 Hello and welcome to the session. This is Professor Farhad and this session we would look at presentation disclosure and how does IFRS treat the third tax asset and the third tax liability. This topic is covered in intermediate accounting as well as the CPA exam far section. As always I would like to remind you my viewers to connect with me on LinkedIn if you haven't done so. YouTube is where you need to subscribe. I have 1500 plus accounting, auditing, finance and tax lecture. This topic goes under my intermediate accounting but I do cover many other courses. On my website in addition to the lectures I do have additional resources such as multiple choice through false PowerPoint, slides, notes and exercises. If you are studying for your CPA exam I have 2000 plus CPA question. It's an excellent supplemental tool for your professional career media. So let's talk about the financial presentation. What should you show on the balance sheet? Well on the balance sheet you should show income tax is payable and income tax refund receivable if you have any. They are reported as current liability and current assets. If you have income tax is payable it's always a current liability income tax refundable it's always a current asset because they expect to be realized or paid out within the next 12 months. So that's on the balance sheet. Also the company should classify the third tax account as net noncurrent amount on the balance sheet. What does that mean? It means you have to net net means you have to cancel assets versus liabilities and after you net them all out the net effect is a noncurrent amount on the balance sheet. Please note it's a noncurrent. We no longer have current the third tax asset and current the third tax liability. It's all noncurrent. Let me show you an example. Let's assume we end up with the following. We end up with the third tax asset of $42,000 due to rent collected in advance, $214,000 the third tax liability because of the depreciation method used, $45,000 of liability because the recognition of income on the installment sales method and warranty liability created at the third tax asset. What we do is we add them all up. The third tax asset is $54,000. The third tax liability is $259,000. Guess what? We net them out. We net them out. We net them out. Minus $54,000 plus $259,000 equals to $205,000. So we have $205,000 of the third tax liability and it's always noncurrent. It used to be where we classify them as current and noncurrent. That's no longer the case. It's always noncurrent. Also what do we have to show in the notes? Well, we have to show a company are required to disclose the total of all the third tax liabilities, the total of all the third tax, all the third asset. So you have to show the total of all of those and the total valuation allowance in the notes of the financial statements. You also have to show this. In addition to this, you have to show the any change during the year and the total of the valuation allowance. So if you increase or decrease your valuation, you have to show this. Also the type of the temporary differences or carry forward that give rise to significant portion of the third tax asset and the third tax liability. So you have to tell us what are those temporary differences or carry forward that resulted in the third tax asset and the third tax liability. As users, we are interested in this. We want to know how are you creating this. Also, you are required to report income taxes, income before income taxes. So notice PepsiCo here, they have to show income before income taxes, then their income taxes. So you have to show this. Also, you have to know that GAP uses or FASB believe in the asset liability method. Okay, sometimes it's referred to as the liability approach in case you are asked about this. This is the most consistent method for accounting for income taxes. And what is the asset liability method? Just basically we're going to look at certain principle of it. A current tax liability or asset is recognized for the estimated taxes or refundable on the tax return of the current year. So what's going to happen is we looked at the liability and the asset. What does that mean really? If you really think about it, you're either going to have a revenue or an expense, a difference in revenues or expense. But the revenues and the expense, they're coming either from a count receivable. So for example, it's a count receivable, credit revenue or a liability will be, let's assume you have an expense, you debit an expense like a warranty and you credit an estimated liability. So notice you are looking from the asset and liability perspective. So you're looking at the differences between the book value of the asset on the for tax purposes and the book value of the asset for financial accounting purposes. So you are using the asset liability approach, asset liability approach. So rather than looking at the revenues and expenses, you are looking from the perspective of asset liability. A deferred asset liability or asset is recognized for the estimated future tax effect, attributable to temporary differences and carry forward. So you're always looking at the difference in the assets. The measurement of the current and deferred tax liability and asset is based on the provision of the enacted tax law. Remember, gap we use the enacted tax law. So when you're computing your future DTA, deferred tax asset and deferred tax liability, make sure if you are giving the future rate, use the enacted future rate. If they say the projected, not the projected, you have to look at the enacted. Enacted means the law has passed and it's final. So the effect of future changes in tax law or rates are not anticipated. If they say it's the anticipated rate, you don't use the anticipated rate. Okay? You don't guess. You don't try to kind of estimate what the tax rate would be. It's what's the enacted, enacted into law. The measurement of the for tax asset is reduced if necessary by the amount of any tax benefit that based on the available evidence are not expected to be realized. We talked about this, you need a valuation account. So this is basically a summary of the main points that we went over. Differences between similarities, differences and similarities between gap and IFRS. Similarities similar to gap IFRS uses the asset liability approach for recording deferred taxes. Also the classification of the third taxed asset is always noncurrent. So they would always use a noncurrent. They have, they don't have a current. Actually they have the IFRS, they were before gap, they use this method but now they both use the method. A few differences under IFRS, an affirmative judgment approach is used by which the third taxed asset is recognized up to the amount that's probable to be realized. So under IFRS, they use what's called affirmative judgment approach. Okay? In other words, they will, they will estimate, okay, by which the third tax is recognized. So they will estimate how much it's going to be. Gap uses something called impairment approach. In this approach, the deferred asset is recognized, the third taxed asset is recognized in fold, then it's reduced by evaluation account. And we saw this earlier. Under gap, what we did is we debited the third taxed asset. We credited income, tax, expense. Then we went ahead and we debited the income tax expense and we credited the allowance. That's what we did in the prior session. So notice, we put the deferred taxed asset on the books, then we removed it. What the IFRS do, they only kind of, they make one entry estimating how much it's going to be realized. But we do basically two entries. Other differences, IFRS uses enacted tax rate or substantially enacted. So under IFRS, they could either use the enacted tax rate or they can substantially enact a tax rate. What's substantially, it means virtually certain. It's mean they think the Congress or the legal authority, they're going to change the law, therefore they can use the new rate based on the projection. Not acceptable for Gap. Gap, you only have to use, you have to use the enacted, the one that's already passed by law. Other differences, the tax effect related to certain items are reported in equity under IFRS. So there are certain differences, they are reported in equity, not for Gap. For Gap, all the differences, permanent or temporary, it's all reported in income. For IFRS, know that certain items, they could be reported in equity. Gap require companies to assess the likelihood of uncertain tax position being sustainable upon audit. So basically what happens sometime, we file our income tax return, then since we're not sure sometime about the rules, we might have to make an estimate that we might be responsible for more taxes. So for Gap, potential liabilities must be accrued and disclosed if the position is more likely than not to be disallowed. So what we do is we file our taxes and we think, well, there's a good chance the IRS might reject this the way we treated this transaction, therefore we create a potential liability. Under IFRS, all potential liabilities must be recognized with respect to measurement. IFRS uses the expected value approach to measure the tax liability. IFRS use something called the expected value approach. We use more likely than not, just the way they come up with the figures. Also IFRS allows the netting of the third tax asset and liabilities only if they occur, if the account related to the same tax and authority and entity has the legal right to offset taxes. Simply put, what they're talking about here is under IFRS, you can offset assets and liabilities as long as those assets and liabilities are within the same jurisdiction, like the same country. Let's take a look at a couple of questions, deals with IFRS. Which of the following is a true statement regarding the reporting of the third taxes and financial statements prepared under US GAAP and IFRS. So we're looking for a true statement. Under US GAAP, the third taxes are classified as current and the third liabilities classified as noncurrent, no way. Everything is noncurrent. Under IFRS, the third tax asset and liabilities are netted if they relate to the same taxing authority or jurisdiction and there's a legal right to offset the amount. Yes, you are allowed to do so under IFRS. Let's just make sure this is the right answer. Under IFRS, the third tax asset can never be netted against the third tax liability. Watch out for the word never. Yes, they can as long as they are within the same jurisdiction. Under US GAAP, the third tax asset and liabilities may only be classified as current, no, they only be classified as noncurrent if that's the case. Let's take a look at this question. There's a lot of data. Look at the question first. Assuming Ginger prepared its financial statements in accordance with IFRS, how should Ginger represent its deferred taxes in December 31st year to financial statement? Okay. So the Ginger operates its business in two international jurisdiction, Greece and Italy and prepares its taxes based on the taxing authority. Ginger also have the legal right to offset taxes in these jurisdiction. Good. Ginger accounting record of December 31st year to report the following taxed asset in liability and their amount. So they have $10,000, the third tax liability in Italy, the third taxed asset of $25,000 in Greece, and the third tax liability of $15,000 in Greece. Now, they already told us then that whatever jurisdiction they are in, whether it's Italy or Greece, they have the legal right to offset the taxes in those jurisdiction. What does that mean? It means they can offset the third tax asset and the third tax liability and overall they have a deferred taxed asset when you net these two out of $10,000. So they have the third tax asset for Greece for $10,000 and the deferred tax liability for Italy for $10,000. So let's see what answer gives us this. The third tax asset of $25,000 out $15,000 out $10,000 the third tax asset and $10,000 the third tax liability. This is the answer. In other words, zero the third tax asset and zero the third tax liability. We don't net. We don't net. Let me go back there. We don't net those two. If you have any questions about this topic, please email me. And again, I would like to invite you to visit my website for additional resources. And I strongly suggest you subscribe as it's an investment in your career. 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