a temporary difference changes

from period to period
Originating timing difference
Cause of the initial difference (e.g. the $30,000 non
taxable revenue in 2014 in Chelsea example)
Reversing timing difference

Causes a temporary difference to decrease (e.g. the
$20,000 and $10,000 amounts taxed in 2015 and
2016 in Chelsea example)
11
11
Permanent Differences
Some items
are recorded
in books
but never
on tax return
Other items
are never
recorded in books
but recorded
on tax return
No future tax effects

for permanent differences
12
12
Permanent Differences
Items recognized for financial accounting
purposes but never for income tax purposes:
Non-tax-deductible expenses (e.g. fines, golf dues,
expenses related to non-taxable revenue)
Dividends from taxable Canadian corporations
Items recognized for tax purposes but not for

financial accounting purposes:
Depletion allowance of natural resources in excess of
cost
13
13
Calculation of Current Income Taxes

Two methods:
1. Taxes payable method
Allowed under ASPE

Current Income Taxes = Taxable income x Tax rate
2. Asset and liability approach

Required by IFRS and option under ASPE
Starts with Current Income Taxes and
- Adjusts for future/deferred income tax assets and
liabilities
- Recognizes a future/deferred income tax expense
14
14
Terminology
ASPE and IFRS use different terminology for the asset
and liability approach to income taxes
Under ASPE
This method is called the future income taxes method
Related tax accounts are called future income tax assets, future
income tax liabilities, and future income tax expense
Under IFRS
This method is called the temporary difference approach
Related tax accounts are called deferred tax assets, deferred tax
liabilities, and deferred tax expense
As a result, you will see the terms future and deferred

used interchangeably
15
15
Income Taxes
Income Taxes
from a
Business
Perspective
Current
Income Taxes
Deferred/Future
Income Taxes
Accounting
income and
taxable income
Deferred tax
liabilities
Calculation of
taxable income
Income tax
accounting
objectives and
analyses of
temporary
deductible
differences
Calculation of
current income
taxes
Deferred tax assets
Income Tax
Loss Carryover
Benefits
Presentation,
Disclosure,
and Analysis
Loss carryback
illustrated
Statement of
financial position
presentation
Loss carryforward
illustrated
Review of deferred
tax asset account
Tax rate
considerations
IFRS/ASPE
Comparison
Comparison of
IFRS and ASPE
Looking ahead
Income and
other statement
presentation
Disclosure
requirements
Analysis
Outstanding
conceptual
questions
16
16
Temporary Differences
Temporary differences are:
Accumulated timing differences
The difference between book value of an
asset or liability and its tax base or basis
The tax base of an asset or liability is

similar to a measurement attribute
17
17
Temporary Differences
There are two types of temporary
differences:
1. Taxable temporary differences (i.e. will be
added to accounting income in calculating
taxable income in the future)
2. Deductible temporary differences (i.e. will be
deducted from accounting income in
calculating taxable income in the future)
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18
Deferred Tax Liabilities and Deferred

Tax Assets
Deferred tax liabilities
Future tax consequences of a taxable
temporary differences
Deferred tax assets

Future tax consequences of a deductible
temporary difference
19
19
Deferred Tax Liabilities - Example
Accounts receivable
Carrying Value
$30,000
Tax Base
-0-
Tax rate = 25%

Income tax payable = $10,000
Deferred tax liability at the end of 2014: $7,500*

*(30,000 x 25%)
20
20

2015
Future
taxable
amounts
2016
Total
$20,000 $10,000 $30,000
Future tax
rate
25%
Future
income tax
liability
$ 5,000
25%
25%
$ 2,500 $7,500
21
21

Journal Entries in 2014:
Current Income Tax Expense 10,000
Income Tax Payable
10,000
Deferred Tax Expense
Deferred Tax Liability
7,500
7,500
22
22
Deferred Tax Assets Example

Cunningham Inc. sells microwave ovens
with a 2 year warranty
In 2015, estimated warranty expense is
$500,000
Actual warranty costs are $300,000 in
2016 and $200,000 in 2017
Income tax payable for 2015 is $600,000
23
23

Warranty liability
Carrying Amount
$500,000
Tax Base
-0-
Tax rate = 25%

Deferred tax asset at the end of 2015: $125,000*
*(500,000 x 20%)
24
24

Journal Entries for 2015:
Current Income Tax Expense 600,000
Income Tax Payable
600,000
Deferred Tax Asset

125,000
Deferred Tax Expense/Benefit 125,000
The total income tax expense of $475,000 is made
up of a current tax expense of $600,000 and a
deferred tax benefit of $125,000
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25
Income Tax Accounting Objectives

1. Recognize the amount of tax that is
payable or refundable for the current year
2. Recognize tax effects in the same
accounting period as the related
transactions and events
Referred to as interperiod tax allocation
26
Future Tax Rates

Should use the rates that are expected to
apply when the tax assets are realized or
the tax liabilities are settled
i.e., the enacted rate or substantively enacted
rate
27
27
Revision of Future Tax Rates

The effect of future tax rate changes should be
immediately recognized on all deferred tax
accounts
Recorded as an adjustment to the deferred tax
expense/benefit
IFRS requires separate disclosure of future tax

expense or benefit due to a change in tax rates
28
28
Revision of Future Tax Rate Example

Given:
Hostel Corp. had the following at end of 2014:
$3,000,000 of excess capital cost allowance (CCA)
Deferred tax liability of $900,000 ($3,000,000 x 30%)
Temporary difference is expected to reverse equally in
2015, 2016 and 2017 ($1,000,000 per year)
Assume a new income tax rate is enacted from 30% to
25%, effective January 1, 2016
Calculate the adjustment to the deferred tax liability and
provide the required journal entry
29
29
Revision of Future Tax Rate Example

Adjustment to the deferred tax liability:
2015
$1,000,000 x 30% = $300,000
2016
$1,000,000 x 25% = $250,000
2017
$1,000,000 x 25% = $250,000
Total
$800,000
Journal entry:
Deferred Tax Benefit
*($900,000 - $800,000)
100,000*
100,000
30
30
Income Taxes
Income Taxes
from a
Business
Perspective
Current
Income Taxes
Deferred/Future
Income Taxes
Accounting
income and
taxable income
Deferred tax
liabilities
Calculation of
taxable income
Income tax
accounting
objectives and
analyses of
temporary
deductible
differences
Calculation of
current income
taxes
Deferred tax assets
Income Tax
Loss Carryover
Benefits
Presentation,
Disclosure,
and Analysis
Loss carryback
illustrated
Statement of
financial position
presentation
Loss carryforward
illustrated
Review of
deferred tax asset
account
Tax rate
considerations
IFRS/ASPE
Comparison
Comparison of
IFRS and ASPE
Looking ahead
Income and
other statement
presentation
Disclosure
requirements
Analysis
Outstanding
conceptual
questions
31
31
Income Tax Loss Carryover Benefits

Tax law permits the use tax losses to offset
taxable income in other years
May be carried back three years (loss carryback)
or forward for the next twenty years (loss
carryforward)
32
32
Tax Loss Carryback

When applying the loss carryback, it is usually
applied to the oldest available year first
Prior years tax returns are refiled, reducing prior
taxable income with the current years loss
To record the tax loss carryback:
Income Tax Receivable
xx
Current Tax Benefit
xx
If a tax loss still remains, carry it forward
33
33
Tax Loss Carryforward

A tax loss carryforward can only be recognized if:
It is more likely than not (i.e., probable) that benefit will be
realized (i.e. company will generate taxable income in the
future to apply loss against)
To record the tax loss carryforward:

Deferred Tax Asset
xx
xx
To record the use of a recognized tax loss
carryforward:
Deferred tax expense
xx
Deferred tax asset
xx
34
34
Tax Loss Carryforward

If future taxable income not likely (i.e. not
likely that benefit will be realized), then do
not record the tax benefit
Instead, report existence of loss
carryforward in notes to the financial
statements
Disclose the amounts and expiry dates of
unrecognized income tax assets related to
the carryforward of unused tax losses
35
35
Tax Loss Carryforward (Contd)

If the tax loss carryforward was not recognized but the
company does generate taxable income in the future and
uses the unrecognized losses:
Taxable income, current tax expense and income tax payable are
reduced in the year that the tax loss carryforward is used
Separate disclosure of the tax benefit from realization of

unrecorded loss carryforward is not required under
ASPE, but is required under IFRS if it makes up a major
component of tax expense
36
36
Carryforward with Valuation Allowance

This approach permitted under ASPE (but not permitted
under IFRS)
Assuming a 20% tax rate and a $150,000 loss
carryforward where it is unlikely that benefit will be
realized in the future:
Deferred Tax Asset
30,000*
30,000
Deferred Tax Expense
30,000
Allowance to Reduce Future Income Tax
Asset to Expected Realizable Value
30,000
*(150,000 x 20%)
37
37
Carryforward with Valuation Allowance

The second entry indicates that the
company cannot conclude that it is more
likely than not that the company will
benefit from the tax loss in the future
The financial statements would be the
same whether the allowance method is
used or the future income tax asset is not
recognized at all
38
38
Review of Deferred Tax Asset Account

Like all assets, deferred tax assets must be
reviewed at year end to ensure that the carrying
amounts are appropriate
This depends on whether taxable income will be
earned in the future against which temporary
differences can be deducted
39
39
Income Taxes
Income Taxes
from a
Business
Perspective
Current
Income Taxes
Deferred/Future
Income Taxes
Accounting
income and
taxable income
Deferred tax
liabilities
Calculation of
taxable income
Income tax
accounting
objectives and
analyses of
temporary
deductible
differences
Calculation of
current income
taxes
Deferred tax assets
Income Tax
Loss Carryover
Benefits
Presentation,
Disclosure,
and Analysis
Loss carryback
illustrated
Statement of
financial position
presentation
Loss carryforward
illustrated
Review of deferred
tax asset account
Tax rate
considerations
IFRS/ASPE
Comparison
Comparison of
IFRS and ASPE
Looking ahead
Income and
other statement
presentation
Disclosure
requirements
Analysis
Outstanding
conceptual
questions
40
40
Statement of Financial Position

Presentation
Current income tax receivable or payable
are reported separately from
deferred/future income tax assets and
liabilities
They are reported as current
Shown on a gross basis unless there is a legal
right to offset
41
Statement of Financial Position

Presentation
Deferred Tax Assets and Liabilities: IFRS
All deferred tax assets and liabilities are recorded as non-current
Deferred Tax Assets and Liabilities: ASPE

Future tax asset or liability is classified as current or non-current
based on the classification of the underlying asset or liability
giving rise to the specific temporary difference
If the a future asset or liability is not related to specific asset or
liability (e.g. expensed research costs deferred for tax purposes),
classification is based on date that temporary difference is
expected to reverse or tax benefit expected to be realized
42
42
Income and Other Statement

Presentation
Income tax expense is reported with its related
item such as discontinued operations, other
comprehensive income, adjustments to
Retained Earnings etc.
This is referred to as Intraperiod Tax Allocation
Results in the tax expense being allocated within the
financial statements of the current period
43
43
Intraperiod Tax Allocation - Example

Assume the following information for Copy
Doctor Inc.:
Tax rate of 35%
A loss from continuing operations of $500,000
Income from discontinued operations of $900,000
($210,000 is not taxable)
Unrealized holding gain of $25,000 on investment
accounted for at FV-OCI
Prepare the journal entries to record current

and future tax expenses
44
44

Current Income Tax Expense
(discontinued operations)
172,500*
Current Income Tax Benefit
(continuing operations)
125,000**
Income Tax Payable
47,500
*income of 690,000 x 25% = 172,500 expense

**loss of 500,000 x 25% = 125,000 benefit
45
45
Deferred Tax Expense (OCI)

6,250
6,250
Calculations: 25,000 x 25% = 6,250
46
46
Disclosure Requirements
IFRS has more extensive disclosure requirements
than ASPE, including:
Major components of income tax expense or benefits

Sources of both current and future taxes
Amount of current and future tax recognized in equity
Reconciliation of effective and statutory tax rates
Information about unrecognized future tax assets
Information about each type of temporary difference
and future tax asset or liability recognized on
statement of financial position
47
47
Analysis
Extensive disclosure help users asses
quality of earnings as well as assist in
better prediction of future cash flows
48
48
Outstanding Conceptual Issues

Asset-liability method (or temporary
difference approach) is considered most
conceptually sound method of income tax
accounting
Significant conceptual questions remain
about:
Lack of discounting (and therefore, no
difference between short-term deferral and
long-term deferral)
Recognition of deferred tax assets
49
49
Income Taxes
Income Taxes
from a
Business
Perspective
Current
Income Taxes
Deferred/Future
Income Taxes
Accounting
income and
taxable income
Deferred tax
liabilities
Calculation of
taxable income
Income tax
accounting
objectives and
analyses of
temporary
deductible
differences
Calculation of
current income
taxes
Deferred tax assets
Income Tax
Loss Carryover
Benefits
Presentation,
Disclosure,
and Analysis
Loss carryback
illustrated
Statement of
financial position
presentation
Loss carryforward
illustrated
Review of deferred
tax asset account
Tax rate
considerations
IFRS/ASPE
Comparison
Comparison of
IFRS and ASPE
Looking ahead
Income and
other statement
presentation
Disclosure
requirements
Analysis
Outstanding
conceptual
questions
50
50
Looking Ahead
Additional changes are expected as the
result of current and future IASB projects
51
51
COPYRIGHT
Copyright 2013 John Wiley & Sons Canada, Ltd. All
rights reserved. Reproduction or translation of this
work beyond that permitted by Access Copyright (The
Canadian Copyright Licensing Agency) is unlawful.
Requests for further information should be addressed
to the Permissions Department, John Wiley & Sons
Canada, Ltd. The purchaser may make back-up copies
for his or her own use only and not for distribution or
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INTERMEDIATE ACCOUNTING

TENTH CANADIAN EDITION

Lisa Harvey, CPA, CA

Understand the importance of income taxes from a business perspective.

Deferred tax assets

Copyright John Wiley & Sons Canada, Ltd.

Income Taxes from a Business

Copyright John Wiley & Sons Canada, Ltd.

Deferred tax assets

Copyright John Wiley & Sons Canada, Ltd.

Accounting and Taxable Income

Taxable income is a tax accounting term

Therefore, accounting income taxable income

Accounting Income and

Taxable income current tax rate = taxes

Copyright John Wiley & Sons Canada, Ltd.

Accounting and Taxable Income Example

Copyright John Wiley & Sons Canada, Ltd.

Accounting and Taxable Income Example

Adjust for revenue

Tax payable (25%)

Copyright John Wiley & Sons Canada, Ltd.

Reversing and Permanent Differences

Copyright John Wiley & Sons Canada, Ltd.

The balance of a temporary difference changes

Reversing timing difference

No future tax effects

Copyright John Wiley & Sons Canada, Ltd.

Items recognized for tax purposes but not for

Copyright John Wiley & Sons Canada, Ltd.

Calculation of Current Income Taxes

Allowed under ASPE

2. Asset and liability approach

Copyright John Wiley & Sons Canada, Ltd.

As a result, you will see the terms future and deferred

Copyright John Wiley & Sons Canada, Ltd.

Deferred tax assets

Copyright John Wiley & Sons Canada, Ltd.

The tax base of an asset or liability is

Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd.

Deferred Tax Liabilities and Deferred

Deferred tax assets

Copyright John Wiley & Sons Canada, Ltd.

Deferred Tax Liabilities - Example

Tax rate = 25%

Deferred tax liability at the end of 2014: $7,500*

Copyright John Wiley & Sons Canada, Ltd.

Deferred Tax Liabilities - Example

$20,000 $10,000 $30,000

Copyright John Wiley & Sons Canada, Ltd.

Deferred Tax Liabilities - Example

Copyright John Wiley & Sons Canada, Ltd.

Deferred Tax Assets Example

Copyright John Wiley & Sons Canada, Ltd.

Deferred Tax Assets Example

Tax rate = 25%

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Deferred Tax Assets Example

Deferred Tax Asset