FSA income tax comparing, liability, expected, purposes, question

Nishant1

This is from schweser concept checkers Reading #37 question 13.

qn) An analyst is comparing a firm to its competitors. The firm has a deferred tax liability and is expected to have capital expenditures decline in the future. How should the liability be treated for analytical purposes?
a) It should be treated as equity at its full value.
b) It should be treated as liability at its full value.
c) The present value should be treated as a liability with the remainder being treated as equity.

I thought the answer was b) since the capital expenditures goes down, the effect would reverese, but schweser has it as c). Could someone explain this ?

Thanks.

soddy1979

That makes sense... Thanks for the clarification rus1bus.

JRossSter

Why is it that when capital expenditures are being cutdown, deferred tax liability to expected to reverse?

Thanks.

Matori

revenant Wrote:
-------------------------------------------------------
> Why is it that when capital expenditures are being
> cutdown, deferred tax liability to expected to
> reverse?
>
> Thanks.


tax liabilties related to capexoccur because you u an accelarated depreciation method for tax purposes and a different (slower) method for book. Over the life of a given asset th total dollars are same and will be equal, but if you keep buying new assets at the same level, as the depreciation gap narrows on old assets, its built up with the new ones. If new asset purchases drop off, then the total book depreciation on the existing assets will start to catch up with the accelerated method, and the deferred tax liability which is based on the gap in depreciation will also shrink.

ishfaque

Super I Wrote:
-------------------------------------------------------
> revenant Wrote:
> --------------------------------------------------
> -----
> > Why is it that when capital expenditures are
> being
> > cutdown, deferred tax liability to expected to
> > reverse?
> >
> > Thanks.
>
>
> tax liabilties related to capexoccur because you u
> an accelarated depreciation method for tax
> purposes and a different (slower) method for book.
> Over the life of a given asset th total dollars
> are same and will be equal, but if you keep buying
> new assets at the same level, as the depreciation
> gap narrows on old assets, its built up with the
> new ones. If new asset purchases drop off, then
> the total book depreciation on the existing assets
> will start to catch up with the accelerated
> method, and the deferred tax liability which is
> based on the gap in depreciation will also shrink.


DTL or DTA's are not only the result of depreciation differences, there are many ways you can have differences between book and tax amounts.

farrukhsadiq

I_Passed_Level_1 Wrote:
-------------------------------------------------------

> DTL or DTA's are not only the result of
> depreciation differences, there are many ways you
> can have differences between book and tax amounts.


True, but the question specifically was about deferred tax liability and capex.

sgupta0827

Thanks Super I, very concise explanation.