{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

2.9.11 Lecture - Part 2

2.9.11 Lecture - Part 2 - Caping with Uncertainty in I...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Caping with Uncertainty in I ncome Taxes 05 companies ax include tax positions subject to multiple interpretations. Despite good faith positions taken in preparing tax Efitulr'gg, those judgments may not ultimately prevail if challenged by e . Illustration Derrick Company c_|a_ims_a deduction on its tax return that will save the company $8 million in 2011 income taxes. Derrick knows that, historically, the IRS has challenged many deductions of this type. Since tax returns usually aren't examined for one, two, or more years, uncertainty EXlStS. Two-Step Decision Process. According to FASBInterprera-nbn N0. 43mm 48) Step 1. A_tax benefit is reflected in the financial statements only if it is "more likely than not" that the com any will be able to sustain the tax return p05ition if challenged, base on its technical merits. Step 2. Measured as the largest amount of benefit that is cumulatively greater than 50-percent likely to be realized. Coping with Uncertainty in - Income Taxes ’ Companies must assume that the position is litigated to the “highest court Possible," and that the IRS has knowledge of all relevant facts. If there's a ess than 50-50 chance of the compan ’5 position being sustained on examination, the tax expense can’t ref ect the tax benefit. Not “More Likely Than Not". Suppose Derrick believes the more-likely-than- not criterion is not met. None of the tax benefit can be recorded in 2011, so income tax expense is recorded at the same amount as if the tax deduction is not available. i Suppose Derricks’s current income tax payable is $24 million after being reduced by the full $8 million tax benefit. ($ in millions) Income tax expense (without $8 tax benefit) 32 Income tax payable (with $8 tax benefit) 24 Liability — unrecognized tax benefit 8 Coping with Uncertainty in Income Taxes easurin the Tax Benefit. Now, let’s say mana ement believes the more-ll ely-than-not criterion is met. Since we etermine in step one that a tax benefit can be recognized, we now need to decide how much. That's step two. W“ What's the largest amount that has 3 Likelihood Table: cumulative probability greater than 50%? Amount of the tax benefit management expects to be sustained $8 $7 $6 $5 $4 Percentage likelihood the tax position will be sustained at this level 10% 20% Cumulative probability the tax position will be sustained 10% 30% 5% 20% 80% 100% ’ Only $6 million of the tax benefit is recognized in income tax expense. Income tax expense (with $6 tax benefit) 26 Income tax payable (with $8 tax benefit) 24 Liability — unrecognized tax benefit ($8 — 6) 2 COping with Uncertainty in Income Taxes . Worst case scenario. Entire deduction is disallowed: Derrick removes the liability, pays more tax, and recognizes additional tax expense: Tax expense 6 Liability — unrecognized tax benefit 2 Income tax payable (or cash) 8 . Best case scenario. Entire deduction is upheld: Derrick removes the liability, owes no additional tax, and recognizes a tax benefit: Liability — unrecognized tax benefit 2 Income tax expense (benefit) 2 . Intermediate scenario. $6 million of the position is allowed (as expected): Derrick removes the liability and pays the $2 million tax: Liability -— unrecognized tax benefit 2 Income tax payable (or cash) 2 ...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern