E10-38. Analyzing and Interpreting Income Tax Disclosures Colgate-Palmolive reports the following income tax footnote

Question

E10-38. Analyzing and Interpreting Income Tax Disclosures Colgate-Palmolive reports the following income tax footnote disclosure in its 10-K report. 2015 2014 Deferred Tax Balances at December 31 ($ millions) Deferred tax liabilities Goodwill and intangible assets. Property, plant and equipment. Other.. $ (458) (380) (150) (988) $ (497) (380) (266) (1,143) continued continued from prior page Deferred Tax Balances at December 31 ($ millions) 2015 2014 Deferred tax assets Pension and other retiree benefits Tax loss and tax credit carryforwards. Accrued liabilities. Stock-based compensation Other. 541 30 235 123 151 638 33 276 119 148 1,080 1,214 Net deferred income taxes $ 92 $ 71 a. Colgate reports $380 million of deferred tax liabilities in 2015 relating to “Property.” Explain how such liabilities arise. b. Describe how a deferred tax asset can arise from pension and other retiree benefits. c. Colgate reports $30 million in deferred tax assets for 2015 relating to tax loss and tax

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a) Deferred Tax Liability of $ 380 millions can be arises due to difference in depreciation amount as per accounting and tax reporting. Normally it seen depreciation in accounting charged as per accounting method and depreciation deduction allowed under income tax with different scheme. If depreciation as per tax is higher than accounting depreciation, then there is creation of Deferred Tax Liability. b) Deferred Tax Assets with respect to pension and other retiree benefits can be arise if employees benefits expenses and provision of retirement benefits expenses is higher in books of accounts and the same expenses are not deductible as expenses under income tax law untill it's not paid. c) Colgate - Palmolive has suffered a loss in a financial year, so the company is entitled to set off (use) it's future income against this loss. So this loss is an assets and in taxation term it called as deferred tax assets. So company will realise deferred tax assets for $ 30 millions by offsetting the future income against this assets. $ d) Income Tax Expenses for 2015 1,215 Deferred tax Assets (net of DTL) arises during 2015: 92 Current Tax Expenses (Tax Payable) 1,307 Opening Tax Payable 1,310 current tax expenses 1,307 Tax paid (cash) -1,259 Tax credit (Assumed) -25 Closing Tax Payable 1,333 Condition to justified: Tax payable decreased by $ 23 millions -23 -

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E10-38

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a) Deferred Tax Liability of $ 380 millions can be arises due to difference in depreciation amount as per
accounting and tax reporting. Normally it seen depreciation in accounting charged as per accounting
method and depreciation deduction allowed under income tax with different scheme. If depreciation
as per tax is higher than accounting depreciation, then there is creation of Deferred Tax Liability.

b) Deferred Tax Assets with respect to pension and other retiree benefits can be arise if employees
benefits expenses and provision of retirement benefits expenses is higher in books of accounts and
the same expenses are not deductible as expenses under income tax law untill it's not paid.

c) Colgate - Palmolive has suffered a loss in a financial year, so the company is entitled to set off (use)
it's future income against this loss. So this loss is an assets and in taxation term it called as deferred tax
assets. So company will realise deferred tax assets for $ 30 millions by offsetting the future income against
this assets.
					$
d) Income Tax Expenses for 2015		1,215
Deferred tax Assets (net of DTL) arises during 2015:	92
Current Tax Expenses (Tax Payable)		1,307

Opening Tax Payable			1,310
current tax expenses			1,307
Tax paid (cash)				-1,259
Tax credit (Assumed)			-25
Closing Tax Payable			1,333

Condition to justified:
Tax payable decreased by $ 23 millions		-23	-