Chapter 12 - Solution Manual

Differences will become taxable amounts in future

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differences will become taxable amounts in future years, thereby increasing taxable income and taxes payable, upon recovery or settlement of the recognized and reported amounts of an enterprise's assets or liabilities. The second characteristic of a liability is that "the duty or responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice”. An enterprise might be able to delay the future reversal of taxable temporary differences by delaying the events that give rise to those reversals, for example, by delaying the recovery of related assets or the settlement of related liabilities. A contention that those temporary differences will never result in taxable amounts, however, would contradict the accounting assumption inherent in the statement of financial position that the reported amounts of assets and liabilities will be recovered and settled, respectively; thereby making that statement internally inconsistent. For that reason, the Board concluded that the only question is when, not whether, temporary differences will result in taxable amounts in future years. The third characteristic of a liability is that "the transaction or other event obligating the entity has already happened". Deferred tax liabilities result from the same past events that create taxable temporary differences. According to current GAAP, liabilities should be reported in the balance sheet at the present value of the future cash flows discounted at the market rate of interest. We argue that since deferred tax liabilities are considered “liabilities”, they should be given the same treatment as other liabilities. As such they should be measured and reported as the present value of the expected future tax outflows. Proponents of reporting deferred taxes at their discounted amounts argue that the company that reduces or postpones tax payments is economically better off. It is their belief that by discounting deferred taxes, a company best reflects the operational advantages of its tax strategies in its financial statements. Proponents also feel that discounting deferred taxes is consistent with the accounting principles established for such items as notes receivable and notes payable, pension costs, and leases. They argue that discounted amounts are considered to be the most appropriate indicators of future cash flows. In short, the time value of money is important to the well-being of companies, and because of this aspect, GAAP requires interest to be imputed for non-interest bearing financial instruments. It follows that the time value of money is enhanced by postponing tax payments, thus, consistency under GAAP would require imputing interest on deferred taxes.
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272 Team 2.
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