Deferred Tax - DTA DTL liability, only, difference, regarding, valuation

Elliotbay

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

smartpants

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.

hariRaj

I think I did the same mistake of comparing expenses rather than comparing income.

Jolyn

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.

Micholien

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?

spartanag07

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.

Beatnik

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.

Wasteoftime

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

jim8z3

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.

MythosHF

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