Classification of Deferred Tax Accounts

Example: Internal Classification - Deferred Tax Accounts

2. Net operating losses -- This topic is covered in a later lesson. It is a loss for tax purposes that can be carried forward to future years. The loss is not associated with any particular asset or liability. The related deferred tax asset is classified according to the period of expected reversal.

Classification for Balance Sheet Reporting

A. For external reporting, the current deferred tax accounts are netted together to form one current deferred tax asset or liability, and the noncurrent deferred tax accounts are likewise netted to form one noncurrent deferred tax asset or liability.

Four Deferred Accounts

A. Internal deferred tax accounts are kept separate. It is therefore possible to have four deferred tax accounts internally: Current Noncurrent Deferred Tax Asset x x Deferred Tax Liability x x B. Each of the four balances is the sum of the relevant future differences as defined above, multiplied by the future enacted tax rate. For example, the current deferred tax liability balance is the sum of future taxable differences across all items giving rise to a taxable difference expected to reverse the following year, multiplied by the enacted tax rate.

Internal Classification - Deferred Tax Accounts

A. The classification of the deferred tax account is based on the classification of the item giving rise to it. 1. If a temporary difference is related to a current liability or asset, then the associated deferred tax account is also classified as current. 2. If a temporary difference is related to a noncurrent liability or asset, then the associated deferred tax account is also classified as noncurrent.

Classification for Balance Sheet Reporting

B. The rationale for this offsetting is that a future deductible difference reversing next year naturally cancels a future taxable difference reversing next year. For example, a future taxable difference of $10,000 reversing next year cancels a $7,000 deductible difference reversing next year leaving future taxable income exceeding book income by $3,000. The net current deferred tax liability is $900 assuming a tax rate of 30%.

(The Start of CPAexcel Flashcards) How are temporary differences with no balance sheet account association classified?

Based on expected year of reversal.

Example: Internal Classification - Deferred Tax Accounts

C. For some items, the future temporary difference is not associated with a specific balance sheet account. For these items, the classification of the deferred tax account is based on the expected period of reversal. For the portion expected to reverse in the year following the current year, the deferred tax account is classified as current. Otherwise the classification is noncurrent. 1. Organization costs -- This cost is related to the entire firm's early activities and is expensed immediately for financial reporting purposes. The cost is deducted for tax purposes over a relatively short period. In the period of incurrence, a future deductible difference is generated for the portion deductible in future periods. The amount of the deduction for the next year is included in the future deductible differences leading to current deferred tax asset. The remainder leads to the noncurrent deferred tax asset.

Classification for Balance Sheet Reporting

C. Therefore, a firm will report at most two net deferred tax accounts in the balance sheet. The current and non-current deferred tax assets are not added together, nor are the current and non-current deferred tax liabilities.

List the four deferred tax accounts possible.

Classified separately, therefore: 1. Current deferred tax asset; 2. Noncurrent deferred tax asset; 3. Current deferred tax liability; 4. Noncurrent deferred tax liability.

How are deferred tax accounts offset for reporting?

Current accounts are offset; noncurrent accounts are offset; two net accounts remain for reporting.

Thorn Co. applies Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. At the end of 2005, the tax effects of temporary differences are as follows: Tax Assets (Liabilities) Deferred Related Asset Classification Accelerated tax depreciation ($75,000) Non-current asset Additional costs in inventory for tax purposes $25,000 Current asset ($50,000) ======== A valuation allowance was not considered necessary. Thorn anticipates that $10,000 of the deferred tax liability will reverse in 2006. In Thorn's December 31, 2005 balance sheet, what amount should Thorn report as non-current deferred tax liability?

Current and non-current deferred tax accounts are not netted together for balance sheet disclosure. In this case, there is a non-current deferred tax liability, and a current deferred tax asset. Therefore, the full $75,000 of non-current deferred tax liability is separately disclosed in the balance sheet. Even though a portion of the liability is expected to reverse within one year of the balance sheet date, that does not change the classification of any of the deferred tax liability account. It is the related asset classification that determines current or non-current classification. Because the deferred tax liability is related to a non-current asset, the entire amount is classified as non-current.

How are deferred tax accounts reported on the balance sheet?

Current assets and liabilities are netted. Noncurrent assets and liabilities are netted.

Short-term prepaid rent gives rise to what type of deferred tax account and how is it classified?

Current deferred tax liability.

Organization costs give rise to what type of deferred tax account and how is it classified?

Deferred tax asset; classification depends on expected period of reversal.

Example: Classification for Balance Sheet Reporting

Example: After recording the year's tax accrual entry, the firm's ending deferred tax balances are: Current Noncurrent Deferred Tax Asset $300 $600 Deferred Tax Liability 900 400 On the balance sheet, this firm would report: Current Deferred Tax Liability $600 Noncurrent Deferred Tax Asset 200

Example: Internal Classification - Deferred Tax Accounts

Example: Assume in year 1 that $50,000 of organization costs are incurred. They are deductible over years 1-5 at even amount per year. The future deductible difference is $40,000 at the end of year 1 (the first $10,000 is deductible in year 1). Of that amount, $10,000 will reverse in year 2. This $10,000 amount is included in the determination of the firm's ending current deferred tax asset for year 1. With a tax rate of 30%, the current deferred tax asset is increased $3,000. The noncurrent deferred tax asset is increased $9,000 ($30,000 x .30).

Example: Classification for Balance Sheet Reporting

Example:The following future temporary differences have been identified in the process of preparing the tax accrual entry for the current year (future enacted tax rate is 30%): Amount of (Deductible) Resulting Deferred Tax Account (*) or Taxable Temporary Difference Associated with $4,000 Noncurrent Asset NDTL $1,200 (3,000) Noncurrent Liability NDTA 900 12,000 Current Asset CDTL 3,600 (8,000) Current Liability CDTA 2,400 (12,000) NonCurrent Liability NDTA 3,600 7,000 NonCurrent Asset NDTL 2,100 * Key: C = Current N = Noncurrent DTA = Deferred Tax Asset DTL = Deferred Tax Liability The deferred tax account balance is the tax rate times the temporary difference. Aggregating by type, the totals are: Current Deferred Tax Liability (CDTL) ($3,600) Current Deferred Tax Asset (CDTA) 2,400 Net current deferred tax liability reported in balance sheet ($1,200) Noncurrent Deferred Tax Asset (NDTA) $4,500 Noncurrent Deferred Tax Liability (NDTL) (3,300) Net noncurrent deferred tax asset reported in balance sheet $1,200

Example: Internal Classification - Deferred Tax Accounts

Examples -- 1. The taxable temporary difference arising from depreciable plant assets is related to a non-current asset. Therefore, the associated deferred tax liability is classified as a non-current liability. 2. The deductible temporary difference arising from a warranty liability (1-year warranty) is related to a current liability. Therefore the associated deferred tax asset is classified as a current asset. 3. If the warranty were a two-year warranty, the portion of the temporary difference relating to the current warranty liability would result in a current deferred tax asset, and the portion relating to the noncurrent warranty liability would result in a noncurrent deferred tax asset. 4. The taxable temporary difference arising from prepaid rent (1-year coverage) is related to a current asset. Therefore, the associated deferred tax liability is classified as a current liability. However, for prepaids covering more than one year, the deferred tax liability pertaining to the noncurrent prepaid is classified as a noncurrent liability.

Hut Co. has temporary taxable differences that will reverse during the next year and add to taxable income. These differences relate to non-current assets. Deferred income taxes based on these temporary differences should be classified in Hut's balance sheet as a

Future taxable differences cause taxable income in the future to exceed pre-tax accounting income. Therefore, deferred tax liabilities are the result of taxable differences. Classification of deferred tax accounts is based on the item giving rise to the temporary differences. In this case, the underlying item is non-current. Therefore, the deferred tax liability is also classified as non-current.

Why is the procedure for offsetting deferred tax accounts reasonable given the nature of the underlying differences?

It is reasonable because future deductible and taxable differences will naturally cancel in the relevant future periods.

How is the classification of a deferred tax account determined?

Same as asset/liability that caused the temporary difference.

In its first four years of operations ending December 31, 2002, Alder, Inc.'s depreciation for income tax purposes exceeds its depreciation for financial-statement purposes. This temporary difference is expected to reverse in 2003, 2004, and 2005. Alder had no other temporary difference and elected early adoption of FASB 109. Alder's 2002 balance sheet should include

The classification of deferred tax accounts is based on the classification of the underlying account giving rise to the deferred tax effect. In this case, depreciable assets are non-current assets, therefore the deferred tax account is also classified as non-current. Because the future temporary differences are taxable (future tax depreciation will be less than book depreciation, causing future taxable income to exceed pre-tax accounting income), the deferred tax account is a liability. Future taxable temporary differences give rise to deferred tax liabilities.

At December 31, 2005, Bren Co. has the following deferred income tax items: A deferred income tax liability of $15,000 related to a non-current asset A deferred income tax asset of $3,000 related to a non-current liability A deferred income tax asset of $8,000 related to a current liability Which of the following should Bren report in the non-current section of its December 31, 2005 balance sheet?

The classification of deferred tax accounts is based on the underlying account to which they are related. The $15,000 income tax liability is related to a non-current asset. Therefore, that deferred tax liability is classified as non-current. Balance-sheet presentation of deferred tax accounts nets the non-current accounts and nets the current accounts, for a maximum of two net deferred accounts reported. This firm would net the $15,000 non-current deferred tax liability with the $3,000 non-current deferred tax asset, to yield a net non-current deferred tax liability of $12,000.

Because Jab Co. uses different methods to depreciate equipment for financial statement and income tax purposes, Jab has temporary differences that will reverse during the next year and add to taxable income. Deferred income taxes that are based on these temporary differences should be classified in Jab's balance sheet as a

The classification of deferred tax accounts is the same as the accounts giving rise to the deferred taxes. The temporary differences referred to in the question are future taxable differences, which cause a deferred tax liability. The account giving rise to the difference is equipment, which is classified as long-term. Therefore, the deferred tax liability is also classified as long-term (non-current).