Question

Homestake Mining Company is a 120-year-old international gold mining company with substantial gold mining operations and exploration in the United States, Canada, and Australia. At year-end, Homestake reported the following items related to income taxes (thousands of dollars).

Total current taxes	\( 26,349
Total deferred taxes	(39,436)
Total income and mining taxes (the provision for taxes per its income statement)	\) (13,087)
Deferred tax liabilities	\(303,050
Deferred tax assets, net of valuation allowance of \)207,175	95,275
	\(207,775
Note 6: The classification of deferred tax assets and liabilities is based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specific asset or liability are classified based on the estimated period of reversal.
Tax loss carry forwards (U.S., Canada, Australia, and Chile)	\)71,151
Tax credit carry forwards	\(12,007

Instructions

1. What is the significance of Homestake’s disclosure of “Current taxes” of \)26,349 and “Deferred taxes” of \((39,436)?
2. Explain the concept behind Homestake’s disclosure of gross deferred tax liabilities (future taxable amounts) and gross deferred tax assets (future deductible amounts).
3. Homestake reported tax loss carry forwards of \)71,151 and tax credit carry forwards of $12,007. How do the carry back and carry forward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

Short answer

1. The "current taxes" section indicates taxes due now, while the "deferred taxes" section represents taxes due in the future.
2. Deferred tax liability should be accounted for the deferred tax consequences relating to future taxable amounts.
3. When determining the deferred tax account balances to be reported at a future date of the statement of financial condition.

Step-by-step solution

Meaning of Tax payable

Tax payable is calculated with help of a business's profits that will determine the amount owed over a given period and the tax rates imposed. Tax payable is a debt that must be paid within the next 12 months. Thus, it is not considered a long-term responsibility but rather a current one.

(a) Explaining the significance of Homestake’s disclosure

The "current taxes" element of the total provision for income taxes (stated in the income statement) indicates taxes due in cash. In contrast, the "deferred taxes" share represents taxes payable in future years (although, in this case, because the deferred taxes are a credit, they represent tax benefits receivable in coming years).

(b) Explaining the concept behind Homestake’s disclosure

Taxable sums in the future Due to transitory changes at the date of the statement of financial position, increase taxable income relative to pretax income in the future. Because of current transitory variances, future deductible amounts will reduce taxable income relative to pretax financial income.

A deferred tax obligation should be recorded for the deferred tax consequences of future taxable amounts scheduled. A deferred tax asset should be registered for the deferred tax consequences attributable to the anticipated future deductible amounts.

(c) Explaining the carry back and carry-forward provisions that affect the reporting of deferred tax assets and deferred tax liabilities.

The carryback and carry forward provisions will affect the amounts to be reported for the resultant deferred tax asset and deferred tax liability.

The appropriate legislated tax rate is applied to future taxable and deductible items attributable to transitory differences existing at the statement of financial position date for computing deferred tax account balances to be reported at an idea of financial position date. One must make assumptions about whether the entity will report taxable income or losses in the different future years projected to be affected by the current temporary variances for establishing the appropriate tax rate.

As a result, calculate the taxes that will be payable or refundable in the future due to current temporary variations. Use the provisions of the tax laws and the adopted tax rates for the relevant periods to make these calculations.

For future taxable amounts:

1. If taxable revenue is expected in the year, a future taxable amount is planned, compute the relevant deferred tax liability using the legislated rate for that year.
2. If an NOL is expected in the year that a future taxable amount is scheduled, calculate the related deferred tax liability using the enacted rate of the prior year to which the NOL would be carried back or the enacted rate of the future year to which the carry forward would apply, whichever is appropriate.

For future deductible amounts:

1. Use the enacted rate for the future year to compute the associated deferred tax asset if taxable income is projected in the year that a prospective deductible amount is scheduled.
2. If an NOL is expected in the year that a future deductible amount is scheduled, compute the relevant deferred tax asset using the enacted rate of the preceding year the NOL would be carried back to or the enacted rate of the future year to which the carry forward would apply, whichever is appropriate.