Average Common Equity and Taxes someone, includes, beginning, average, comment

aurific

My book adds 50% of deferred taxes to Average common equity in order to calculate ROCE. The book states "[ROCE] includes 50% of deferred taxes we assume as equity."

Until this point, I was under the impression that average common equity was calculated by adding beginning and ending period common equity divided by 2, with no consideration of deferred taxes. Can someone please comment on this.

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rkapoor

Rusbus, awesome expansion. I appreciate everyone's commentary here. I thought I was going nuts when I was reading the text, and I am conferring with my CFAI books which I just received yesterday.

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Flok

Well to my understanding, you can check company's growth rate.
If growth rate is very high, means company is adding more and more PP&E so more and more depreciation, means DTL aren't going to reverse in near term. Obviously the company must be using non-accelerated depreciation for statements for this to happen.

So in exam if it's specifically mentioned that "very high growth rate", it means DTL isn't going to reverse in near future unless something tragic happens. Plus earnings from non-consolidated subsidries may create DTL which will not reverse.

otherwise they may just simply specify that it's not going to reverse in near term.

burnsy562000

A DTL that is not expected to reverse is added to equity.

Soddy- you were right the first time around.

ishfaque

soddy1979 Wrote:
-------------------------------------------------------
> Hi Rus1bus, are you sure on that?
>
> DTL not expected to reverse is a future economic
> outflow I thought.

Hi Rus1bus, indeed you are correct and so is my first comment. I contradicted my first comment with this comment which is a load of cr@p and incorrect. A DTL that reverses results in taxes paid.

Apologies if I confused anyone.

farrukhsadiq

Hi Soddy, I agree with your comment "However you do treat Deferred tax liabilities as equity if you do not expect them to reverse, so theoretically you could include it. "

To elaborate my understanding on this: DTL is liability in your accounting books, when you have showed more Tax Expense in your Accounting Books than what you have actually paid to Govt in your Tax Books. (e.g. Straight Line Depreciation in Accounting books and Double Depreciation in Tax Books). Eventually, you expect to pay this difference to govt in subsequent years and hence take this as a liability in your books.

But, lets say, due to some changed circumstances, you manage to avoid paying that diff to govt in subsequent years (that is, it is no more likely to reverse), then this liability is written off and your equity will increase. A = L + E; L down, E up, other things assumed same.

Is this what you were looking for?



Edited 1 time(s). Last edit at Thursday, August 6, 2009 at 06:52AM by rus1bus.

LokiDog2

Soddy, totally agree with you.

However, when I had read Levista's query, I had DTA in my mind. DTA that IS expected to reverse in future, could be taken in as equity.

But, as you said, DTL that is NOT expected to reverse is also a case for addition to equity.

This is the power of discussion. Everyone gains Thanks.

marsilni

rusbus1 is correct. I have never seen it used in a ROE/ROCE calculation in CFA Level 1.

However you do treat Deferred tax liabilities as equity if you do not expect them to reverse, so theoretically you could include it.

Edit: I would only include it if the question stated/implied that the DTL was not expected to reverse.



Edited 1 time(s). Last edit at Thursday, August 6, 2009 at 05:47AM by soddy1979.

bluejazzy

Deferred Taxes and Common Equity are Balance Sheet items. ROCE/ROE is not.

ROCE is a calculated figure for analytical purposes, and there could be differences in how different people calculate it. I guess it is ok, as long as you mention how you have calculated it.

As far as CFA text is considered, to my knowledge, Deferred Taxes were never added to Common Equity for ROE calculations.

Others, please correct if this is not true.

hariRaj

Thank you for follow-up nevertheless. If anyone else can comment on this, please do so.