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Chapter 12 - Solution Manual

The validity of a tax position is a matter of tax law

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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. b. A specification that the tax basis of an asset is determined by the tax deductions that would be available if the entity recovered the carrying amount of the asset by sale. c. The introduction of an initial step to determine deferred tax assets and liabilities so that no deferred tax arises if there will be no effect on taxable income when the entity recovers or settles its carrying amount.
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276 d. New definitions of tax credit and investment tax credit as: i. Tax credit is a tax benefit that takes the form of an amount that reduces income tax payable. ii. Investment tax credit is a tax credit that relates directly to the acquisition of depreciable assets. e. Removal of the initial recognition exception in IAS No. 12. f. Changes to the exception in IAS No. 12 from the temporary difference approach relating to a deferred tax asset or liability arising from investments in subsidiaries, branches, associates and joint ventures. g. A proposal to recognize deferred tax assets in full, less, if applicable, a valuation allowance to reduce the net carrying amount to the highest amount that is more likely than not to be realizable against taxable income. h. A proposal that current and deferred tax assets and liabilities should be measured using the probability-weighted average amounts of possible outcomes assuming that the tax authorities will examine the amounts reported to them by the entity and have full knowledge of all relevant information. i.
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The validity of a tax position is a matter of tax law and...

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