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Lecture 4

ACTG 3120 Lecture Notes - Lecture 4: Income Tax, Cash Flow, Income Statement


Department
Accounting
Course Code
ACTG 3120
Professor
Elizabeth Farrell
Lecture
4

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Week 4 – Tax income
IFRS- always non-current
ASPE-both current and non current
Interperiod Tax allocation:
Deals with allocating tax expense to appropriate year, regardless of when its actually paid
Extent of allocation:
oTaxes payable method
oComprehensive tax allocation method –IFRS MUST USE
Measurement method:
oDeferral method
Record future tax impact by the tax rate in the year the tempora\ry
diference first arises
Beast measure of the expense is the effect that is had in the year that the
temporary difference orginated
Not affected by future changes in the tax rate
oLiability method
Used the tax rate that will be in effect in the year of the reversal
Emphasis on measure of future cash flows
Affected and alterns SFP when tax rate estimate changes
Discount:
oNo discounting
oMany estimated must be made in order to discount, very difficult and complex
Cash Flow statement: must include only taxes actually paid
Income statement approach
ASPE:
Choose Taxes payable method or Comprehensive Tax allocation method
Income tax expense must be allocated to
oContinuing operations
oDiscountinued opersation
oG/L in RE
oG/L in share capital
Permanent Difference:
Enters the computation of either taxable income or pre-tax actg income but never enterins
into the computation of each other
Ex.
oDividends received
oEquity in earnings from significantly influence associate company
o50% of capital gains
oGolf club dues

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o50% of meals & entertainment expenses
oInterest and penaltes on taxes, fines
oPolitical contributions
oGood will purchases and purchased subscription 75% if total costs subject to CCA
at a declining balance rate of 7%
Temporary Difference:
Tax basis of an asset or liability differs from its actg carrying value
Counted in actg income first then tax basis or vice versa
Ex.
oDepreciation Tax Vs. Amotization
oDevelopment costs (immediate for tax, amortized for actg)
oCapitalized interest (deducted when paid, amortized for actg)
oWrite down of inventory, investments, tangible assets (only when realized is it
taxed)
oG/L from inventories valued at NRV (tax when realized)
oMultiple revenue payments (tax when reciveed, actg at point of sale)
oBad debt expense (taxed when uncollectable)
oCapital assets written up under re-valuation method- (taxable once asset class is
closed)
oFV increase for investment properities or biological assets (taxable when property
is sold)
oWarranty costs (taxable when paid)
oBond discount or premium – taxable when the principal is settled at maturity
Temporary difference reverses
Deferred income tax L/A due to temporary diference drawn down
Comprehensive tax allocation method
Full allocation, recognized that future cash flow impact arises from all temporary
difference, no matter how far in the future
Tax payable method
No interperiod allocation
Income tax expense= current income tax
Aka. Flow through methof
Aggregate measure
Corresponds with actual cash outflow for income tax
Approach to Income Tax:
Step 1: Calculate taxable income and Income Tax Paybale
oAdjust actg income for temporary and permanent difference
+expensed now but not tax deductible
-revenu on income but not tax able now
-expense not on income statement but taxable
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