Income Taxes (ASC 740)
ASC 740 governs the accounting for income taxes, requiring recognition of deferred tax assets and liabilities for temporary differences between book and tax bases of assets and liabilities.
Explanation
The asset-and-liability method under ASC 740 compares the book basis and tax basis of each asset and liability. Temporary differences that will result in future taxable amounts create deferred tax liabilities, while those resulting in future deductible amounts create deferred tax assets. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion will not be realized.
Current tax expense reflects taxes payable for the current period. Deferred tax expense captures the change in deferred tax balances. Together, they make up total income tax expense. The standard also addresses uncertain tax positions, requiring recognition only when it is more likely than not the position will be sustained upon examination.
Key Points
- •Deferred tax liabilities arise from future taxable temporary differences
- •Deferred tax assets arise from future deductible temporary differences and carryforwards
- •Valuation allowance required when realization is not more likely than not
- •Uncertain tax positions use a two-step recognition and measurement process
Exam Tip
ASC 740 is one of the most heavily tested FAR topics. Master the difference between permanent and temporary differences, and know when a valuation allowance is needed.
Frequently Asked Questions
Related Topics
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities represent the future tax consequences of temporary differences between the book and tax bases of assets and liabilities.
Income Statement
The income statement reports an entity's revenues, expenses, gains, and losses over a period of time, resulting in net income or net loss.
Corporate Taxation
Corporate taxation covers the tax rules for C corporations, which are taxed as separate entities at a flat 21% federal rate under current law.
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