To explain how this timing difference affects tax

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which means it has a tax basis of $0. To explain how this timing difference affects tax expense, assume that a company accrues $300 of restructuring costs in Year 1 and settles the liability in Year 2 as follows: Financial Tax Deferred 'Tax Deferred Tax ReportingsReporting Book Asset (Bopk vs Expense (Decrease (Net Book (Tax vs Tax Tax DifI'~rence (or Increase) in Value) Basis) Difference x Tax Rate) Deferred Tax Asset) Year 1: Accrue restructuring costs ... $(300) $ 0 End of Year 1: Liability book value ... $ 300 $ 0 $300 $120 $(120) ($300 - $0) ($300 x 40%) ($120 - $0) Year 2: Pay restructuring costs ..... $(300) End of Year 2: Liability book value ... $ 0 0 $ 0 $ 0 $120 ($0 - $0) ($0 x 40%) ($120 - $0) Timing differences created by the restructuring liability yield a deferred tax asset in Year 1. Timing differences disappear in Year 2 when the company pays cash for restructuring costs. To see how tax expense is determined, assume that this company has $500 of pre-restructuring income; computations follow:
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Year 1 . $200 ($500 - $0) x 40% $ 80 ($500 - $300) x 40% $(120) $ 80 Module 5 I Revenue Recognition and Operating Income 5-38 Taxes Paid Deferred Tax Expense Total Tax Expense Year 2 . $120 $200 -~rredtax accounts derive from timing differences between GAAP expenses and tax deductions. This creates rences between the net book value and the tax basis for many assets and liabilities. Pfizer's deferred tax foot- (see Exhibit 5.6) reports several deferred tax assets and liabilities that explain its book-tax difference and the basis. For example, in 2010, its deferred tax liability associated with PPE is $1,726 million ($2,146 million ity less $420 million asset). This reflects the cumulative tax savings to Pfizer from accelerated depreciation - PPE. If we assume a tax rate of 35%, we can compute the book-tax difference for Pfizer's PPE as $4,931 - n ($1,726 million/O.35). Its balance sheet reveals total PPE of $19,123, which implies that the tax basis for assets is $14,192 million ($19,123 - $4,931).
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