deferred tax assets & liabilities someone, assets, please, Hello

manchester88

Hello,
Can someone please help me grasp the concept of deferred tax assets and liabilities.
Ty for any replies.

laurab

For whatever reason, this was very difficult for me to grasp as well. I finally got it, but it took a while. I'll try to take a stab at an explanation tomorrow when I have some time, but my advice is to give that section a break and come back to it later. The second time through might make a little more sense (as it did for me).

mar350

Hey I'll basically tell you what my intermediate two teacher old....

"THE GOVERNMENT DOESN'T CARE IF YOU'RE GROWING FUNNY PLANTS IN YOUR BASEMENT, THEY WANT THEIR MONEY."

With that said remember that THE GOVERNMENT WANTS THEIR MONEY. This means that if you receive money for 'unearned revenue' they want to tax it. But, that makes no sense, why would they tax you on money that you haven't fully earned/reported on your income statement? Answer (look above if you forgot): THE GOVERNMENT WANTS THEIR MONEY.

Basically anytime you are getting money they want their peice. Sometimes, you can defer your tax liability by paying more up front. You have to consider the two books that profits are being accounted for in. The real book, and the tax book. For tax purposes people will tax at accelerated rates and lower their current tax expense. This creates a future liability because the government missed out on the money they should have gotten.

Opposite case. You sell widgets and warrantys for widgets. The government gets to tax the widgets when you sell them, but they also get to tax the warranty money. The warranty money is still considered a liability by your company because you might have to actually fix the widget. However, THE GOVERNMENT WANTS THEIR MONEY, so you will need to put this in your tax books revenue.

I hope these examples explain to you the basic concept. If you have a specific question let me know. I will try to tell you the rationale.

economicz

The most important thing to remember when trying to understand DTA and DTL is that ultimately all income will be taxed at some point and all expenses will be deducted at some point (of course this is a simplification and not all income/expenses are considered for tax purposes; lets assume however that all income is taxable and expenses deductible; nontaxable income and nondeductible expenses don't affect the DTA/DTL).

Once you realize that all income/expenses are considered eventually, the next question is to decide whether the income/expense is taxable/deductible in the current period or in the future. If it is taxable/deductible in the current period, then it won't affect the DTA/DTL. The company pays its tax owed and everything is nice and easy. If, however, some of the income/expenses are not taxable/deductible now but will be in the future, a DTA or DTL arises.

Although it seems tricky at first, deciding whether an item is a DTA or DTL is actually very easy. We first have to make one basic assumption: companies would prefer to pay less taxes than more. In addition, remember that more income = more tax and more expenses = less taxes. With this in mind, ask yourself: will recording this item in the future result in more or less taxes? If the item results in more tax in the future then the item contributes to the DTL. If the item results in less tax in the future then the item contributes to the DTA (think more tax = bad = liability and vice versa).

Using the same logic from the paragraph above, you can see that income that will be recorded in the future (instead of right now) is bad, it results in more taxes in the future. Therefore income that is deferred (recorded in the future) increases the DTL. On the other hand, expenses that will be deferred are good because expenses reduce the amount of taxes you will pay. Therefore deferred expenses increase the DTA.

The other thing to consider is what happens when DTAs and DTLs reverse. By "reverse" I mean that the income/expense that we previously deferred is now affecting our current taxes. In other words, income that was deferred in the past is now taxable in the current period; expenses that were deferred in the past are now deductible in the current period. When this happens just reverse the DTA or DTL that was previously recorded. So if an income item previously increased the DTL, recording that income in current taxable income will decrease the DTL. If an expense item previously increased the DTA, recording that expense in the current taxable income calculation will reduce the DTA. Keep in mind that a particular question might start out in the middle of this process. In other words, the DTA or DTL may have previously been recorded and the question requires that you now reverse that DTA or DTL.

Because all income/expenses are eventually considered (as I mentioned in the first paragraph), all DTAs and DTLs will eventually reverse. If you looked at a business over the course of its lifetime, the net DTA/DTL would be 0. DTAs and DTLs only result because of temporary differences between book and tax income/expenses.

Hope that helps!



Edited 1 time(s). Last edit at Thursday, July 14, 2011 at 10:03AM by RockGuitar417.

ba736

Thank you sooo kindly for the responses. Its starting to make sense. A world of difference. Greatly appreciated.