The income tax note shown in NMBT's 2010 annual report is reproduced below. NMBT is a Connecticut
Question:
The following table represents a reconciliation of the provision for income taxes as shown in the statements of operations with that which would be computed by applying the statutory federal income tax rate (34%) to income before income taxes:
NMBT will only recognize a deferred tax asset when, based on available evidence, realization is more likely than not. A valuation reserve is established for tax benefits available but for which realization is in doubt. In 2010, NMBT reduced the valuation allowance to approximately 6% of the deferred tax asset to recognize the remaining available Federal income tax benefits which NMBT expected to utilize, and other book/tax temporary differences. At December 31, 2010, NMBT recorded a valuation reserve against 100% of the State and Federal capital loss carryforwards which NMBT does not expect to utilize.
Required:
a. Explain the differences between the company's tax and book accounting. (Focus on the general explanation, not the specifics of the bank's accounts)
b. What information does this note contain that is relevant to a potential investor in NMBT's common stock?
c. What role did management judgment play in determining the company's provision for income taxes? (The income tax note is one of the more complex and difficult notes to understand. Do not be discouraged if you do not understand all of its content. The purpose behind the problem is to illustrate the role of notes in financial reporting.)
Step by Step Answer:
Accounting Texts and Cases
ISBN: 978-1259097126
13th edition
Authors: Robert Anthony, David Hawkins, Kenneth Merchant