Analysis of Income Taxes

Accounting profit is the income before taxes reported on the income statement, following accounting standards. Taxable income is the income subject to taxes as per tax laws, forming the basis for income tax payable or recoverable.

These arise when there are differences between the tax base and the carrying amount of assets and liabilities, which reverse over time. Examples include timing differences in revenue recognition and the use of different depreciation methods for tax and accounting purposes.

These are differences between accounting standards and tax laws that will not reverse in the future. Examples include expenses not deductible under tax laws and tax credits that directly reduce taxes.

Deferred tax assets arise when taxable income is temporarily less than accounting profit, suggesting future tax relief. Deferred tax liabilities occur when taxable income is temporarily higher than accounting profit, indicating future tax payments.

Tax expense on the income statement includes both the income tax payable and changes in deferred tax assets and liabilities. It reflects the tax consequences of all transactions in the current period, adhering to the matching principle.

Temporary differences are discrepancies between the tax base of an asset or liability and its carrying amount on the balance sheet. These differences result in deferred tax assets or liabilities.

Deferred tax assets arise when expenses are recognized in the income statement before they are deductible for tax purposes, or when losses are available to carry forward to future periods to reduce taxable income.

Deferred tax liabilities occur when income is recognized for accounting purposes before it is subject to taxation, or when a tax deduction is received before the expense is recognized in the income statement.

A valuation allowance is used to reduce the carrying amount of a deferred tax asset to the amount that is more likely than not to be realized. It reflects the likelihood of the deferred tax asset being utilized against future taxable income.

The realizability of deferred tax assets depends on the ability of a company to generate sufficient taxable income in the future. Factors such as future profitability and tax planning strategies influence this assessment.

The official corporate income tax rate set by the government in the country where the company is domiciled.

Calculated as the income tax expense reported on the income statement divided by the pre-tax income. It represents the average rate at which a corporation is taxed on earned income.

The actual tax paid in cash over a period divided by the pre-tax income. It reflects the immediate cash impact of tax policies on the company's finances.

Deferred tax assets and liabilities arise from temporary differences between the tax base of an asset or liability and its reported amount in the financial statements. These are expected to result in deductible or taxable amounts in future periods when the reported amount of the asset or liability is recovered or settled.

Effective tax rate reconciliation involves explaining the differences between the statutory tax rate and the effective tax rate using a reconciliation statement. This includes adjustments for foreign tax rate differentials, changes in valuation allowance, unrecognized tax benefits, and other factors.

A valuation allowance is recorded against deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes in the valuation allowance can indicate shifts in expectations about future profitability.

The recognition and measurement of deferred tax assets and liabilities, and the associated valuation allowance, affect a company's financial statements, particularly the balance sheet and income statement. These figures also influence key financial ratios, such as the effective tax rate and potentially the debt-to-equity ratio, depending on how deferred tax liabilities are classified.