Hello and welcome everyone to our lesson today. In today's lesson, we're going to continue our discussion on accounting for income taxes, where we will introduce a more realistic scenario of having more than one difference originating, and more than one difference reversing in the same period. A case which we refer to as Multiple Differences. Let's get started. As we discussed before, differences between the IRS Code and the FASB codification, we will categorize them into two differences, temporary and permanent. Let's start with the temporary differences. So all temporary differences, if we have multiple of those, are going to be categorized according to whether they create either future taxable amounts or future deductible amounts. For future taxable amounts, the total of the future taxable amounts is then multiplied by the future tax rate or rates, which we will understand what that rates the S that we add for the rates later on. To determine the appropriate balance for the deferred tax liability; so I'm taking all the differences, summing them up, multiplying it by the tax rate, and that gives me the balance that I need for the deferred tax liability. When we compare the already existing balance in the deferred tax liability with the one that I desire, just calculated in the first step, we will be able to decide whether we need to increase or decrease such a deferred tax liability. Assuming that the same enacted tax rate applied to all temporary differences, we can interpret the change in deferred tax liability as one of either two things, either increasing or decreasing. In the case of an increasing of a deferred tax liability, which means that the sum of the originating taxable amount is more than the sum of the reversing taxable amounts for that particular period that I'm working on. What about decreasing? If it's a decrease, then it means that the sum of the originating taxable amounts is less than the sum of the reversing taxable amounts, and for that particular period, then I need to decrease the deferred tax liability. Let's go to the future deductible amounts. What are we going to do? Similar to what we did to the future taxable amounts. So we're going take the total, add up all the future deductible amounts and then multiply by the future tax rate or rates to determine the appropriate balance that you want in the deferred taxes. That's the amount that I wanted. Now, we're going to compare that balance with what I already have in the deferred tax asset. If we want to increase it or decrease it, depending on what? Depending on the balance that I have versus what I need it to be. Assuming, again, that the same enacted tax rate is applied to all temporary differences, we will be able to interpret the change, either increasing or decreasing, as we did with the deferred tax liability, that's what we're gonna do with a deferred tax asset, also. Increasing a deferred tax asset, what does it mean? It means that the sum of the originating deductible amounts is more than the sum of those that are reversing for that particular period. What if I need to decrease it? What does that mean? It means that the sum of the originating deductible amount is less than the sum of the reversing deductible amounts for that particular period as well. That is the case for temporary differences. So we group future taxable amounts, future deductible amounts, decide the balance versus what do I already have, interpret the increase or the decrease. What about those permanent differences? Now I have multiple of those permanent difference, but multiple differences, on the other hand, those are caused by transactions and events that under the existing tax law will never affect taxable income or taxes payable. These differences are not to reverse in the future, different than temporary differences. Thus, no deferred tax asset or liability will be created and obviously will not be reverse also, because it was never created. Thus, as you can see in the equation here, the tax expense will equal to the tax payable with respect to all permanent differences. Please note that the permanent differences affect the effective tax rate because they affect the relationship between the tax expense and the pretax accounting income. Thus, the effective tax rate is going to be equal to the tax expense divided by the Pretax GAAP Income and permanent differences will have effect on the effective tax rate. In summary, handling multiple differences does not differ significantly from handling individual differences, it's just that I have more than just one difference. First, we need to identify all temporary differences. Second, we need to group these differences based on whether they are relating to future taxable or future deductible amounts. Finally, for each group that we sum together, we need to calculate a net position on the generation and the reversing amounts for each and thus, determine whether we want to increase or decrease and the corresponding account that we want to increase or decrease, meaning a Deferred Tax Asset or a Deferred Tax Liability. Thank you very much.
