Question

LO3 M10-22. Analyzing and Interpreting Income Tax Disclosures Apple Inc. (AAPL) Apple Inc. reports the following footnote disclosure to its 2016 10-K report (5 millions). The provision for income taxes consisted of the following: Fiscal Year Ended September 24, 2016 Federal Current.... Deferred.... ** . $ 7652 ... 5043 12,695 State Current Deferred... .. *** 990 (138) 852 Foreign Current Deferred ...... 2,05 33 Total $15,685 a. What amount of income tax expense does Apple report in its income statement for 2016? b.How much of Apple's income tax expense is current (as opposed to deferred)? c. Why do deferred tax assets and liabilities arise? How do they impact the tax expense that Apple reports in its 2016 income statement?

Answer 1

a. Income tax expense is that amount which is associated with income during the year. The total income tax that Apple would report in its Income statement is Total of all taxes(Federal, State and Foreign including the deferred tax for all), i.e. $ 15,685.

b. Apple's current income tax is Federal 7652+State 990+ Foreign 2105= 10,747

    Apple's Deferred tax expense is=Federal 5043+State (138)+ Foreign 33= 4,938

c.Deferred tax can either be an asset or liability on a company’s balance sheet. They arise due to timing differences. The timing difference should be temporary and not permanent. Deferred tax is a notional asset or liability to reflect company's income taxes on a basis that is the same or more similar to recognition of profits than the taxation treatment.

Deferred tax liabilities can arise as a result of corporate taxation treatment of Depreciation being more rapid than the accounting depreciation treatment and deferred tax liability can arise due to accounting depreciation being more rapid than the taxation treatment.

Deferred tax affects the future tax liability of a company. It can be shown with the help of an example.

The following table below shows the difference in treatment between the calculations in the tax return submission and that in the accounts.

Year 1 – Deferred tax liability

	Tax Return	Accounts
Income	9,000	9,000
Depreciation	1,600	1,000
Pre-tax income	7,400	8,000
Income tax (25%)	1,850	2,000
Net income	5,550	6,000

The table shows that tax payable for the year as per tax calculation is 1850 whereas as per books it is 2000. So, there is difference of 150 because tax dep is higher for tax. The temporary difference is a liability which needs to be paid in future years as deferred tax gets reversed.

So, deferred tax will affect the current tax expense of apple and also the future taxes. As we can see all together that the current tax of apple is 10,747. However due to deferred tax it is now 15,685. So apple is paying more tax of $ 4,938 for current year because of deferred tax. In future years apple will be paying less taxes.