Question

please explain this in proper english. i can't undestand the answers that is up for this question on here

Financial Statement Analysis Case Homestake Mining Company Homestake Mining Company is a 120-year-old international gold mining company with substantial gold mining operations and exploration in the United States, Canada, and Australia. At year-end, Homestake reported the following items related to income taxes (thousands of dollars). Total current taxes Total deferred taxes Total income and mining taxes (the provision for taxes per its income statement) $ 26,349 (39,436) $(13,087 Deferred tax liabilities Deferred tax assets, net of valuation allowance of $207,175 Net deferred tax liability $303,050 95,275 $207,775 Note 6 The classification of deferred tax assets and liabilities is based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specific asset or liability are classified based on the estimated period of reversal. Tax loss carryforwards (U.S., Canada, Australia, and Chile) $71,151 Tax credit carryforwards $12,007 Instructions (a) What is the significance of Homestake's disclosure of "Current taxes" of $26,349 and "Deferred taxes" of $(39,436)? (b) Explain the concept behind Homestake's disclosure of gross deferred tax liabilities (future taxable amounts) and gross deferred tax assets (future deductible amounts). (d) Homestake reported tax loss carryforwards of $71,151 and tax credit carryforwards of $12,007. How do the carry and carryforward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

Answer 1

(a)  What is the significance of Homestake's disclosure of “Current taxes” of $26,349 and “Deferred taxes” of $(39,436)?

            Reporting of current taxes reports the current liability reportable.     “… the total deferred tax expense (or benefit) equals the sum of the changes in the deferred tax assets, deferred tax liabilities, and the valuation allowance for the year” (Keisco, D.W., Warfield, T.D., & Weygandt, J.J., 2016, pg. 1078).

(b)  Explain the concept behind Homestake's disclosure of gross deferred tax liabilities (future taxable amounts) and gross deferred tax assets (future deductible amounts).

            “…disclosure of gross deferred tax assets, deferred tax liabilities, and changes in the valuation allowance helps users make better predictions of future cash flows… Examination of the deferred portion of income tax expense provides information as to whether taxes payable are likely to be higher or lower in the future”(Kinney, pg. 1077). .

(c)  Homestake reported tax loss carryforwards of $71,151 and tax credit carryforwards of $12,007. How do the carryback and carryforward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

                        A company can have a operating loss (net) going back two years while receiving refunds for the income taxes paid during those years. Any loss is first applied to the earliest year and then the subsequent years. Any loss can be carried forward up to 20 years to offset future taxable income. Or, they may choose the loss carryforward offsetting up to 20 years of taxable income.

                        “Companies implement a tax-planning strategy to realize a tax benefit for an operating loss or tax credit carryforward before it expires. Companies consider tax-planning strategies when assessing the need for and amount of a valuation allowance for deferred tax assets” (Kinney, pg. 1074).

Keisco, D. W., Warfield, T.D., & Weygandt, J.J. (2016). Intermediate Accounting (16th ed.). Hoboken: John Wiley & Sons. ISBN: 978-1-118-74320-1

Virginia

Professor Mullins

I took the effort to reread thoroughly and research this subject matter. So, I will reply in the order I understand it.

Companies that are new and have incurred high expenditures compared to income brought in, or a company that clearly can claim operating losses due the its excess of expenditures versus revenues from operations and can be in distress, or potential bankruptcy, then perhaps, the first way to increase net income is by reporting operating losses.

Reporting these losses decreases income tax expenses and increases net income. In some cases, this may be the way out instead of bankruptcy. The bigger issue the companies need to be honest about is whether they truly feel that in the future they will have taxable income to recover the tax credits received with reporting operating losses.

The differences reported between the Tax reporting and the GAAP reporting accounts for the future taxes owed. This amount is called the Deferred Tax Liability. It would be a Deferred Tax Asset if the difference were negative, inferring overpayment in taxes, thus lower future taxes owed. It is very important to be honest in this reporting because the IRS, I feel, is much quicker to see taxes owed and dishonestly reported. So, when reporting book or carry amounts for assets or liabilities, the result can be either taxable amounts or deductible amounts; both effecting taxable income accordingly.

To defer something is simply to put it off, but is meant to avoid future obligations to recover the credit given in dire circumstances. Setting up an allowance account can show integrity with intentions to produce recovery assets in good faith, for those not certain of their future taxable income possibilities. The other is to offset these loss carryforwards by creating more income.