Increase in IT rate and impact on DTA/DTL decrease, increase, previous, because

sabina

Why is it that when the tax rate increases, DTL and DTA increase and when the tax rate decreases DTL and DTA decrease?

I am confused because, at a point in time you create entries in balanace sheet for DTA/DTL. Now, if the tax rate increases why do we need do increase the already recorded DTA/DTL. Doesn't this mean that we are erroneously adjusting previous DTA/DTL amounts based on current rates?

It makes sense that going forward DTA and DTL be increased/decreased based on the new rate, but why do we adjust the existing DTA/DTL accounts for the new rate?

Thanks!

Micholien

I think its because when the temporary differences reverse in the future, they will do so at a rate different from what you had previously calculated.

BS is a point in time. Defered assets and liab will "cashed in" or "paid out" at a future time. We are just making an assesment at this point in time based on what will change in the future.

btcapital

Take a quick example.

I lost $1000 last year in the market, and my tax rate is 25%, so I book a deferred tax asset of $250.

This year, my tax rate changes to 30%, so being able to reduce my taxable income by that same $1000 will allow me to now book a $300 DTA.

Same thing with DTLs.

Make sense?

burnsy562000

Thank you guys. Makes sense now...!!