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INCOME TAX ALLOCATION
Accounting for Income Taxes
FAS NO. 109
Codification section 740-10

I.	Two Types of Tax Allocation
	A.	Intra-period (within the same period)
	B.	Inter-period (between Periods) (subject of FAS No. 109)
II.	Differences between pre-tax accounting income and taxable income
	A.	Why there are differences
	B.	Types of differences
		1.	permanent- items that enter into the calculation of either pre-tax accounting income or taxable income but never into the other calculation.
			No deferred tax consequences to be recognized for permanent differences. They do not give rise to future taxable or deductible amounts
		2.	temporary (timing)- result from differences between tax laws and the recognition and measurement standards of financial accounting standards.
			a.	Result in the recognition of revenues and expenses in different accounting periods for pre-tax accounting income versus taxable income. Temporary differences give rise to income tax allocation.
			b.	types of temporary differences (para. 10)
III.	Methods of accomplishing tax allocation
	A.	Deferred method (APB 11)
	B.	Asset/Liability method (FASB 96 and FASB 109)
	C.	Net of tax method
IV.	Comprehensive vs. partial allocation Partial Allocation --deferred taxes recognized only in those cases in which tax benefits or tax obligations are likely to be reversed in the aggregate within a reasonable time in the future. For example, tax allocation would not be done on depreciation-related differences. Under the partial allocation view, there is no legal liability in this case. If accelerated depreciation is used for tax purposes while straight line is used for financial reporting purposes, the tax difference will not be paid so long as the firm continues to replace its assets.
V.	Objectives of tax allocation
	A.	Recognize the amount of taxes payable or refundable for the current year.
	B.	Recognize deferred tax liabilities and assets for the future tax consequences of events that have already been recognized in the financial statements or tax returns.
VI.	Recognition of deferred tax assets
	A.	FASB No. 109 relaxed restrictions on recognition of deferred tax assets contained in FASB No. 96.
		1.	A deferred tax asset is recognized for all deductible temporary differences. This asset must be reduced by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the asset will not be realized. (A likelihood of more than 50%) (Para. 17-e)
		2.	The valuation allowance is evaluated at the end of each accounting period and, if necessary, adjusted. Would involve and adjustment to the current year's income tax expense account. (Para. 26)
VII.	Discounting of Deferred tax Liabilities- Discounting not considered (required) in FASB 109 (see para. 198-199)
VIII.	Balance Sheet Classification
	A.	Separate deferred tax assets and liabilities into a current and a non-current amount
	B.	Classification based on the classification of the related asset or liability giving rise to the deferred tax (e.g., if due to depreciation differences on plant assets, then the deferred tax should be classified as non-current, since the plant assets are non-current.)
	C.	If not related to an asset or liability, then classify according to the expected reversal date of the temporary difference.
	D.	all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets shall be offset and presented as a single amount.

Comparison of FAS 109 and Opinion No. 11

Statement No. 109 APB Opinion No. 11

Requires an "asset/liability" approach Required a "deferred" approach

Deferred income taxes are viewed as assets and liabilities of the firm Primary intent: to match tax expense with corresponding revenues and expenses for the year in which the revenues and expenses for the year in which the revenues and expenses were recognized in the financial statements.

Deferred income taxes are viewed as assets and liabilities of the firm Did not require adjustment to deferred tax balances for subsequent events such as changes in tax rates or laws

Deferred income tax expense is determined by the current -year change in the firm's deferred income tax liabilities and assets

Requires firms to recognize:
1. Taxes payable or refundable for the current year;
2. Deferred tax liabilities and assets for future tax implications of transactions that have been recognized in the firm's financial statements or tax returns

FASB stated that "the asset/liability approach . . . is most consistent with the definitions in SFAC No. 6, and with other parts of the conceptual framework"

FASB believes that the asset/liability approach produces the most useful and understandable information that is no more complex than any other approach to accounting for income taxes.

Balance sheet emphasis Income statement emphasis

This summary does not substitute for reading the ASC section(s)!
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Statement No. 109	APB Opinion No. 11
Requires an "asset/liability" approach	Required a "deferred" approach
Deferred income taxes are viewed as assets and liabilities of the firm	Primary intent: to match tax expense with corresponding revenues and expenses for the year in which the revenues and expenses for the year in which the revenues and expenses were recognized in the financial statements.
Deferred income taxes are viewed as assets and liabilities of the firm	Did not require adjustment to deferred tax balances for subsequent events such as changes in tax rates or laws
Deferred income tax expense is determined by the current -year change in the firm's deferred income tax liabilities and assets
Requires firms to recognize: 1. Taxes payable or refundable for the current year; 2. Deferred tax liabilities and assets for future tax implications of transactions that have been recognized in the firm's financial statements or tax returns
FASB stated that "the asset/liability approach . . . is most consistent with the definitions in SFAC No. 6, and with other parts of the conceptual framework"
FASB believes that the asset/liability approach produces the most useful and understandable information that is no more complex than any other approach to accounting for income taxes.
Balance sheet emphasis	Income statement emphasis