[求助]Deferred tax liability liability

cfa_09

Level II 的session 7上说 deferred tax liabilities may not reverse as property and equipment increase. 有人能解释一下这个reverse是怎么回事吗？怎么做adjustment？谢～～～

fgy0818

reverse 就是将来把欠的交上.

likui

Hello CFA_09,

 

From the "deferred", we know that both deferred tax asset or liability will reverse in the future.

 

What reversion means and when it happens? When the corporation pay taxes to government by cash in the future, the deferred liability decreases along with the decrease in assets. Or, when the government pay tax relief back to corporation by check in the future, the deferred tax asset decreases along with an increase in cash equivalents.

 

How could deferred tax liability not to be reversed as property and equipment increase? But before that, let's answer what results in the "deferred" first? One cause is the difference of depreciation for accounting purpose against for tax purpose.

 

One thing around the property and equipment is depreciation. For tax purpose, the corporation is willing to use accelerated depreciation method, the method that leads more depreciation, smaller EBIT and lower taxes in the early years. For accounting purpose, the corporation can use straight-line depreciation method and the depreciation will be allocated the service life evenly. This treatment is allowed by GAAP. The tax difference caused by the two methods then is catch up by deferred tax liability. Notice that their final sum number of depreciation will be the same.

 

But think about a extreme condition that a promising and growing company has capital expenditures that will likely grow indefinitely.  In this case, deferred tax liability caused by depreciation difference will be there as long as new property and equipment are purchased. That time we cannot say it is deferred but adjust it into equity in order to balance.

 

Jc

 

xiaojingzhao

bacuo~