Question

SFAS No. 109, “Accounting for Income Taxes” (FASB ASC 740) requires companies to use the asset-liability method of interperiod income tax allocation.

Required:

a. Discuss the criteria for recognizing deferred tax assets and deferred tax liabilities under the provisions of FASB ASC 740.

b. Compare and contrast the asset-liability method and the deferred method

Answer 1

(a) As per the provisions of FASB ASC 740, a deferred tax liability is recognized for temporary differences that will result in taxable amounts in future years, whereas a deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and for carryforwards.

(b) Asset-liability method: This method is accepted by GAAP. Under this method, the deferred tax amount is based on the expected tax rates for the period in which the temporary differences reverse. Hence, the same is considered as a balance-sheet-oriented approach.

Deferred method: This method is not accepted by GAAP. Under this method, the deferred tax amount is based on tax rates in effect when the temporary differences originated (and not reversed). Hence, the same is considered as an income-statement-oriented approach.