Analysis of Income Taxes

Why accounting profit and taxable income differ, how temporary differences create deferred tax assets and liabilities, how income tax expense is built from taxes payable and deferred tax changes, and how to read effective, statutory and cash tax rates and the tax note.

1. 1. Accounting profit, taxable income and the tax baseA company keeps two sets of rules, one for its financial statements and one for the tax authority, so its accounting profit and its taxable income are rarely the same number.Free12 min
2. 2. Temporary versus permanent differencesA temporary difference reverses later and creates deferred tax; a permanent difference never reverses, creates no deferred tax and pushes the effective tax rate away from the statutory rate.Video · 7 min13 min
3. 3. Deferred tax balances and income tax expenseDeferred tax balances equal temporary differences times the tax rate, and income tax expense equals taxes payable plus the period's change in those balances.Video · 7 min14 min
4. 4. Realising deferred tax assets and tax rate changesA deferred tax asset is only worth something if future taxable profits can absorb it, and every deferred tax balance must be remeasured when the tax rate changes.Video · 6 min13 min
5. 5. Effective, statutory and cash tax ratesThe statutory rate is the law, the effective rate is what the income statement charges per unit of pretax income, and the cash tax rate is what was actually paid.Video · 6 min13 min
6. 6. Tax disclosures and financial analysisThe income tax note breaks pretax income and the tax provision into their parts, reconciles the statutory to the effective rate, and lists every deferred tax item, which lets an analyst judge earnings quality, cash taxes and leverage.14 min
7. 7. Integrated cases: reading a tax note, cash tax versus effective taxA tax note lets you split a change in the effective rate into geographic mix and one-off items, and tie cash taxes to the movement in the net deferred tax balance, so each rate is used for the question it answers.16 min