FAR coverage for current tax expense, deferred tax assets and liabilities, valuation allowances, NOLs, intraperiod allocation, and uncertain tax positions.
Income tax accounting is tested in FAR because book income and taxable income often move in different periods. The chapter starts with the current-versus-deferred split, then adds the judgment areas that change the answer: deferred tax asset realizability, operating loss carryforwards, intraperiod tax allocation, and uncertain tax positions.
The core exam habit is to identify which question is being asked. Some fact patterns ask whether a temporary difference creates a deferred tax asset or liability. Others ask whether a deferred tax asset should be reduced by a valuation allowance, where a tax effect should appear in the financial statements, or whether a claimed tax benefit is strong enough to recognize.
| Lesson | Main question | What to master |
|---|---|---|
| Current Tax Expense and Deferred Tax Assets and Liabilities | Is the tax effect current, deferred, or permanent? | Temporary differences, enacted tax rates, deferred tax assets, deferred tax liabilities, and rate-change effects |
| Valuation Allowances, NOLs, and Intraperiod Tax Allocation | How much deferred tax benefit is realizable, and where does the tax effect belong? | More-likely-than-not realizability, valuation allowances, carryforwards, and allocation to continuing operations, discontinued operations, OCI, or equity |
| Uncertain Tax Positions and Related Disclosures | Is a claimed tax benefit sustainable enough to recognize? | Recognition, measurement, unrecognized tax benefits, interest and penalties, open tax years, and note disclosures |
| Step | What to do | Why it matters on FAR |
|---|---|---|
| 1. Separate current and deferred tax | Identify taxes payable or refundable for the current year before analyzing future tax effects. | Current tax expense and deferred tax expense answer different questions. |
| 2. Classify differences | Determine whether each book-tax difference is temporary, permanent, carryforward-related, or uncertain. | Only temporary differences and carryforwards create deferred tax assets or liabilities. |
| 3. Measure deferred amounts | Apply enacted tax rates to temporary differences and carryforwards expected to reverse in future periods. | Deferred tax measurement uses enacted rates, not expected future proposals. |
| 4. Assess realizability and uncertainty | Evaluate valuation allowances for deferred tax assets and recognition thresholds for uncertain tax positions. | Valuation allowances and uncertain tax benefits are separate judgment models. |
| 5. Place the tax effect correctly | Allocate tax effects to continuing operations, discontinued operations, OCI, equity, or disclosures as required. | FAR often tests presentation after the tax amount is computed. |
| Checkpoint | Exam use | What to avoid |
|---|---|---|
| Difference type | Classify each book-tax item as temporary, permanent, carryforward-related, or uncertain. | Creating deferred tax for permanent differences. |
| Current versus deferred | Separate taxes payable or refundable from future tax effects. | Combining current tax expense and deferred tax expense into one undifferentiated amount. |
| Enacted rate | Measure deferred amounts using enacted rates expected to apply when differences reverse. | Using proposed or expected future rates that have not been enacted. |
| Realizability and uncertainty | Distinguish deferred tax asset valuation allowances from uncertain tax position recognition and measurement. | Treating realizability and sustainability as the same judgment. |
| Presentation location | Allocate tax effects to continuing operations, discontinued operations, OCI, equity, or disclosure. | Computing the tax amount correctly but presenting it in the wrong statement area. |