Here’s an excerpt from one AF’s notes to its financial statements: Deferred taxes (in part) Deferred tax assets related...
Here’s an excerpt from one AF’s notes to its financial statements:
Deferred taxes (in part)
Deferred tax assets related to temporary differences and carryforwards are recognized only to the extent it is probable that a future taxable profit will be available against which the asset can be utilized at the tax entity level.
Is this policy consistent with U.S. GAAP? Explain.
Homework Answers
Deferred tax assets related to temporary differences and carry forwards are recognized only to the extent it is probable that a future taxable profit will be available against which the asset can be utilized at the tax entity level. Probable is defined as more likely than not. Measurement is based on the entity's best estimate of the amount of the tax benefit.
But in U.S. GAAP prescribes a two step verification and measurement approach to determine the amount of tax benefit to recognize in the financial statements. Deferred tax assets are recognized in full and then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be recognized.
Hence Deferred tax policy is not consistent with U.S. GAAP.
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