Second in a series on ASC-740 fundamentals. Subscribe to TaxOps blog for the full series.
ASC-740 (formerly known as “FAS 109″), addresses the accounting for income taxes that result from an enterprise’s activities during the current and preceding years. Before we launch into calculating the ASC-740 provision, we must first understand the key terms and definitions found in the guidance. You can refer to this guide in calculating the provision.
ASC-740 liability
Organizations are required to establish a tax reserve for potential liabilities that could result from uncertain tax positions.
Current tax provision
A current expense or benefit tax provision is a tax liability or refund that can be expected on the current year’s tax return. It can also include a prior year’s return-to-accrual adjustment or any changes in provision liability for open tax years.
Deferred tax asset
A Deferred Tax Asset (DTA) is a future benefit the company can reasonably expect. The tax effect of future deductible amounts impacts loss carryovers and credit carryovers. In calculating a DTA, companies should consider the need for a valuation allowance .
Deferred tax liability
A Deferred Tax Liability (DTL) is a future liability that affects future taxable income amounts. The actual liability may be affected by tax laws and rate changes in the period the DTL is expected to be settled or realized. The DTL is calculated separately for each tax-paying component in each jurisdiction, and for each individual entity or group of entities consolidated for tax purposes. A DTL is either classified as current or non-current based on the underlying asset or liability.
Deferred tax provision
A deferred expense or benefit is a tax liability or refund that will eventually be paid or received. The deferred expense can be adjusted by any changes in net deferred tax assets or liabilities relating to the balance at the beginning of the year versus the balance at the end of the year. Changes in the valuation allowance may also adjust the deferred tax position.
Effective tax rate
An effective tax rate (ETR) is the total tax expense divided by book income. Calculating the ETR requires rate reconciliation, and reconciliation between the tax expense or benefit computed by applying the statutory federal rate to book income and the actual expense recorded as income tax expense or benefit.
Permanent difference
Differences that arise from statutory provisions under which specified revenues are exempt from taxation and certain expenses are not allowed as deductions in determining taxable income. Among the expense disallowed under permanent difference is non-taxable income (tax-exempt interest); non-deductible expenses (fines and penalties); limited expenses (meals and entertainment); and tax credits. Permanent differences are considered when measuring taxes payable or refundable (current tax expense). These differences are generally found on the income statement, and impact total tax expense and the effective tax rate.
Return-to-Accrual adjustment
Also known as the “Return-to-Provision” adjustment or “Prior Year
True-up,” a Return-to-Accrual (RTA) adjustment results from the comparison of individual items included in the prior year provision to the final income tax returns. These adjustments can relate to permanent items that generally affect the income statement or temporary items, such as a reclassification between balance sheet accounts.
Temporary difference
Temporary differences occur because the book and tax treatment of certain transactions are different. It is a difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Temporary differences show up on the balance sheet, and can include carryovers, such as net operating losses and credits. It is expected that temporary differences will be recovered and settled at their financial statement amounts.
Uncertain tax position
ASC 740-10 (formerly known as FIN 48) addresses and establishes uniform accounting for “uncertain tax positions”. Although there may be substantial authority to take a position on a return for a particular income or expense item, the possibility of success may ultimately not be “more likely than not”. In these situations, the benefit of the position cannot be taken for financial reporting purposes until the tax year is closed or the taxpayer ultimately prevails on the issue with the IRS or other reporting entity.
Total tax provision
A total tax provision is a book basis expense resulting from current expenses (benefit) plus deferred expenses (benefit). It may also include increases or decreases to uncertain tax positions. A total tax provision equals the amount of total tax that will be paid or refunded in connection with income, expenses, and events that are captured in this period’s financial statements. The total tax provision can increase due to adjustments in the uncertain tax position relating to new or existing items. Similarly, the provision can be decreased when uncertain tax positions are not settled with cash or other tax attributes.
For question regarding these terms and definitions or other ASC-740 provision matters, please contact Daniel DeLau at 720-227-0065 or delau@taxops.com.
