Ch 17 LO-5 DQs

How does a company determine if a deferred tax asset or liability should be classified as current or noncurrent on its balance sheet?

A company classifies its deferred tax assets and liabilities based on the classification of the asset or liability to which the deferred tax account relates. Deferred tax liabilities related to a long-term asset (for example, depreciation of a fixed asset) are classified as noncurrent because the related asset is classified as noncurrent on the balance sheet. A deferred tax asset related to uncollectible accounts receivable is classified as a current asset because accounts receivable is treated as a current asset. Deferred tax liabilities and assets not related to a specific asset (for example, a net operating loss carryover or organizational expenditures capitalized for tax purposes) are classified based on the expected reversal date of the temporary difference.

What is a company's hypothetical income tax provision and what is its importance in a company's disclosure of its income tax provision in the tax footnote?

A company's hypothetical income tax provision is the income tax provision or benefit that would result from applying the company's U.S. statutory tax rate (34% or 35%) to its pretax income or loss from continuing operations. The hypothetical income tax provision is the amount that is reconciled with the company's actual income tax provision or benefit in the effective tax rate reconciliation component of the company's income taxes note to the financial statements.

Under what conditions can a company net its current deferred tax assets with its current deferred tax liabilities on the balance sheet?

ASC 740 permits netting of current deferred tax assets and liabilities if they are attributable to the same tax jurisdiction or relate to the same components of the enterprise (for example, a subsidiary that is part of the consolidated financial statements and part of the consolidated income tax return). The same netting rule applies to noncurrent deferred tax assets and liabilities as well.

True or False: A publicly traded company must disclose all of the components of its deferred tax assets and liabilities in a footnote to the financial statements. Explain.

False. ASC 740-10-45-4 states that a publicly traded company should disclose the approximate "tax effect" of each type of temporary difference and carryforward that gives rise to a "significant" portion of net deferred tax liabilities and deferred tax assets. A privately held company only needs to disclose the types of significant temporary differences without disclosing the tax effects of each type. ASC 740 does not define the term "significant," although the SEC requires a publicly traded company to disclose separately the components of its total deferred tax assets and liabilities that are 5% or more of the total balance.

Briefly describe the difference between a company's effective tax rate, cash tax rate, and structural tax rate.

The effective tax rate is the company's total income tax expense or benefit divided by the company's pre-tax net income or loss from continuing operations. The effective tax rate often serves as a benchmark for companies in the same industry. A company's cash tax rate is the effective tax rate taking into account only taxes actually paid or refunded during the year. Taxes paid or refunded usually is reported in the company's Statement of Cash Flows. A company's structural tax rate is the effective tax rate adjusted for one-time (discrete) and non-recurring book-tax differences. It is usually interpreted as the company's sustainable effective tax rate from operations (that is, the rate under management's control).