Chapter 12 - Solution Manual

Hence both deferred tax assets and liabilities would

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Hence, both deferred tax assets and liabilities would increase. An increase in deferred tax assets would decrease income tax expense. Hence, net income for a company with deferred tax assets would increase. Alternatively, an increase in deferred tax liabilities would increase income tax expense and result in a decrease in net income. Decreases in tax rates would have the opposite effects. Case 12-9 The solution to this case is dependent upon the companies selected by the students. A recommended method to check their solutions is to require the downloaded company information to be turned in along with the solution. Case 12-10 A review of the compliance with the reporting requirement of Sarbanes-Oxley by the FASB discovered that many of the problems associated with compliance with its Section 404 were related to tax issues and as a result numerous financial statement restatements were required. Most specifically, the use of tax contingencies had become too flexible and were used to manipulate income and the reporting and disclosure of tax positions lacked transparency. The SEC was also concerned about the reporting of tax contingencies, and many SEC comment letters were issued on this issue In response to the above voiced concerns, the FASB undertook a project to determine how to account for uncertain tax positions. The result of this project was FIN No. 48 that establishes the proper accounting treatment for uncertain tax positions. The validity of a tax position is a matter of tax law, and it is not controversial to recognize the benefit of a tax position in an firm’s financial statements when there is a high degree of confidence that a particular tax position will be sustained after examination by the IRS. However, in some cases, tax law is subject to varied interpretations, and whether a tax position will ultimately be sustained may be uncertain. The evaluation of a tax position under FIN No 48 is a two-step process: 1. Recognition : A firm determines whether it is more likely than not that a tax position will be sustained upon examination by the IRS based on the technical merits of the position. In evaluating whether a tax position has merit, a firm is to use a more-likely-than-not recognition threshold. This evaluation should presume that the IRS would have full knowledge of all relevant information. 2. Measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest cumulative amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Case 12-11 IASC Income Tax Project The main changes contained in the proposed new IAS No 12 are: a. A change in the definition of tax basis. Tax basis would be defined as: the measurement under applicable substantively enacted tax law of an asset, liability or other item.
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