Chapter 12 - Solution Manual

Because the assetliability approach reports future

Info icon This preview shows pages 17–19. Sign up to view the full content.

Because the asset/liability approach reports future tax consequences, the measurement of the expected future assessment or benefit is based on tax rates that will be in effect (under currently enacted tax law) when the taxable or deductible amounts resulting from temporary differences occur. The resulting deferred tax assets and liabilities have predictive ability because the balance sheet amounts are measures of expected future resource flows. This approach is superior to the deferred method which measures deferred taxes at the originating rate, which does not measure expected tax benefits or assessments. Because of the measurement approach used, the deferred tax assets and liabilities reported under the asset/liability approach meet the definitions of assets and liabilities found in SFAC No. 6. Deferred tax assets can be viewed as embodying probable future benefits because they represent amounts of tax that are recoverable when future taxable income is less than accounting income (deductible amounts). Deferred tax liabilities meet the definition of liabilities because they represent amounts that will be assessed when future taxable income is greater than financial accounting income (taxable amounts). As such this approach increases the predictive ability of items in the balance sheet, increases the ability to assess liquidity as well as financial flexibility. The asset/liability approach to measuring deferred taxes provides balance sheet measures that are relevant to assess future resource flows. The balance sheet is becoming more important. There is an
Image of page 17

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

271 increased tendency to rely upon changes in assets and liabilities to indicate income statement measures. Such measures are consistent with the definition of comprehensive income and as well the economic concept of income as well. Debate 12-2 Discounting Deferred Taxes Team 1. SFAS No. 109stated that the asset and liability approach to accounting for income taxes is consistent with the definitions in FASB Concepts Statement No. 6, Elements of Financial Statements . Liabilities are defined in paragraph 35 of Concepts Statement 6 as "probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events". Accordingly, liabilities comprise three characteristics. The FASB argued that deferred tax liabilities have all three characteristics. The first characteristic of a liability is that it "embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand". Taxes are a legal obligation imposed by a government, and an obligation for the deferred tax consequences of taxable temporary differences stems from the requirements of the tax law. A government levies taxes on net taxable income. Temporary
Image of page 18
Image of page 19
This is the end of the preview. Sign up to access the rest of the 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