Chapter 18

Intermediate Accounting
13th Canadian Edition, Volume 2

Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy
Chapter 18
Income Taxes
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Chapter 18: Income Taxes (LO 1 to LO 5)
After studying this chapter, you should be able to:
1. Understand the importance of income taxes from a business
perspective.
2. Explain the difference between accounting income and taxable
income and calculate taxable income and current income taxes.
3. Explain taxable and deductible temporary differences,
determine their amounts, and calculate deferred tax liabilities
and deferred tax assets.
4. Prepare analyses of deferred tax balances and record deferred
tax expense.
5. 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.
Copyright ©2022 John Wiley & Sons, Canada, Ltd. 2
Chapter 18: Income Taxes (LO 6 to LO 9)
After studying this chapter, you should be able to:
6. Account for tax loss carryover benefits, including any note
disclosures.
7. Explain why the Deferred/Future Tax Asset account is reassessed
at the statement of financial position date, and account for the
future tax asset with and without a valuation allowance account.
8. Identify and apply the presentation and disclosure requirements
for income tax assets and liabilities and apply intraperiod tax
allocation and discuss analytics.
9. Identify the differences in accounting between ASPE and IFRS for
income taxes, and what changes are expected in the near future.

Income Taxes from a Business
Perspective
• Corporations file income tax returns following the Income
Tax Act (administered by the Canada Revenue Agency)
and related provincial legislation
• GAAP methods differ from tax legislation; pre-tax
accounting income (under IFRS or ASPE) and taxable
income usually differ
• Although under ASPE, companies have an option of using
the taxes payable approach where income tax expense
typically equals income taxes payable
LO 1 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 4

Accounting Income and Taxable Income
• Accounting income—also known as “income before
taxes”, “income for financial reporting purposes” or
“accounting profit”—is a pre-tax concept
o Determined according to IFRS or ASPE
o Objective is to provide useful information to users of the
financial statements
• Taxable income—also known as “income for tax purposes”
or “taxable profit”; determined according to the Income
Tax Act and Regulations
• Different approaches: companies prepare a schedule that
begins with accounting income and adjusts it for
differences to determine taxable income
Differences between Accounting and
Taxable Income
• The major reasons for differences
o Temporary differences/timing differences
• Revenues or gains are taxable before/after being recognized
in accounting income
• Expenses or losses are deductible for tax purposes
before/after they are recognized in accounting income
• Differences will reverse over time
o Permanent differences
• Items included in accounting income that are never included
in taxable income and vice versa
• Affect only one period—there are no deferred or future tax
consequences

Revenues or Gains Taxed After
Recognition in Accounting Income
• Revenue that is recorded in the period it is earned for
accounting income; taxable income recognizes revenue
when the cash is received
• Gains on disposal or holding gains not included in taxable
income until they are realized—that is, received in cash
• Examples
o Instalment sales recognized for tax on a cash basis
o Contracts under percentage-of-completion method for
accounting income; completed-contract or zero-profit basis
for tax purposes
o Unrealized holding gains recognized in income or OCI but
not taxable until the assets have been sold
Expenses or Losses Taxed After
• When an expense is accrued for accounting purposes but
is not deducted for tax purposes until paid (cash basis)
• A liability is recognized in the current period on the
financial statements but is not included in taxable
income until it is settled/paid
• Examples
o Product warranty liabilities
o Estimated losses and liabilities related to restructuring
o Litigation accruals
o Accrued pension costs
o Holding or impairment losses on assets
Revenues or Gains Taxed Before
• Cash received and reported as an accrued liability (e.g.,
unearned revenue) may have to be included in taxable
income because the cash has been received
• When the revenue is recognized in future periods in
accounting income, it is deducted from income for tax
purposes
• Examples
o Subscriptions, royalties, rent received in advance
o Sale and leaseback gains, including deferral of profit on a
sale that would be included in taxable income

Expenses or Losses Taxed Before
• Depending on which method is used for depreciation,
accounting income may be less than income for tax
purposes (based on CCA)
• Taxable income in the early years of an asset’s life may
be lower than accounting income
• Examples
o Property depreciated faster for tax purposes
o Deductible pension funding that exceeds pension expense
o Prepaid expenses that are deducted for tax purposes
when they are paid

Permanent Differences Between
Accounting and Taxable Income
• Caused by items that
o Are included in accounting income but never in
taxable income
• Non-tax-deductible expenses: fines and penalties,
gym club fees, expenses related to earning non-
taxable revenue
o Are included in taxable income but never in
accounting income
• Non-taxable revenue: dividends from taxable
Canadian corporation, proceeds on life insurance
policies carried by the company on employees/officers

Calculating Taxable Income
PiP 18.1 Facts A company reports accounting income of
$200,000 for 2023, 2024, & 2025. The company is subject to
a 30% tax rate and has the following differences between
accounting income and taxable income
• Royalty revenue of $18,000 earned in 2023; will be received in
equal payments over 18 months beginning January 1, 2024
• Insurance premium on company key officers of $5,000 paid in
2024 and 2025
• Estimated warranty costs of $30,000 on sales was expensed in
2023. Actual cost of work performed in 2024 was $20,000 and
in 2025 was $10,000

Reconciling Accounting and Tax Incomes
PIP 18.1 Solution A reconciliation of the accounting income to
taxable income showing the timing and permanent differences:
• The two “timing” differences, revenue and warranty expense

show as an adjustment for 2023, with reversals in 2024 & 2025.
• Permanent differences have no reversals.
Taxes Payable Method
PiP 18.2 Using taxable income calculated in PiP 18.1
• Multiply the taxable income by the tax rate (30%)
• Journal entry is
Debit—Current Tax Expense;
Credit—Income Tax Payable

Temporary Difference Approach
• Begins with calculation of current income taxes and then
adjusts for any changes in deferred tax assets and
deferred tax liabilities (deferred tax expense)
• Based on the premise that income tax expense reported
should be directly related to the accounting income that
is reported
• Is an asset and liability approach
• Required by IFRS; permitted under ASPE

Current Income Tax Terminology
• Temporary difference approach—same process under IFRS
and ASPE, but different terminology
IFRS ASPE
Temporary difference approach Future taxes method
Deferred tax assets Future tax assets
Deferred tax liabilities Future tax liabilities
Deferred tax expense Future tax expense
• IASB supports the temporary difference approach (asset-

liability approach)—most conceptually sound
• Objectives: recognize the amount of taxes payable
(refundable) for the current year; recognize tax
assets/liabilities for future tax consequences
Deferred/Future Income Tax
• Reversible differences result in an effect on the amount of
income taxes payable in the future as the differences
reverse
• The accumulated tax effects of the differences are
recognized as deferred tax assets (pay less income tax in
the future) and deferred tax liabilities (pay more in the
future)
• Adjustments to these accounts to show the correct
amount on the SFP result in deferred tax expenses (or
benefits)
• Current income tax expense and deferred tax expense are
shown as separate components of income tax expense on
the income statement
Tax Base/Tax Basis of an Asset
• Tax base of an asset: amount that will be deductible for
tax purposes against any taxable economic benefits when
the asset’s carrying amount is recovered
• If the economic benefit is not taxable, tax base equals the
carrying amount
PiP 18.3 Situation 1 A capital asset was

acquired at an original cost (and tax The tax base at the end
base) of $1,000. By the end of Year 3, of Year 3 is its
capital cost allowance totaling $424 has undepreciated capital
been deducted when calculating taxable cost, $576 ($1,000 −
income for Years 1 to 3. $424)

Calculating the Tax Base of Assets
Tax base is $1,000. When it is sold, the
PiP 18.3 Situation 2 A purchase company will have to deduct the cost
of another company’s shares from the proceeds to determine taxable
was made at a cost of $1,000. income.
PiP 18.3 Situation 3 Carrying

amount of accounts receivable is When the $10,000 is collected, it is
$10,000. Related revenue is not taxable. Tax base = carrying value
included in taxable income as it = $10,000.
is earned.
PiP 18.3 Situation 4 A company When the company receives the
holds a fully paid-for life $100,000 proceeds, they are not taxable
insurance policy on the company under the Income Tax Act. Tax base =
president. Cash surrender and carrying amount = $100,000. No tax
carrying value: $100,000. consequences.

Tax Base/Tax Basis of a Liability
• Tax base of a liability: carrying amount reduced by amount
that will be deductible for tax purposes in future periods
• Tax base of revenue received in advance: carrying amount
less any amount that will not be taxable in the future
• When a liability is settled for the carrying amount without
any tax consequences, tax base = carrying amount
PiP 18.4 Situation 1 Company Expense is deductible for tax purposes
has accrued liability with an only when it is paid.
carrying amount of $1,000. Tax base = carrying amount of $1,000
Related expense was charged less amount deductible for tax purposes
to accounting income when it in future periods, $1,000 = $0.
was accrued.

Calculating the Tax Base of Liabilities
PiP 18.4 Situation 2 A company Interest was taxed on a cash basis
receives $1,000 interest in when it was received.
advance and records it as Tax base = carrying amount of $1,000
unearned revenue liability. less amount that will not be taxable
in future periods, $1,000 = $0.
PiP 18.4 Situation 3 Accrued

liability of $200. Related expense There is no tax consequence when
was deducted for tax purposes in either liability is paid in the future.
the same period as when the Tax base = carrying amount = $200
expense and liability were and $500.
recognized. The company also
reports a loan payable of $500.

Tax Base of Items not on the SFP
• Some items have a tax base, but are not recognized on the
statement of financial position
• Carrying amount is zero, but the company is allowed to
reduce future taxable income
Example: R&D costs that have been expensed in the accounts as
incurred but are deductible for tax purposes in a future year.
• Although the carrying amount on the SFP is $0, the tax
authorities allow the company to reduce future taxable income
• Tax base of these R&D costs = amount that would be permitted
as a deduction in future periods
• Temporary difference = difference between the tax base and its
reported amount on the SFP
Temporary Differences
• A temporary difference is the difference between the tax
base of an asset or liability and its reported amount on
the statement of financial position
o A taxable temporary difference—the effect is an increase in
taxable income and income taxes in the future
o A deductible temporary difference—will decrease taxable
income and taxes in the future
• Under accrual accounting it is necessary to recognize
deferred tax consequences of temporary differences in
the current period
• Deferred or future income tax expense is based on the
change in the SFP deferred tax asset or liability account
from the beginning to the end of the accounting period
Deferred Tax Liabilities
PiP 18.5 Facts Company reported $130,000 revenue in 2023.
It reported only $100,000 of taxable revenue, which was the
amount collected. Future tax rate is 25%. Since this was the
beginning of operations, the beginning balance in the
deferred tax liability would be $0.
Carrying amount of the receivable: $130,000 - $100,000 = $30,000
Tax base of this asset = amount that can be deducted for tax
purposes when the $30,000 is received = $0.
Taxable temporary difference = carrying amount ($30,000) less the
tax base ($0) = $30,000.

Calculating Deferred Tax Liability
PiP 18.6a Facts (Refer to 18.5) The company paid income tax
of $10,000 in 2023 ($40,000 × 25%).
• The taxable temporary difference of $30,000 is expected to be
reversed when $20,000 is collected in 2024 and $10,000 in 2025
• The taxable difference creates a deferred tax liability at the end
of 2023--$30,000 × 25% = $7,500
• As the tax liability at the beginning of the year is $0, the tax
expense would be $7,500 − $0 = $7,500
• Journal entry to record deferred tax liability and deferred tax
expense: Deferred Tax Expense 7,500
Deferred Tax Liability 7,500
• Two components for taxes in 2023: Current Tax Expense of
$10,000 and Deferred Tax Expense of $7,500
Deferred Tax Liability in Future Years
PiP 18.6b The deferred tax liability for future years is determined
as follows:
• At the end of 2024, the deferred tax liability should be $2,500

($10,000 x 25%), and the deferred tax expense would be
Deferred tax liability, end of 2024 $ 2,500
Less: Deferred tax liability, beginning of 2024 7,500
$ (5,000)
• Notice the deferred tax “expense” is a credit; this is called a deferred

tax benefit or a tax income account
• The journal entry to record this: Deferred Tax Liability 5,000
Deferred Tax Benefit 5,000

Deferred Tax Assets
PiP 18.7 Facts Company sells microwave ovens including a 2-year
assurance warranty. In December 2024, they started selling a new
microwave with estimated warranty expense of $500,000 related
to the sales.
• $500,000 warranty expense recognized in 2024
• Actual costs were as expected: $300,000 in 2025; $200,000 in 2026
• Income tax payable: $600,000 in 2024; $440,000 in 2025
• Future tax rate is 25%
• A deferred tax asset or future tax asset is the future tax

consequence of a deductible temporary difference
• It represents the reduction in taxes payable or the increase in
taxes refundable in future years as a result of a deductible
temporary difference at the end of the year
Calculating Deferred Tax Assets
PiP 18.8a For tax purposes, warranty costs are deductible when
incurred. Therefore, no warranty costs can be deducted in
determining 2024 taxable income. There is a temporary difference
of $500,000. The future benefit of the tax deductions is recognized
in 2024.
• Deferred tax Carrying amount of warranty liability $ 500,000
asset at the Tax base of warranty liability -
end of 2024: Deductible temporary difference (end of 2024) 500,000
Future tax rate 0.25
Deferred tax asset (end of 2024) $ 125,000
• Assuming this is the first year of operations the deferred tax
benefit for 2024 would be $125,000 − $0 = $125,000

Deferred Tax Asset in Future Years
PiP 18.8a Cont’d The warranty costs were expected to be $300,000
in 2025 and $200,000 in 2026, so the estimated deferred tax asset
at the end of 2025 and 2026 would be:

Determining Income Tax Expense
PiP 18.8b Assuming income tax payable for 2024 is $600,000, income tax
expense is calculated as follows:
Current tax expense $ 600,000
Deferred tax benefit:
Deferred tax benefit, end of 2024 $ 125,000
Deferred tax benefit, beginning of 2024 - (125,000)
Income tax expense (total) for 2024 $ 475,000
• There would be two components recorded for income tax for 2024:
Current Tax Expense 600,000
Income Tax Payable 600,000
Deferred Tax Asset 125,000

Calculating Deferred Amounts
PiP18.9 (Refer to PiP 18.8) Assume the actual warranty costs were
as predicted, $300,000 in 2025 and $200,000 in 2026
• The future deductible amount at the end of 2025 would be:
$500,000 - $300,000 = $200,000
• The deferred tax asset at the end of 2025 would be $200,000 x
25% tax rate = $50,000
• The deferred tax expense for 2025 would be $50,000 - $125,000 =
$(75,000) -- a partial reversal of the $125,000 benefit recorded in
2024
• The future deductible amount at the end of 2026 would be:
$200,000 - $200,000 = $0
• The deferred tax asset at the end of 2026 would be $0
• The deferred tax expense for 2026 would be $0 - $50,000 =
$(50,000) -- final reversal of the benefit recorded in 2024
Income Tax Accounting Objectives
• One objective of accounting for income tax is to recognize
the tax payable or refundable for the current period
• A second objective is interperiod tax allocation: recognize
tax effects in the accounting period when the transactions
and events are recognized for financial reporting purposes
• The expense amount is related primarily to the revenues
and expenses that are reported on each year’s income
statement

Analysis of Multiple Differences
Example: A company reports accounting income of $200,000
in each of the years 2023, 2024, and 2025. The company is
subject to 30% rate. It has the following differences between
accounting and taxable income:
• Royalty revenue: recorded $18,000 in 2023; collected at $1,000
per month beginning Jan 1, 2024
• Insurance premium: $5,000 per year in 2024 and 2025. Not
deductible for tax purposes; expensed for accounting income
• Warranty expense: recognized $30,000 in 2023; Actual costs
paid were $20,000 in 2024 and $10,000 in 2025

Determine Taxable Income
Example: (Cont’d) All differences between accounting income and
taxable income are considered in reconciling the income reported
on the financial statements to taxable income.
2023 2024 2025
Accounting income $ 200,000 $ 200,000 $ 200,000
Adjustments:
Revenue from royalties (18,000) 12,000 6,000
Warranty expense 30,000 (20,000) (10,000)
Non-deductible insurance expense - 5,000 5,000
Taxable income 212,000 197,000 201,000
Tax rate 0.30 0.30 0.30
Income tax payable, current tax expense $ 63,600 $ 59,100 $ 60,300

Calculating Deferred Amounts, 2023
Example: (Cont’d – see Illustration 18.9) Assume the tax rate is the
same for all years
Taxable/
Deductible
Temporary Deferred
Carrying Difference Tax Asset/
SFP Account Tax Base (a) Amount (b) (a - b) Tax Rate Liability
Accounts Receivable $ - $ 18,000 $ (18,000) 0.30 $ (5,400)

Warranty Liability - (30,000) 30,000 0.30 9,000
Deferred tax asset, Dec 31 3,600
Net deferred tax asset/
liability before adjustments -
Increase in deferred tax asset
and deferred tax benefit, 2023 $ 3,600
• For A/R, the $18,000 has been included in accounting income, it will only be
taxable when the related cash is received—tax will be paid in the future
• For the warranty, $30,000 was expensed for accounting purposes, but is only
deductible when the actual costs are incurred—there will be future tax
reductions
PiP 18.10 (Example Cont’d) The temporary differences have started
to reverse Taxable/
Deductible
Temporary Deferred
Accounts Receivable $ - $ 6,000 $ (6,000) 0.30 $ (1,800)

Warranty Liability - (10,000) 10,000 0.30 3,000
Deferred tax asset, Dec 31 1,200
Less: Net deferred tax asset
before adjustments 3,600
Decrease in deferred tax asset
and deferred tax expense, 2024 $ 2,400
• For A/R, $12,000 was received in 2024; the remaining temporary difference
is $18,000 − $12,000 = $6,000
• For the warranty, actual costs for the year were $20,000, so the future tax
deduction will be $30,000 − $20,000 = $10,000

PiP 18.11 (Example Cont’d) The temporary differences have been
eliminated Taxable/
Deductible
Temporary Deferred
Accounts Receivable $ - $ - $ - 0.30 $ -

Warranty Liability - - - 0.30 -
Deferred tax asset, Dec 31 -
Less: Net deferred tax asset
before adjustments 1,200
Decrease in deferred tax asset
and deferred tax expense, 2025 $ 1,200
• By the end of 2025, all temporary differences will have been reversed. The
balance in the net deferred asset/liabilities account will be zero

Income Statement (Partial) Presentation
PiP 18.11b and c 2023 2024 2025
Income before income tax $ 200,000 $ 200,000 $ 200,000
Less: Income tax expense
Current expense 63,600 59,100 60,300
Deferred expense (benefit) (3,600) 2,400 1,200
60,000 61,500 61,500
Net income $ 140,000 $ 138,500 $ 138,500
Effective tax rate 30.00% 30.75% 30.75%
• The effective tax rate is calculated by dividing total income tax

expense for the period by the pre-tax income reported on the
financial statements
• The enacted tax rate is 30%; effective tax rate is 0.75% higher than
enacted tax rate because of the $5,000 non-deductible life insurance
premium
Future Tax Rates
• Accounting standards—use the income tax rates that are
expected to apply when the tax liabilities are settled, or
tax assets are realized
• Rates used should include any tax rate reductions
• Sometimes a substantively enacted rate or tax law is more
appropriate
o For ASPE, this means drafted and tabled in Parliament and
the government will be able to pass the legislation
o For IFRS, government announcements have the effect of
actual enactment
• Discounting deferred tax assets and liabilities is not
permitted
Deferred Tax Liability Based on Future
Tax Rates
Example: A company has a temporary difference at the end of
2023—$300,000 difference between the carrying amount of
depreciable assets and their tax base; future taxable amounts and
tax rates are shown.
• The deferred tax liability at the end of 2023 is $78,000.

Revision of Future Tax Rates
PiP 18.12a A company has a temporary difference at the
beginning of 2023--$3 million of excess capital cost allowance
• At a tax rate of 30%, this makes the balance in the Deferred Tax
Liability account $900,000 ($3,000,000 × 30%)
• Future taxable amounts will be $1 million per year
• On Sept 10, 2023, it was announced that effective Jan 1, 2025
the rate would be 25%
• The revised deferred tax liability at the end of 2023 is $800,000

Calculating Deferred Amounts and
Journal Entry
PiP 18.12b (Con’t) The effect of a change in the tax rate should be
recorded immediately as an adjustment to income tax expense in
the period of the change. An entry must be made on September
10, 2023, to recognize the decrease in the Deferred Tax Liability
account ($900,000 − $800,000)
Deferred Tax Liability 100,000

PiP 18.12c IFRS requires separate disclosure of the future tax

expense or benefit due to a change in tax rates

Income Tax Loss Carryover Benefits
• Tax laws permit taxpayers to use a tax loss of one year to
offset taxable income of other years
o Loss carryback: carry a tax loss back against taxable income
of the immediately preceding 3 years
o Loss carryforward: carry losses forward to the 20 years
immediately following the loss
o If full amount of loss cannot be absorbed by carrybacks,
then it can be carried forward
• If a loss is carried back, it is usually applied against the
earliest available income
• Decision on how to use a tax loss depends on what
management sees as the greatest tax advantage
Benefit of the Loss Carryback
PiP 18.13 Facts A company has a loss of $500,000 in 2024. The
following are the taxable incomes and tax rates for the years 2020
to 2023: 2020 2021 2022 2023 2024
Taxable income or loss $ 75,000 $ 50,000 $ 100,000 $ 200,000 $ (500,000)
Tax Rate 0.30 0.25 0.30 0.20 -
Tax Paid $ 22,500 $ 12,500 $ 30,000 $ 40,000
• The carryback is applied as follows: 2021, $12,500; 2022, $30,000;

2023, $40,000; for a total tax benefit of $82,500—recognized in the
year of the loss, 2024
• The taxable income used by the carryback is $350,000 (2021, $50,000;
2022, $100,000; 2023, $200,000)
• The balance of the loss, $150,000 ($500,000 - $350,000) can be
carried forward
Recording the Benefit of the Loss
Carryback
PiP 18.13b The $82,500 is recognized as Income Tax Receivable
and a current tax benefit of the loss carryback
Income Tax Receivable 82,500
Current Tax Benefit 82,500
• The current benefit reduces the tax loss for 2024

PiP 18.13c Presentation on the income statement

Income Tax Loss Carryforward
• If it appears it is “probable” or “more likely than not”
there will be income in the future to offset the loss
carryforward, the benefits should be recognized in the
period of the loss
o As a deferred tax benefit in the income statement
o As a deferred tax asset on the statement of financial
position
• If it appears that it is not “more likely than not” there will
be taxable income available to offset the losses, then the
benefits are not recognized in the financial statements
• If previously unrecorded tax losses are used to benefit a
future period, the benefit is recognized in that period
Recording the Benefit of a Tax Loss
Carryforward
PiP 18.14a (Refer to PiP 18.13) The company has $150,000 tax loss that
can be carried forward. It is probable they will generate sufficient
taxable income in the future to absorb the loss. The future tax rate is
20%. The journal entry would be:
PiP 18.14b Presentation on the income statement

Realizing the Benefit of a Tax Loss
Carryforward
PiP 18.15a (Refer to PiP 18.13 and 18.14) The company
experiences $200,000 taxable income in 2025 at a 20% tax rate.
They use their carryforward loss of $150,000 from 2024.
• Revised taxable income for 2025 = $50,000 ($200,000 − $150,000)
• Income tax payable for 2025 = $10,000 ($50,000 × 20%)
• Deferred tax expense Deferred tax asset, end of 2025 $ -
Less: Deferred tax asset, beginning of 2025 30,000
Deferred tax expense 2025 $ 30,000
• Journal entry to record current • Journal entry to record deferred

tax expense: tax expense:
Current Tax Expense 10,000 Deferred Tax Expense 30,000
Income Tax Payable 10,000 Deferred Tax Asset 30,000

Reporting Tax Loss Carryback and
Carryforward
PiP 18.15b The benefit from the loss carryforward is not shown
separately in 2025, it was already reported in 2024.

Recognition of Tax Loss Carryback Only
PiP 18.16a (Refer to PiP 18.13) Assume the company did not
recognize the potential benefits of a loss carryforward of $150,000
in 2024 because the company’s future profitability was too
uncertain
• But the company will recognize the tax loss carryback of $82,500
Income Tax Receivable 82,500
Current Tax Benefit 82,500
• The unrecognized potential tax benefit associated with the

remaining $150,000 of tax losses is relevant information for financial
statement readers
• The amounts and expiry dates of unrecognized tax losses are
disclosed in the notes to the financial statement
Recognition of Benefit of Loss
Carryforward When Realized
PiP 18.17 Assume the company had $200,000 in taxable income in
2025. After applying the $150,000 loss carryforward, tax is payable
on only $50,000 ($200,000 - $150,000).
• The income tax expense is $10,000 ($50,000 × 20%)
Tax payable on $200,000 at 20% $ 40,000
Tax deduction from realization of the
unrecorded loss carryforward $ (30,000)
Income tax expense $ 10,000
• Separate disclosure of the $30,000 deferred tax benefit from the

loss carried forward is required by IFRS on the income statement for
2025, but can be netted under ASPE
• If only a portion of the $150,000 could be used in 2025, the
remaining unused loss would be disclosed in the notes
Carryforward with Valuation Allowance
• (ASPE) A future tax asset is recognized along with an
offsetting valuation allowance (contra account to Future
Tax Asset)
• Not recognized under IFRS; recognition allowed only to the
extent that future benefits are probable
Example: Assume it is unlikely the benefit from the $150,000 loss
carryforward will be realized in the future. The tax rate is 20%.
To record the tax Future Tax Asset 30,000
benefit Future Tax Benefit 30,000
To bring the Tax Asset Future Tax Expense 30,000

account to zero—not Allowance to Reduce Future Tax Asset 30,000
enough evidence of to Expected Realizable Value
future benefit
Adjusting the Valuation Allowance
Example (Cont’d): Now assume the company performs better than
expected, generating $200,000 taxable income. The tax loss
carryforward is applied with no tax losses remaining.
To adjust the
Future Tax Expense 30,000
Future Tax
Future Tax Asset 30,000
Asset Account
To adjust (clear) Allowance to Reduce Future Tax Asset 30,000

the allowance to Expected Realizable Value
account Future Tax Benefit 30,000
The deferred tax expense of $30,000 from adjusting the

tax asset account cancels out the $30,000 deferred tax
benefit from adjusting the allowance account.
Under ASPE only the current tax expense is reported.

Review of Deferred Tax Asset Account
• The Deferred Tax Asset account must be reviewed at each
reporting date to ensure the carrying amount is
appropriate based on existing conditions at the SFP date
• This depends on whether taxable income will be earned in
the future against which temporary differences can be
deducted
• If unlikely that sufficient taxable income will be generated,
the income tax asset may have to be written down
• The deferred tax asset account is also reviewed to
determine if it may now be reasonable to recognize a
deferred tax asset that was previously unrecognized
Revaluation of Deferred Tax Asset
Account—Year 2
PiP 18.18 Facts A company has a loss carryforward of $1 million at the
end of its first year if operations. It has a tax rate of 20% and recognized a
deferred tax asset of $200,000. At the end of the second year, the
deductible temporary difference is still $1 million, but only $750,000
meets the criterion for recognition. The deferred tax asset must be
revalued: from $200,000 to $150,000 ($750,000 × 20%)
Direct adjustment: Deferred Tax Expense 50,000

Allowance method: Future Tax Expense 50,000

Allowance to Reduce Future Tax Asset 50,000
to Expected Realizable Value

Revaluation of Deferred Tax Asset
Account—Year 3
PiP 18.18d At the end of Year 2, the deferred tax asset had been
revalued from $200,000 to $150,000. By the end of Year 3, it is
determined that $850,000 of the original $1 million temporary difference
will be deductible in the future. The deferred tax asset must be revalued
again: this time from $150,000 to $170,000 ($850,000 × 20%)
Direct adjustment: Deferred Tax Asset 20,000
Allowance method: Allowance to Reduce Future Tax Asset
to Expected Realizable Value 20,000
Future Tax Benefit 20,000
The net effect of the two approaches is identical. However, the valuation
allowance method has the advantage of retaining the relationship
between the Future Tax Asset account and the future deductible amounts.

Sources of Taxable Income Available
(Under Tax Law) to Realize a Tax
Benefit
• Future reversals of existing taxable temporary differences
• Future taxable income before considering reversing
temporary differences, tax loss and other deductions
• Taxable income available in prior carryback years
• Tax planning strategies implemented to realize a deferred
tax asset

SFP Presentation—Income Taxes
Receivable or Payable Currently
• Under all methods, current income taxes payable or receivable
are reported separately from deferred or future tax assets and
liabilities
• If there is a debit balance in the payable account from
instalment payments, reported as Prepaid Income Tax or
Income Tax Receivable
• Income tax refund from a loss carryback is reported as an
income tax receivable and as a current asset
• Netting similar assets and liabilities is allowed only when there
is a legal right to offset, and the intention is to settle them on a
net basis
SFP Presentation—Deferred Tax
Assets/Liabilities
• For fiscal periods starting on or after Jan 2020, the
presentation of deferred or future tax asset and liability
accounts is the same under IFRS and ASPE
• All deferred tax assets and future income tax liabilities are
reported as non-current
• Deferred or future income tax assets and liabilities cannot
be netted unless
o They relate to the same taxable entity and tax authority
o There is a legal right to settle or realize them at the same time

Income and Other Statement
Presentation
• Intraperiod tax allocation—basis for how income tax
expense or benefit (current and deferred) is reported
• Objective: report current and deferred tax
expense/benefit in same period as, and with, the
underlying transaction or event that gave rise to the tax
• Current and deferred tax expense/benefit is reported with
the related income for the following categories
o Income before discontinued operations
o Discontinued operations
o Other comprehensive income
o Adjustments reported in retained earnings
o Capital transactions
Analysis, Intraperiod Tax Allocation—
Current Taxes, 2024
PiP 18.19c Facts The company has a tax rate of 25% and pre-tax items--
• Loss from continuing operations, $500,000
• Income from discontinued operations, $900,000 of which $210,000
is not taxable
• An unrealized holding gain of $25,000 on investments accounted
for at fair value through OCI, which will be taxable as ordinary
income when it is realized
• An analysis to show the amounts and location of current tax
expense/benefit in 2024 is presented on the next slide

Presentation of Intraperiod Tax
Allocation
PiP 18.19c Solution

Presentation in Equity or OCI
• Intraperiod tax allocation—application different when
related transactions are recognized in equity or OCI of a
prior period
• ASPE does not recognize OCI—there would be no separate
OCI intraperiod tax allocation
IFRS ASPE
Where practical: tax effect should be Income taxes are charged or credited
traced back to where the transaction to various equity accounts only for
originated, and be presented in the items recognized in the current
same statement as in the prior period period

Disclosure Requirements—Taxes
Payable Method (ASPE)
• Income tax expense or benefit in determining
o Income (loss) before discontinued operations
o Amount related to transactions recognized in equity
• Reconciliation of the actual or effective tax rate to the
statutory tax rate, and the amounts that were derived
from these rates
• Amount of capital gain and other reserves to be included
in taxable income in the next five years
• The amount of unused income tax credits and losses
carried forward
Disclosure Requirements—Future
Income Taxes Method (ASPE)
• Income tax expense or benefit in determining
o Income (loss) before discontinued operations
o Amount related to capital transactions or transactions
recognized in equity
• The amount of unused income tax losses, income tax
reductions, and deductible temporary differences for
which no future income is recognized
• If any enterprise not taxed because it is taxable directly to
its owners

Disclosure Requirements--IFRS
• Major components of income tax expense or benefit
• Source of both current and deferred taxes
• Amount of current and deferred tax recognized in equity
• Tax expense for each component of OCI
• Reconciliation of effective and statutory tax rates and
explanation of any changes
• Information about unrecognized deferred tax assets and
supporting evidence for recognized deferred tax assets
• Information about each type of temporary difference and
deferred tax asset or liability recognized on the SFP

Analytics
• Assessment of quality of earnings—accounting for
deferred taxes is an area that requires considerable
judgement and may be open to abuse
o Profits that are improved by a favourable tax effect should
be examined very carefully
o Justification is needed for recognizing deferred tax assets
and tax benefits
o Valuation of deferred tax assets will affect profits
• Better predictions of future cash flows—examine policies
that give rise to taxable temporary differences
• Data analytics has impacted how CRA checks non-
compliance—e.g., monitoring Facebook, Twitter, and
using text mining
Outstanding Conceptual Questions
• Asset-liability method (or temporary difference approach)
is considered most conceptually sound method of income
tax accounting
• Significant conceptual questions remain about:
o Lack of discounting (and therefore, no difference between
short-term deferral and long-term deferral)
o Recognition of deferred tax assets—deferred tax assets
reflect a tax prepayment--a prepaid tax; with carryforward
losses, no prepayment has been made
o Application of the conceptual framework—do deferred tax
assets meet the definitions

Comparison of IFRS and ASPE
• ASPE allows an accounting policy choice—either the taxes
payable method or the future income taxes method
• IFRS requires the use of the temporary difference
approach (similar to ASPE future income taxes method)
• Main differences relate to
o Terminology
o Use of a valuation allowance
o Extent of the disclosure

Looking Ahead and Recent Changes
• IASB issued IFRIC 23 “Uncertainty over Income Tax
Treatments”, effective January 1, 2019
o Discussion point—The decision regarding the amount to
record as taxable income--should be based on which
method provides the best prediction of how the
uncertainty will be resolved
• IASB amended IAS 12 for deferred taxes related to assets
and liabilities arising from a single transaction—items no
longer exempt from applying deferred tax asset and
liabilities requirements, effective Jan 1, 2023

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Intermediate Accounting

13th Canadian Edition, Volume 2

Copyright ©2022 John Wiley & Sons, Canada, Ltd. 3

LO 1 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 4

LO 2 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 6

LO 2 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 9

LO 2 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 10

LO 2 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 11

LO 2 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 12

• The two “timing” differences, revenue and warranty expense

• Multiply the taxable income by the tax rate (30%)

LO 2 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 14

LO 2 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 15

• IASB supports the temporary difference approach (asset-

PiP 18.3 Situation 1 A capital asset was

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 18

PiP 18.3 Situation 3 Carrying

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 19

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 20

PiP 18.4 Situation 3 Accrued

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 21

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 24

• At the end of 2024, the deferred tax liability should be $2,500

• Notice the deferred tax “expense” is a credit; this is called a deferred

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 26

• A deferred tax asset or future tax asset is the future tax

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 28

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 29

LO 3 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 30

LO 4 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 32

LO 4 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 33

LO 4 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 34

Accounts Receivable $ - $ 18,000 $ (18,000) 0.30 $ (5,400)

Accounts Receivable $ - $ 6,000 $ (6,000) 0.30 $ (1,800)

LO 4 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 36

Accounts Receivable $ - $ - $ - 0.30 $ -

LO 4 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 37

• The effective tax rate is calculated by dividing total income tax

• The deferred tax liability at the end of 2023 is $78,000.

LO 5 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 40

• The revised deferred tax liability at the end of 2023 is $800,000

Deferred Tax Liability 100,000

PiP 18.12c IFRS requires separate disclosure of the future tax

LO 5 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 42

• The carryback is applied as follows: 2021, $12,500; 2022, $30,000;

• The current benefit reduces the tax loss for 2024

LO 6 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 45

PiP 18.14b Presentation on the income statement

LO 6 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 47

• Journal entry to record current • Journal entry to record deferred

LO 6 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 48

LO 6 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 49

• The unrecognized potential tax benefit associated with the

• Separate disclosure of the $30,000 deferred tax benefit from the

To bring the Tax Asset Future Tax Expense 30,000

To adjust (clear) Allowance to Reduce Future Tax Asset 30,000

The deferred tax expense of $30,000 from adjusting the

LO 6 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 53

Direct adjustment: Deferred Tax Expense 50,000