Tax Assets and Liabilities needed, exceed, already

TheMBAGlover

Please explain to me how these are calculated. Definition of DTA for instance is when taxes payable exceed tax expense. Aren't taxes payable already due on the BS? Maybe the wording is throwing me off but I just needed some clarification. The def is from Schweser. Thanks in advance.

mnieman

Taxes payable is what is recorded on financial statements. tax expense is the actual taxes that the company needs to pay.

Penny-wenny

Reverse that. Taxes payable is what a company actually pays and income tax expense is what's recorded on the income statement.

Remember:
ITE=ITP+DTL-DTA

If ITE is greater than ITP then that means there's a positive balance on the left side of the equation and you would need to have a DTL on the right side to offset it. Keep that formula in mind and you'll be fine.

LokiDog2

I think I kind of grasp it now. I understand the formula, I was just trying to grasp it conceptually.

So assuming a company has NI of $1MM and a effective tax rate of 30%, their tax expense will be 300k. The interest payable will be the amount they actually distribute to the govt. If this amount is less, then they have a deferred tax liability and vice versa for a deferred tax asset. My question is why would they ever overpay taxes in order to create a deferred tax asset?

Please correct me if I am wrong about the logic.

Thanks for the responses guys.

bapswarrior

ayodayo Wrote:
-------------------------------------------------------
> I think I kind of grasp it now. I understand the
> formula, I was just trying to grasp it
> conceptually.
>
> So assuming a company has NI of $1MM and a
> effective tax rate of 30%, their tax expense will
> be 300k. The interest payable will be the amount
> they actually distribute to the govt. If this
> amount is less, then they have a deferred tax
> liability and vice versa for a deferred tax asset.
> My question is why would they ever overpay taxes
> in order to create a deferred tax asset?
>


The reason why it occurs can be attributed to collecting cash on bills before they are booked on an accounting/accrual basis.

Example:

Dec 28th, I walk into your tailor shop, looking to get measured and having a custom suit made for me. You measure me, run my credit card through the machine and I pay that day.

I go away for holiday. You do also. You make the suit on January 3rd and then I come back and receive the suit on January 10th.

The work was probably performed in January, I got the suit in January, and on an accounting/accrual basis it will post to your books for January's sales. But the tax authorities will see you collected cash in December. Therefore you paid tax on that, before the actual revenue was recognized. You can't hide $$$ from the tax authorities just because your accounting books say otherwise.

DTAs show up in all kinds of unique situations. Tyco used to create a ton of them when they played accounting games in their acquisitions.



Edited 1 time(s). Last edit at Saturday, November 13, 2010 at 08:46PM by prophets.