Disclosures Relating to Deferred Tax Items

Introduction Income tax disclosures that are included in the notes to financial statements can provide analysts with very useful information. Their inclusion therefore can have a material impact on the results of financial statements analysis, inclusive of the derivation of…

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Measurement of Current and Deferred Tax Items

Introduction Current taxes payable or recoverable are determined using the relevant tax rates at the balance sheet date. Deferred taxes however are measured at the tax rate that is expected to be applicable when the asset is realized or the…

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Valuation Allowance for Deferred Tax Assets

Introduction US GAAP recognizes a deferred tax asset in full but then reduces it by a valuation allowance if it is very likely that some or all of the deferred tax asset will not be realized. Valuation allowance Deferred tax…

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Temporary and Permanent Differences

Introduction Temporary differences occur whenever there is a difference between the tax base and the carrying amount of assets and liabilities on the balance sheet. Permanent differences are differences between the tax and financial reporting of revenue or expense items…

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Impact of Tax Rate Changes

Introduction Changes to the income tax rate can significantly impact a company’s financial statements and the financial ratios which are derived from them. It is important therefore for an analyst to take note of any proposed changes to tax laws…

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Changes in the Income Tax Rate

Introduction Changes in the income tax rate can influence the measurement of income tax expense, and the deferred tax asset and liability carrying amounts in the year of change. When the income tax rate changes, deferred tax assets and liabilities…

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Tax Base of a Company’s Assets and Liabilities

Introduction An asset’s tax base is the amount that will be deductible for tax purposes in future periods once the economic benefits are realized and a company can recover the carrying amount of the asset. If the economic benefit will…

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Creation of Deferred Tax Liabilities and Assets

Introduction A deferred tax asset arises whenever a company’s taxable income is greater than its accounting profit, which results in an excess amount being paid for income taxes, which the company expects to recover during the course of future operations….

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Differences between Accounting Profit and Taxable Income

Introduction Accounting profit, also referred to as income before taxes, is reported on a company’s income statement in accordance with the prevailing accounting standards. Taxable income is the portion of a company’s income that is subject to income taxes in…

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Effect of Finance Leases and Operating Leases on Financial Statements

Introduction In substance, a finance (or capital) lease is equivalent to the purchase of an asset by a buyer (or lessee) that is directly financed by the seller (or lessor). An operating lease is an agreement providing the lessee with…

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