spartanag07

maxmeomeo Wrote:
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> 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.