FAS 109: a primer for non-accountants - Financial Accounting Standards Board's "Statement 109: Accounting for Income Taxes"

Tax Executive, The, Sept, 2000 by Aaron Schall

The example below is divided into seven tables to illustrate the issues discussed in this article and demonstrate how the provision is prepared. Most numbers are tied to either another table or something in the financial sheets, which themselves are set forth in Tables 5 and 6. This linkage is important for two reasons. One, it allows a reviewer to check the preparer's work. Two, if a new person prepares the provision in subsequent years that person can understand where the numbers came from in prior years.

Table 1: Deferred Tax Assets (Liabilities)

XYZ Corporation
Deferred Tax Assets/Liabilities
12/31/99

                            Deferred Tax           Current
                            Asset (Liability)      Year
                            12/31/98               Activity

Allowance for
 doubtful accounts   Book   BS    15,000      Calc   19,000

Accumulated          Book   BS    320,000     P&L    203,994
 Depreciation        Tax    PY    (594,000)   (1)    (377,842)

Accrued Bonuses      Book   BS    322,000     Calc   (17,000)

Accrued Vacation     Book   BS    325,000     Calc   69,000

Accrued Legal Fees   Book   Bs    150,000     P&L    (150,000)

Total                             538,000            (252,848)

                            (2)   206,000     (2)    (96815)

                             Deferred Tax
                             Asset
                             (Liability)    Tax      Tax
                             12/31/99       Rate     Effect

Allowance for
 doubtful accounts   BS      34,000         38.29%   13,019

Accumulated          BS      523,994        38.29%   200,637
 Depreciation        Calc    (971,842)      38.29%   (372,118)

Accrued Bonuses      BS      305,000        38.29%   116,785

Accrued Vacation     BS      394,000        38.29%   150,863

Accrued Legal Fees           0              38.29%   0

Total                        285,152        38.29%   109,185

Tax Rate

Federal                    34.00%
State (Blended)    6.50%
 Federal benefit   2.21%
Net state rate             4.29%

Total                      38.29%

(1.) Estimate based on last year's proportion of tax depreciation/amortization to book depreciation/amortization (assuming no material acquisitions or retirements).

(2.) Tax effect of total. Compare to Table 3 as check.

BS = Balance Sheet

PY = Prior Year

P&L = Profit & Loss or Income Statement

"Calc = calculation, e.g., ending year balance minus prior year ending balance."

Table 2: Income Tax Provision

XYZ Corporation
Income Tax Provision
12/31/99

                                           With
                                         Temporary
                                        Differences

Book Income (Loss) Before Taxes   P&L     1,708,650

Permanent Items
Non-deductible goodwill           P&L       256,395
50% of Meals and Entertainment    P&L        35,162

Income before temporary
  differences                             2,000,207

State tax expense
Federal benefit of state
  deduction

Temporary Items
Allowance for doubtful accounts   T1         19,000
Depreciation                      T1      (173,848)
Accrued Bonuses                   T1       (17,000)
Accrued Vacation                  T1         69,000
Accrued Legal Fees                T1      (150,000)

Total temporary differences               (252,848)

State Taxable Income              E       1,747,359

State taxes payable               F         113,578

Federal taxable income            G       1,633,781

Federal taxes payable at 34%                555,486

Total tax expense/(benefit)

Statutory Rate Reconciliation
Income before taxes               I         580,941
Effect of permanent differences   J          99,129
Effect of state taxes
 (net of Federal benefit)         K          85,809
Other

                                            765,879

Valuation Allowance                               0

Total                                       765,879

Current vs. Deferred Tax
 Expense/(Benefit)

                                            Current
Federal                           L         555,486
State                             M         113,578

Total                                       669,064

                                      Tax             Rate
                                    Expense      Reconciliation

Book Income (Loss) Before Taxes   A   580,941        34.00%

Permanent Items
Non-deductible goodwill           A    87,174    B   05.10%
50% of Meals and Entertainment    A    11,955    B    0.70%

Income before temporary
 differences

State tax expense                 C   130,013    B   07.61%
Federal benefit of state
 deduction                        D   (44,205)   B   -2.59%

Temporary Items
Allowance for doubtful accounts
Depreciation
Accrued Bonuses
Accrued Vacation
Accrued Legal Fees

Total temporary differences

State Taxable Income

State taxes payable

Federal taxable income

Federal taxes payable at 34%

Total tax expense/(benefit)       H   765,879    B   44.82%

Statutory Rate Reconciliation
Income before taxes                    34.00%
Effect of permanent differences        05.80%
Effect of state taxes
 (net of Federal benefit)              05.02%
Other

                                       44.82%

Valuation Allowance                     0.00%

Total                                  44.82%

Current vs. Deferred Tax
 Expense/(Benefit)

                                      Deferred         Total

Federal                           N   124,585    O   680,070
State                             N   (27,769)   K    85,809

Total                                   96,815       765,879