may 12, 2008
DESCRIPTION
2008 Accounting Day FAS 109 Update. Presented by: Shelly McGuire. May 12, 2008. Agenda. FAS 109 Overview Key Considerations Tax Rate Determination Goodwill Valuation Allowances Financial Statement Presentation Hot Topics FAS 141R FIN 48 for Private Companies Questions. - PowerPoint PPT PresentationTRANSCRIPT
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May 12, 2008
2008 Accounting DayFAS 109 Update
Presented by: Shelly McGuire
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Agenda
• FAS 109 Overview• Key Considerations– Tax Rate Determination– Goodwill– Valuation Allowances
• Financial Statement Presentation• Hot Topics– FAS 141R– FIN 48 for Private Companies
• Questions
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FAS 109 Overview
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FAS 109 Overview
Guidance comes in many different forms…• FAS 109 issued February 1992• FAS 115• FAS 123R• FAS 141, 141R•Numerous EITFs• FASB Q&A• ASB guidance•Other forms of guidance
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FAS 109 Overview
Excerpt from FAS 109:
This Statement establishes standards of financial accounting and reporting for income taxes that are currently payable and for the tax consequences of:• Revenue, expenses, gains or losses that are
included in taxable income of an earlier or later year than the year in which they are recognized in financial income• Other events that create differences between the tax
bases of assets and liabilities and their amounts for financial reporting• Operating loss or tax credit carrybacks for refunds of
taxes paid in prior year and carryforwards to reduce taxes payable in future years.
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FAS 109 Overview
Applies to :• Federal, foreign, state and local taxes
based on income– this includes franchise taxes based on
income
• All entities included in the reporting entity’s financial statements– this generally includes foreign entities
• Exception for partnerships and S corporations– beware of FIN48
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FAS 109 Overview
FAS 109 is a balance sheet, liability-based approach:• Deferred tax liability represents an increase in
future taxes payable and a decrease in current taxes payable• Deferred tax asset represents a decrease in
future taxes payable and an increase in current taxes payable
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FAS 109 Overview
Temporary versus Permanent Differences
• Temporary differences defined as book-tax basis differences that will result in taxable or deductible amounts in future years.• Permanent differences not defined in FAS
109, but definition of temporary differences states: some events recognized in financial statements do not have consequences. Certain revenues are exempt from taxation and certain expenses are not deductible. Events that do not have tax consequences do not give rise to temporary differences.
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FAS 109 Overview
The formula…
Ending Deferred Taxes
less
Beginning Deferred Taxes
equals
Deferred Tax Expense/Benefit
plus
Current Taxes Payable
equals
Book Tax Expense/Benefit
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FAS 109 Overview
Example 1• X Co formed in 2008• Purchased asset for $100; depreciable over 4
years for financial reporting, 3 years for income taxes• Received payment of $150 in 2008 for service
to be performed in 2011• X Co accrued legal fees of $50 in 2009, paid
in 2011• Book income of $100 in 2008 - 2011
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FAS 109 Overview
2008 2009 2010 2011 Total
B/T B/T B/T B/T B/T
Deferred Revenue 0/150 0/0 0/0 150/0 150/150
Professional Fees 0/0 <50>/0 0/0 0/<50> <50>/<50>
Depreciation <25>/<33> <25>/<33> <25>/<34> <25>/0 <100>/<100>
Total <25>/117 <75>/<33> <25>/<34> 125/<50> 0/0
Net 92 <108> <59> 75 0
<DR>/CR
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FAS 109 Overview
2008 2009 2010 2011
Deferred Revenue 150 150 150 0
Professional Fees 0 50 50 0
Depreciation <8> <16> <25> 0
Total 142 184 175 0
Statutory Rate 40% 40% 40% 40%
DTA/<DTL> 56.8 73.6 70 0
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FAS 109 Overview
2008 2009 2010 2011
Book Income 100 100 100 100
Deferred Revenue 150 0 0 <150>
Professional Fees 0 50 0 <50>
Depreciation <8> <8> <9> 25
Total 242 142 91 <75>
Statutory Rate 40% 40% 40% 40%
Current Tax Expense/ 96.8 56.8 36.4 <30>
<Benefit>
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FAS 109 Overview
2008 2009 2010 2011
Ending DTA/<DTL> 0 56.8 73.6 70
less
Beginning DTA/<DTL>56.8 73.6 70 0
equals
Deferred Tax Expense/ <56.8> <16.8> 3.6 70
<Benefit>
plus
Current Tax Expense/ 96.8 56.8 36.4 <30>
<Benefit>
equals
Book Tax Expense/ 40 40 40 40
<Benefit>
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FAS 109 Overview
2008 2009 2010 2011
Ending DTA/<DTL> 0 56.8 73.6 70
less
Beginning DTA/<DTL>56.8 73.6 70 0
equals
Deferred Tax Expense/ <56.8> <16.8> 3.6 70
<Benefit>
plus
Current Tax Expense/ 96.8 56.8 36.4 <30>
<Benefit>
equals
Book Tax Expense/ 40 40 40 40
<Benefit>
Hint:
Book Income
plus
Permanent Differences
multiplied by
Effective Tax Rate
equals
Book Tax Expense
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Key Considerations
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Tax Rate Determination
DTAs/DTLs measured using enacted rates expected to apply to taxable income in the periods in which they will be realized.– Graduated rates?– Loss companies?– Multi-state filers?– Impact of tax planning?
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Goodwill
Goodwill can be ‘created’ as a result of
business combination–Tax deductibility depends on type of
transaction and prior ownership of goodwill–Goodwill is not amortized for financial
purposes
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Goodwill
• Nondeductible goodwill – no deferred tax assets/liabilities recognized; impairments treated as permanent differences• Deductible goodwill – deferred tax
assets/liabilities will be recognized–Reported amount of goodwill and tax
deductible goodwill each need to be segregate into two components:• First component is the lesser of book
goodwill and tax deductible goodwill• Second component is remaining balance
–Deferred taxes recognized on difference between first components
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Valuation Allowances
• Companies must evaluate the likelihood that they will realize deferred tax assets• If it is ‘more likely than not’ that the Company
will not realize their deferred tax assets, they are required to record a valuation allowance against the deferred tax assets.– Recording the valuation allowance will
affect the book tax expense
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Valuation Allowances
• When evaluating the need for a valuation allowance, all available evidence (both positive & negative) must be considered.• Four future sources of taxable income that can
be considered:–Future reversal of existing taxable differences–Future taxable income (exclusive of reversing
temporary differences and carryforwards)–Taxable income in prior carryback years (if
allowable)–Tax planning strategies
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Financial Statement Presentation
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Financial Statement Presentation
Balance Sheet• Current and non-current deferred tax
balances should be reported separately• Valuation allowance should be allocated
proportionately to current and non-current deferred tax assets• Deferred tax assets and liabilities may be
offset and presented as a single amount where they relate to the same taxing jurisdiction and taxpayer within the company
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Financial Statement Presentation
Footnote disclosures• Total of deferred tax assets, deferred tax liabilities and
valuation allowance• Net change in valuation allowance• Non-public entities disclose types of significant
temporary differences and carryforwards• Public entities disclose tax effects of each type• Significant components of income tax expense by
taxing jurisdiction• Allocation of income tax expense to continuing
operations and other discrete events• Public entities disclose rate reconciliation
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Sample
The (provision) benefit for income taxes is comprised of:
2008 2009 2010
Current federal 100 150 200
Current state 8 24 32
Deferred federal 150 200 <30>
Deferred state 7 16 <2>
Provision for income tax
expense (benefit) 265 390 200
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes.
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Sample
The Company has the following deferred tax assets and liabilities:
2008 2009 2010
Deferred tax assets $150 $200 $175
Deferred tax liabilities <50> <75> <100>
Net deferred tax assets/
<deferred tax liabilities> $100 $125 $100
The Company’s deferred tax assets consist of deferred revenue and accounts receivable basis differences. The Company’s deferred tax liabilities consist of basis differences in fixed assets.
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Hot Topics
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FAS 141R
• Effective for periods beginning after December 15, 2008• Changes accounting applicable to valuation
allowances established as part of the business combination•Under FAS 141 – adjustment to goodwill•Under FAS141R – results in income tax
expense/benefit
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FIN 48
• Generally effective for private companies for years beginning after December 15, 2007• Clarifies accounting for income taxes by
prescribing minimum thresholds that must be met before a tax position can be recognized for financial reporting purposes.• Tune in to the next session for further details!
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Questions?
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2008 Accounting DayFAS 109 Update