Essay: Uncertainty in Income Taxes

Sample Essay

The decisions made and steps taken for the measurement of various revenues and expenses may result in varying amounts represented on the tax returns. This representation though in good faith may be subject to change if the IRS challenges the presentation and the calculation criterion becomes invalid. In order to correctly account for uncertainties in tax decisions, companies follow a two step procedure.

The first step involves the reflection of tax benefits in financial statements only if there is more than 50 percent chance that the benefits will sustain in the future. The second step entails that the amount of tax benefits disclosed should be the highest benefit the company would get after 50 percent benefit is realized.

Intra-period Tax Allocation

Intra-period tax allocation means the allocation of current year taxes across various parts of financial statements. The tax expenses are shown in various parts of the income statement and balance sheet with a representation of net effect of taxes on the company. Income from continuing and discontinued operations and extra ordinary items are included in the intra-period tax allocation.