This example demonstrates how accelerated

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This example demonstrates how accelerated depreciation for tax reporting and straight-line for financial reporting creates deferred tax liabilities. Other differences between tax reporting anC financial reporting create other types of deferred tax accounts. Deferred tax assets arise wh the tax payment is greater than the tax expense for financial reporting purposes (opposite of the illustration above). Restructuring accruals are one source of deferred tax assets. In the year in which a compare approves a reorganization plan, it will accrue a restructuring liability for estimated employee severance payments and other costs and it will write down assets to their market values (this reduces the net book value of those assets on the balance sheet). However, tax authorities de
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Module 5 I Revenue Recognition and Operating Income 5-22 recognize these accrual accounting transactions until they are realized. In particular, for tax ""!IIl:~ses,restructuring costs are not deductible until paid in the future, and asset write-downs are ::eductible until the loss is realized when the asset is sold. As a result, the restructuring accrual a liability for tax reporting until the company makes the payment, and the write-down of is not a deductible expense for tax purposes until the assets are sold. Both of these differ- (the liability and the assets) give rise to a deferred tax asset. The deferred tax asset cost will -,'-.n1Cferred to the income statement in the future as an expense when the company pays the turing costs and sells the impaired assets for a loss. Another common deferred tax asset relates to tax loss carryforwards. Specifically, when a .•...•.. ~llly reports a loss for tax purposes, it can carry back that loss for up to two years to recoup -"""",c taxes paid. Any unused losses can be carried forward for up to twenty years to reduce _ taxes. This creates a benefit (an "asset") for tax reporting for which there is no correspond- ~~ ...... iancial reporting asset. Thus, the company records a deferred tax asset but only if the com- _ 0 "more likely than not" to be able to recoup past taxes. This depends on the company's :::::iSSlllientof whether it will have sufficient profits in the future. Companies are required to establish a deferred tax asset valuation allowance for deferred ts when the future realization of their benefits is uncertain. The effect on financial state- of establishing such an allowance is to reduce reported assets, increase tax expense, and equity (this is similar to accounting for the write-down of any asset). During 2010, Pfizer JL::~sed its valuation allowance from $353 million to $894 million. Increases in the valuation ce reduce net income on a dollar-far-dollar basis. The increase in the valuation allowance __ 010, decreased net income by $541 million ($894 million - $353 million). These effects zeversed if the allowance is reversed in the future when, and if, realization of such tax benefits e more likely.
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