Just read on Elan notes that a DTL usually arises when an asset's tax base is lower than its carrying value.
But at the same time, the treatment of temporary difference says that when an asset tax base is greater that its carrying value, it reseults in a DTA.
Si I'm confused. What is the difference between the 2 ?
When do we have a DTL or a DTA from a liability or an asset exactly ?
Also, regarding the valuation allowance, is it applicable for both IFRS and USGaap or only USGaap ? Thanks作者: LokiDog2 时间: 2011-7-13 16:12
tax base lower than carrying value on financial statements= I pay less in taxes= will have to pay future taxes = DTL
Tax base higher than carrying value on financial statements= i pay too much in taxes= prepaid tax= DTA
The differences arise b/c of differences in the way you report your 1) financial statements vs. 2) tax books. Keep the 2 sets of books separate in your mind.
I think valuation allowance is for both but i could be wrong.作者: dotamasta 时间: 2011-7-13 16:12
Miss*Yiota Wrote:
-------------------------------------------------------
> Just read on Elan notes that a DTL usually arises
> when an asset's tax base is lower than its
> carrying value.
> But at the same time, the treatment of temporary
> difference says that when an asset tax base is
> greater that its carrying value, it reseults in a
> DTA.
>
> Si I'm confused. What is the difference between
> the 2 ?
>
> When do we have a DTL or a DTA from a liability or
> an asset exactly ?
>
>
> Also, regarding the valuation allowance, is it
> applicable for both IFRS and USGaap or only USGaap
> ? Thanks
Let me tell you the way I like to remember it to save time:
I say-
Asset CA > TB gives DTL (I have learnt this) .......(I)
Now if I change one thing, DTL changes to DTA. If I change both, DTL stays put. Let me show:
Asset CA < TB gives DTA (Inequality sign flips. Single change)
Liability CA > TB gives DTA (Asset in (I) changes to Liability. Single change)
Liability CA < TB gives DTL (Asset in (I) changes to Liability and sign flips. 2 changes)作者: ishfaque 时间: 2011-7-13 16:12
Sgupta, it's not a specific question, just through my reading again and notice that these DTL / DTA are confusing
regarding valuation allowance, are you sure that's an IFRS stuffs ? I checked again and looks like it's more USGaap. But haven't found out if the same treatment of uncertain DTA is valid under IFRS...作者: kasinkei 时间: 2011-7-13 16:12
That's right..It's very confusing..
Well you are right..I checked it again it's more of a US GAAP thing. Nowhere it is mentioned that how it needs to be treated under IFRS.作者: FVPV 时间: 2011-7-13 16:12
so let's just assume there is no valuation allowance under IFRS. Any CFA guy or accountant here to confirm please ?作者: soddy1979 时间: 2011-7-13 16:12
Miss*Yiota Wrote:
-------------------------------------------------------
> so let's just assume there is no valuation
> allowance under IFRS. Any CFA guy or accountant
> here to confirm please ?
One question, does the valuation allowance change when tax rates change? DTAs reduce when tax rates reduce, right? What about valuation allowance?作者: ramdabom 时间: 2011-7-13 16:12
yeah I haven't seen questions on tax rate implication on valuation allowance. Very interesting point Anish..Ideally it should change as that's a contra account and should have the same effect otherwise it will be either overstated or understated depending upon the tax rate change.作者: homie 时间: 2011-7-13 16:12
I think if the tax rate is reduced, that means the probability to benefit from our DTA is getting low. So the valuation allowance should increase.
I just saw a question where it was asked what will be the impact of an extension of the carrying forward period on the valuation allowance作者: pogo 时间: 2011-7-13 16:12
Miss*Yiota Wrote:
-------------------------------------------------------
> I think if the tax rate is reduced, that means the
> probability to benefit from our DTA is getting
> low. So the valuation allowance should increase.
>
> I just saw a question where it was asked what will
> be the impact of an extension of the carrying
> forward period on the valuation allowance
Can you post the question miss?作者: btcapital 时间: 2011-7-13 16:12
the question was as i said above, in substance (without copying it exactly). And the answer is that if carryng forward period are extended, then the valuation allowance account will decrease and then DTA increase because it is likely that the company will be able to use its DTA作者: sgupta0827 时间: 2011-7-13 16:12
Miss*Yiota Wrote:
-------------------------------------------------------
> the question was as i said above, in substance
> (without copying it exactly). And the answer is
> that if carryng forward period are extended, then
> the valuation allowance account will decrease and
> then DTA increase because it is likely that the
> company will be able to use its DTA
I do see your logic. But look at it this way:
CA - TB = $200, Tax Rate = 50%
DTA = $100
Company thinks that it can use $60 out of this next year when its tax payable will be $60.
Val allowance = $40
Not Tax Rate decreases to 25%
CA - TB = $200
DTA = $50
Company's tax will be $30 next year instead of $60 so it can use only $30.
Val allowance = $20 (a decrease)
Is this wrong?作者: MythosHF 时间: 2011-7-13 16:12
the carrying forward period are the number of period you are still entitled to use any tax advantage such as the DTA. You can't carry on your DTA indefinitely, that what i understood. Let say this time is limited to 3 years. So if for any reason you can't use your DTA, and you are in year 2, you'll account for a valuation allowance. If somehow your time is extend to 4 more years, then you'll decrease your valuation allowance since the probablity of using it is getting high again
that what i understood作者: jim8z3 时间: 2011-7-13 16:12
Miss*Yiota Wrote:
-------------------------------------------------------
> the carrying forward period are the number of
> period you are still entitled to use any tax
> advantage such as the DTA. You can't carry on your
> DTA indefinitely, that what i understood. Let say
> this time is limited to 3 years. So if for any
> reason you can't use your DTA, and you are in year
> 2, you'll account for a valuation allowance. If
> somehow your time is extend to 4 more years, then
> you'll decrease your valuation allowance since the
> probablity of using it is getting high again
>
> that what i understood
I don't disagree with this at all.. This makes sense.. But my question is whether valuation allowance decreases when tax rate decreases.作者: Wasteoftime 时间: 2011-7-13 16:12
No, i think i saw another question about that. If tax rate decrease, that means you get less chance to benefit from the DTA, so valuation allowance increase and DTA decrease作者: Beatnik 时间: 2011-7-13 16:12
I have a question related to tax implication: I recall reading that if the company is growing and expanding, it's very likely that the difference is not going to reverse and DTL can be treated as equity for analysis purpose.
So why the heck in mock exam , the answer for this question does not follow the above logic. Do I miss something?
A company which prepares its financial statements in accordance with IFRS incurred and
capitalized €2 million of development costs during the year. These costs were fully deductible
immediately for tax purposes, but the company is depreciating them over two years for financial
reporting purposes. The company has a long history of profitability which is expected to
continue. Which is the most appropriate way for an analyst to incorporate the differential tax
treatment in his analysis? He should include it in:
A. liabilities when calculating the company’s current ratio.
B. equity when calculating the company’s return on equity ratio.
C. liabilities when calculating the company’s debt-to-equity ratio.作者: spartanag07 时间: 2011-7-13 16:12
maxmeomeo Wrote:
-------------------------------------------------------
> I have a question related to tax implication: I
> recall reading that if the company is growing and
> expanding, it's very likely that the difference is
> not going to reverse and DTL can be treated as
> equity for analysis purpose.
>
> So why the heck in mock exam , the answer for this
> question does not follow the above logic. Do I
> miss something?
>
>
> A company which prepares its financial statements
> in accordance with IFRS incurred and
> capitalized €2 million of development costs during
> the year. These costs were fully deductible
> immediately for tax purposes, but the company is
> depreciating them over two years for financial
> reporting purposes. The company has a long history
> of profitability which is expected to
> continue. Which is the most appropriate way for an
> analyst to incorporate the differential tax
> treatment in his analysis? He should include it
> in:
> A. liabilities when calculating the company’s
> current ratio.
> B. equity when calculating the company’s return on
> equity ratio.
> C. liabilities when calculating the company’s
> debt-to-equity ratio.
The reason you treat a growing company's DTL as equity is because it will keep buying assets, keep capitalizing costs and hence DTL will keep increasing. It just won't get a chance to reverse. In this case, there is no such indication. The company recongnizes a DTL which is only long term liability in IFRS, not current liability. It is possible that in future, it will have to pay up. That is why answer is C.作者: Micholien 时间: 2011-7-13 16:12
anish Wrote:
-------------------------------------------------------
> maxmeomeo Wrote:
> --------------------------------------------------
> -----
> > I have a question related to tax implication: I
> > recall reading that if the company is growing
> and
> > expanding, it's very likely that the difference
> is
> > not going to reverse and DTL can be treated as
> > equity for analysis purpose.
> >
> > So why the heck in mock exam , the answer for
> this
> > question does not follow the above logic. Do I
> > miss something?
> >
> >
> > A company which prepares its financial
> statements
> > in accordance with IFRS incurred and
> > capitalized €2 million of development costs
> during
> > the year. These costs were fully deductible
> > immediately for tax purposes, but the company
> is
> > depreciating them over two years for financial
> > reporting purposes. The company has a long
> history
> > of profitability which is expected to
> > continue. Which is the most appropriate way for
> an
> > analyst to incorporate the differential tax
> > treatment in his analysis? He should include it
> > in:
> > A. liabilities when calculating the company’s
> > current ratio.
> > B. equity when calculating the company’s return
> on
> > equity ratio.
> > C. liabilities when calculating the company’s
> > debt-to-equity ratio.
>
>
> The reason you treat a growing company's DTL as
> equity is because it will keep buying assets, keep
> capitalizing costs and hence DTL will keep
> increasing. It just won't get a chance to reverse.
> In this case, there is no such indication. The
> company recongnizes a DTL which is only long term
> liability in IFRS, not current liability. It is
> possible that in future, it will have to pay up.
> That is why answer is C.
But the question does say that costs are fully deductible immediately for the tax purposes. What does this mean? Does it mean that tax is paid in the first period itself but asset is depreciated for two periods? As per my reasoning, in the first year, CA<TB, shouldn't this be a DTA rather than DTL which will reverse in the future once you have pre tax income due to asset depreciation in the next period?作者: Jolyn 时间: 2011-7-13 16:12
Let me try to explain:
The question means that Depreciation expense for Tax purpose will be accounted in the first year. This result in lower taxable income. -> lower tax payable
Dep. expense for financial reporting is devided into 2 years, implying that pretax income is higher than the taxable income -> higher tax expense
Since tax payable < tax expense -> you have DTL.作者: hariRaj 时间: 2011-7-13 16:12
I think I did the same mistake of comparing expenses rather than comparing income.作者: smartpants 时间: 2011-7-13 16:12
Ok so I have seen a question in Schweser Q bank where it says valuation allowance is not only presented under US GAAP. It's also presented under IFRS.
