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1、“FAS 109”“Accounting for Income Taxes”Statement of Financial Accounting Standards No.109November 24,2004,FAS 109,Issued in February 1992Guidance for Accounting for Income TaxesBalance sheet approach for financial accounting and reporting of income taxesObjectives Recognize amount of income taxes pay
2、able or refundable for current year Recognize the amount of deferred income tax assets and liabilities for the future tax consequences of events that have already been recognized in either the companys financial statements or local tax returns,but not yet for both,Why Do We Need FAS 109?,Purpose of
3、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
4、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,The Basics,Income Taxes Payable or Re
5、fundable 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 shee
6、t.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,Temporary Differences,Another example of an item that can result in a temporary diffe
7、rence are accrued expenses.They may be deductible on the income tax return only when actually paid,not when recorded for financial statement purposes.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 resu
8、lt 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 di
9、fferences resulting from intercompany profits on assets that remain within the group.,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)Financial Statement Deductions Tax Return D
10、eductions-OR-Income is reflected in a tax return before being reflected in the financial statements(e.g.pre-paid services).Taxable Income Financial Statement IncomeIn the year a DTA reverses*(when the impact of an expense or income item that was temporarily different for book and tax becomes the sam
11、e for both),it causes taxable income to be lower than financial statement income.Taxable Income Financial Statement Income*Please note the reversal process can take more than one year.,Deferred Tax Liabilities(DTLs),Deferred Tax Liabilities(DTLs)arise when deductions are reflected in a tax return be
12、fore being reflected in the financial statements(e.g.accelerated depreciation)Tax Deductions Financial Statement Deductions-OR-Income is reflected in the financial statements before being reflected in a tax return(e.g.installment sale).Financial Statement Income Taxable IncomeIn the year a DTL rever
13、ses*(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*Please note the reversal process can take more than one year.,D
14、TAs&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.Basis Difference for Assets on the Balance Sheet:Book Basis Tax Basis=DTLTax Basis Book
15、Basis=DTABasis Difference for Liabilities on the Balance Sheet:Book Basis Tax Basis=DTATax Basis Book Basis=DTL,Balance Sheet Impact of DTAs&DTLs,Both DTAs and DTLs are recorded on the balance sheet.They are computed by taking the future taxable income amount or the future tax deduction amount times
16、 the statutory tax rate.Future Taxable Income/Deduction X Statutory Tax Rate=DTA/DTL,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
17、 income tax is derived from.A deferred income tax asset or liability that is not related to an asset or liability,such as operating loss or tax credit carryforward,is classified based on the expected reversal or utilization date.Reversal or utilization beyond one year will require the classification
18、 to be non-current.,Example,Example:Depreciation,Temporary Differences,An example of something that can cause a temporary difference are depreciation methods(used to calculate depreciation).Different depreciation methods are often used for the local income tax return versus the U.S.GAAP financial st
19、atements.Over time the same amount of total depreciation will be recognized in the local income tax return and in the U.S.GAAP financial statements,but will be charged to different periods.,Deferred Income Taxes:Depreciation-Based on Depreciation Difference,Deferred Income Taxes:DepreciationBased on
20、 Basis Difference,Example,Example:U.S.Warranty Reserve,U.S.Warranty Reserve Example,In the year 2003 Delphi set-up$2,000 in warranty reserves in the U.S.and reflects a book expense of$2,000.No payments to settle any warranty claims are made in 2003.On Delphis year 2003 Federal U.S.Income Tax return
21、this expense would have to be reversed since a deduction for warranties can not be taken until a payment is actually made.,U.S.Warranty Reserve Example(cont.),Assuming no other book-tax differences for year 2003 and Delphis U.S.Pre-Tax book income of$10,000,Delphis U.S.taxable income for 2003 would
22、be$12,000.For year 2004,Delphi does not create any additional U.S.warranty reserves,but does pay out$2,000 to cover warranty claims.In 2004,Delphis U.S.pre-tax book income is$2,000.The U.S.warranty payments are deductible in 2004.Assuming no other book-tax differences in 2004,Delphis U.S.taxable inc
23、ome would be$0,U.S.Warranty Reserve Example(cont.),In year 2003,the DTA related to the warranty reserves needed to be booked in the year-end financial statements would be$740($2,000 x 37%)(35%U.S.Federal and blended 2%U.S.State&Local).In year 2004,the deduction was taken for the$2,000 warranty reser
24、ves since payments were made.Therefore,the DTA of$740 would be reversed since the deduction was taken on the 2004 tax return.,Valuation Allowance,A net DTA is reduced,by a“valuation allowance”if,based on the weight of available evidence,it is more likely than not(50%)that some portion or all of the
25、DTAs will not be realized.All available evidence,both positive and negative,is considered to determine whether,based on the weight of the evidence,a valuation allowance is needed for some portion or all of a deferred tax asset.Positive and Negative Evidence includes financial position and results of
26、 future operations.It also looks to other measures.,Valuation Allowance(Cont.),Examples of Positive Evidence:Strong earnings historySales back logAppreciated net asset valuesExamples of Negative Evidence:Cumulative losses(commonly thought to be the most recent 3 year period,including the current yea
27、r)Carryforwards expiring unusedContingenciesIndustry trendsGoing-Concern issues,Book Income Tax Expense(Provision),The Book Income Tax Expense(Provision)is derived by taking pre-tax book income and building in the impact of permanent tax differences between book and tax to arrive at Book Taxable Inc
28、ome.The Book Taxable Income is then multiplied by the Statutory Tax Rate.,Book Income Tax Expense(Provision)(cont.),Temporary differences are not factored into Book Income Tax Expense(Provision)because over time the amount recognized for book and tax is the same.The only impact temporary items have
29、on Book Income Tax Expense is on the classification between current and deferred.(Non-U.S.Current 9308;Deferred 9316)In the case of Delphi,the combined U.S.Statutory Tax Rate is 37%(35%federal and blended 2%State&Local).For Non-U.S.locations,the statutory tax rate varies from country to country.,Boo
30、k Income Tax Expense(Provision)(cont.),Permanent Differences Items that create a difference in the treatment of an income or expense between the financial statements and income tax returns that will never reverse over time.Examples:Meals and EntertainmentPenaltiesNon-deductible goodwillTax Credits,E
31、ffective Tax Rate(ETR),The Effective Tax Rate(ETR)is the rate of tax that a company actually uses to calculate the income tax expense recorded in its income statement.It is calculated by taking the book income tax expense divided by the pre-tax book income.The difference between the statutory tax ra
32、te and the ETR is due only to the impact of permanent differences.,Effective Tax Rate(cont.),The current(as of 9-30-04)overall worldwide ETR for Delphi is 5%for 2004 vs.an approximate worldwide blended Statutory Tax Rate of 32%.The difference between the worldwide ETR&worldwide blended Statutory Tax
33、 Rate is largely due to:the U.S.losses(tax benefit)offsetting much of the Non-U.S.income(Tax Expense)various Non-U.S.countries have tax holidaysvarious permanent differences,such as tax credits and meals&entertainment,that exist throughout the worldwide Delphi organization.,Non-U.S.Income Tax Provis
34、ion,Each Non-U.S.unit is responsible for their own FAS 109 recording and reporting.Analysis of the Non-U.S.Income Tax Provision Headquarters tax staff analyzes and monitors the ETR used to record the Book Income Tax Expense by comparing the trial balance to the ETR projected on the Schedule 21,prepa
35、red by the non-U.S.units throughout the year.The projected annual ETR is provided in February.An updated“mid-year”ETR projection is provided in July,which is based on 6 months actual and 6 months projected data.In October,a more detailed 9 month submission is required(9 mth actual+3 mth projected):U
36、pdated ETR(Schedule 21)Schedule detailing the items comprising the DTLs and DTAs(Schedule 7)Schedule detailing the net operating losses from the Non-U.S.units local tax returns(Schedule 20).In January,during the year-end close,the schedules,mentioned above,are updated for 12 months of actual data.Th
37、e information provided is also used to prepare the financial statement income tax footnotes.,Non-U.S.Income Tax Provision(cont.),Delphi has had a reoccurring D&T audit point regarding the accuracy of the recording of the income taxes on the Non-U.S.trial balances.The increased requirements for this
38、year with regard to the 9 month submission were to improve the accuracy of the Non-U.S.trial balance submissions and the data collection for this coming year-end.It is currently viewed by D&T that Delphi has a significant deficiency in its internal controls under Sarbanes-Oxley over its accounting f
39、or income taxes with regard to its Non-U.S.units.This must be corrected by year-end.,Reporting Deferred Income Taxes on Schedule 7,Temporary differences are to be tracked item by item.These items are reported on Schedule 7“Detail of Deferred Tax Assets and Liabilities”(DTAs&DTLs).Common mistakes fou
40、nd on Schedule 7:The statutory tax rate used to calculate deferred income taxes is not the proper one.The proper statutory tax rate to be used is the statutory tax rate that is enacted for next year.Both a deferred income tax asset(DTA)and a deferred income liability(DTL)is reported for the same ite
41、m instead of being shown as a net DTA or DTL.Vague descriptions are given to items.The net balance of Schedule 7(net DTAs&DTLs)does not support the net balance of deferred income taxes reported on the trial balance in Hyperion.,Reporting Net Operating Losseson Schedule 20,The unused Net Operating Lo
42、sses from the local tax return must be reported on Schedule 20“NOL Summary”.Common mistakes found on Schedule 20:The amount of losses reported are the amount of losses reported on the trial balance(book losses)instead of being the amount of losses reported on the local tax return.,Reporting ETR on S
43、chedule 21,The Effective Tax Rate is calculated using the Schedule 21“Reconciliation from Statutory Tax Rate to Effective Tax Rate”.Common mistakes found on Schedule 21:Vague descriptions are given to items.Temporary items are reported in the“Permanent Adjustments”and“Other(Tax Effect)”sections.The
44、statutory tax rate used to calculate taxes at the statutory tax rate is not the proper one.The statutory tax rate to be used is the statutory tax rate that is enacted for the current year.Tax Holiday questions are not responded to properly.When a trial balance is under a tax holiday period,“Yes”shou
45、ld be selected and the starting year and ending year of the holiday period must be provided.,Reporting ETR on Schedule 21(cont.),Important points regarding Schedule 21:Items to be reported under the“Tax Credit”section are credits granted by the taxing authority.Prior year adjustments impacting the P
46、&L(i.e.permanent)need to be reported in the“Other(Tax Effect)”section.The total tax provision(expense)reported on Schedule 21 DOES NOT represent the cash tax you will pay for the current year,but rather the total income tax expense(which includes both current and deferred)that is to be recorded on t
47、he trial balance for the current year.,?Questions?,Accounting for Income Tax Problem 1,Problem 1 Determination of Basis Differences,Problem 1 Analysis of Change in Basis Differences,Problem 1 Income Tax Expense Calculation,Problem 1 Flow of Income Tax Expense Elements,Problem 1-Entry,Problem 1Schedu
48、le 7 Page 1,Problem 1 Schedule 7 Page 2,Problem 1 Schedule 20 Page 1,Problem 1 Schedule 20 Page 2,Problem 1 Schedule 21 Page 1,Problem 1 Schedule 21 Page 2,Problem 1 Schedule 21 Page 3,?Questions?,Appendix A,Appendix ABlank Schedules 7,20&21&Instructions,Schedule 7 Blank Form Page 1,Schedule 7 Blank
49、 Form Page 2,Schedule 7 Instructions:Purpose,Schedule 7 Instructions:General Information,Schedule 7 Instructions:Detail of Deferred Tax Assets and Liabilities,Schedule 7 Instructions:Check to Hyperion and Other,Schedule 7 Instructions:Comments,Preparer Information,and Printing,Schedule 7 Instruction
50、s:Buttons Function,Schedule 20 Blank Form Page 1,Schedule 20 Blank Form Page 2,Schedule 20 Instructions:Purpose,Schedule 20 Instructions:General Information,Schedule 20 Instructions:Net Operating Losses,Schedule 20 Instructions:Net Operating Losses(cont.),Schedule 20 Instructions:Comments,Preparer I
