Hello everyone and welcome to our lesson today, which we are going to start talking about income taxes. We'll introduce the conceptual background necessary to understand one of the more complex issues in financial reporting. Accounting for income tax. The reason for this complexity is that the accounting is dealing with two sets of rules. The first set of rules is set by the tax code, while the second set is actually set by the accounting standard codification. As you can see in the figure in front of you, I have the IRS versus the FASB IRS, the tax authority. The FASB is basically the financial appointing authority. Under the IRS, there's the tax code that determines the rules for used by the IRS. The FASB sets the accounting standard codification, which tells you how to account for your income. Since those two rules are sets of rules are different, then we're actually ending up with, according to the IRS, the income that is calculated for tax compliance purposes. While from the FASB using the codification, I am actually going to infer or calculate what we call income calculated for financial reporting purposes. That income calculated for the tax compliant purposes we are going to talk about it and call it taxable income. While for financial reporting based on the FASB or the accounting standard classification, we're going to call that gap pre-tax income. It is very seldom that those two numbers of income will be the same. As you can see, the taxable income there is the arrow going from the taxable income leading to calculating the tax liability. This arrow is missing under the FASB column, and that was done on purpose and you will understand exactly in few minutes why is that. Then there is an arrow horizontally that will connect the tax liability with the tax expense because we are not going to be able to infer the tax expense as a direct derivation from the gap pre-tax income, but it will be inferred given the tax liability that will be determined in reference to the taxable income. This graphical representation is very indicative of a theme of steps that we are going to use in calculating or accounting for the income taxes. A tax liability inferred from the taxable income, but a tax expense that will not be inferred from the gap pre-tax income. Thus, we will determine the liability on the taxable income first from the tax authority's point of view and then after taking into consideration the differences between the two codes, we will be able to drive the tax expense for the period, those are the steps. This setup has to be clear because that's the theme that we are going to always use. That is why we will always refer to the calculation of the tax expense to be a plug in figure, we get the liability, account for the different someway or another, and then infer as a plug-in the tax expense. That is why in the previous figure that arrow between the pre-tax gap income and the tax expense was disconnected because we will not be able to infer directly from the pre-tax income. Now, the difference between the two are caused by some differences in the code. We are going to classify those differences into two groups. First, what we call permanent differences, while the second is referred to as temporary differences. Let's get to permanent differences. What do we mean by these differences? These differences occur because a revenue or an expense item is recognized either for financial or tax reporting purposes, but not for both. It's either-or, these differences will not reverse in the future, thus will not cause any differences between the tax liability and the tax expense. Although the taxable income, in this case, will not equal the gap pre-tax income. In this particular case, the tax expense will be calculated as a single current portion identified by the tax payable. Please notice the following equation. In this particular scenario, the income-tax expense equal the income tax payable. Permanent differences will not have an effect or make those two different. What about temporary differences? These differences arise because a revenue or an expense item is recognized in different periods due to timing differences in recognition of financial versus tax reporting purposes. These differences will obviously reverse in the future, thus will result in differences between the tax liability and the tax expense. In this case, the income tax expense, which is a plug-in number, as you can see in the equation in front of you, will equal the income tax payable plus or minus the deferred portion determined based on temporary differences. As you can see in the previous equation, the differed portion, which is determined based on the temporary differences, can be either added or deducted from the current portion, which is referred to or inferred from the income tax payable. If the temporary differences give rise to future taxable amount then an additional tax charge which will be added to the current portion. On the other hand, when these temporary differences give rise to future deductible amounts, a tax benefit on these amounts need to be deducted from the current portion, reducing the tax expense. In summary, we need to think about the tax expense to recognize in the books in terms of two components. The first is the one we refer to as the current portion and will be determined based on the taxable income and the enacted tax rate for that particular period. The second portion is the one that we refer to as that differed portion, which is determined based on whether the temporary differences will generate future taxable amounts or future deductible amount. Future taxable amounts will generate future charge, while future deductible amount will obviously generate a future benefit. Thank you.