FAR, Financial Accounting and Reporting

Sources for Income Taxes

Last reviewed 2026-10-06

The standards and authorities behind PocketCPA's FAR lessons on Income Taxes. The topic rests on ASC 740.

About this topic

Income tax expense is what a company reports as the cost of the tax on its profits. It is one of the last numbers computed on the income statement, and one of the most heavily tested on the FAR exam.

ASC 740 applies the asset-and-liability method, also called the balance-sheet method. The deferred tax accounts on the balance sheet are measured first, and income tax expense is largely whatever falls out of the change in those balances.

Key points

Deferred tax assets and liabilities arise from temporary differences between book and tax carrying amounts.
A valuation allowance reduces a deferred tax asset when it is more likely than not that some portion will not be realized.
Deferred tax is measured at the enacted rate expected to apply when the temporary difference reverses.
All deferred taxes are classified as noncurrent on the balance sheet.

What the lessons cover

Current tax: what is owed this year (ASC 740-10-25-2)
Book-tax differences: permanent versus temporary
Measurement: the enacted rate, undiscounted (ASC 740-10-30-8)
Putting current and deferred together
Deferred tax liabilities in isolation
Deferred tax assets and the valuation allowance
Uncertain tax positions (ASC 740-10-25-6)
Rate changes illustrated
Intraperiod tax allocation (ASC 740-20-45-2)
Balance-sheet presentation (ASC 740-10-45-4)
Outside basis differences and disclosures

Authoritative references

ASC 740-10-10-1, the core relationship: total income tax expense or benefit equals current tax payable or refundable plus the change in deferred tax assets and liabilities.
ASC 740-10-25-2, current tax: what is owed for the year.
ASC 740-10-25-6, uncertain tax positions: recognition only if a position is more likely than not to be sustained.
ASC 740-10-25-13 and 25-14, the three subsequent recognition events, including effective settlement and its three conditions.
ASC 740-10-25-20 and 25-23, the definition of a temporary difference and its two types, taxable and deductible.
ASC 740-10-30-5, the valuation allowance where it is more likely than not that some or all of a deferred tax asset will not be realized.
ASC 740-10-30-7, measurement of an uncertain position at the largest amount of benefit that is greater than 50 percent likely to be realized.
ASC 740-10-30-8 and 35-4, measurement at the enacted rate, undiscounted, and remeasurement of existing deferred balances in the period of enactment.
ASC 740-10-30-9, interest and what it is computed on.
ASC 740-10-30-18 and 30-21 through 30-23, the four sources of taxable income for realizability, and the negative and positive evidence weighed.
ASC 740-10-35-2, later changes as discrete items, with only new information counting.
ASC 740-10-40-2 and 40-3, derecognition of a position that no longer meets the threshold, and the two things a valuation allowance cannot do.
ASC 740-10-45-4, 45-6 and 45-10B, balance sheet presentation, with deferred amounts offset and presented as one noncurrent amount, and where the liability for an uncertain position sits.
ASC 740-10-45-15 and ASC 740-20-45-8(b), the effect of a change in a valuation allowance through continuing operations, even for items that arose in other comprehensive income or equity.
ASC 740-10-45-20, a change in judgment recognized in the period it changes, through continuing operations.
ASC 740-10-50-1A, 50-6, 50-8 and 50-9, the disclosures, including the deferred tax liabilities and assets before the valuation allowance and the current and deferred expense for each year.
ASC 740-10-50-10A and 50-10B, income or loss before income taxes split between domestic and foreign, and tax expense split by federal, state, and foreign.
ASC 740-10-50-12, 50-12A, 50-12B and 50-13, the rate reconciliation of a public business entity, its named categories, the jurisdiction threshold, and the qualitative disclosure of significant reconciling categories.
ASC 740-10-50-15, the classification of interest and penalties, with the amounts disclosed either way.
ASC 740-10-50-22 and 50-23, income taxes paid net of refunds, disaggregated by federal, state, and foreign, with a 5 percent threshold.
ASC 740-10-55-231, the illustration of below-threshold items gathered into an Other line.
ASC 740-10-65-9, the effective date, applied prospectively with retrospective application permitted.
ASC 740-20-45-2, intraperiod tax allocation.
ASC 740-30-25-18 and 25-19, the deferred tax liability on foreign subsidiary earnings, and the exception for earnings the parent asserts are indefinitely reinvested.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.