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Deferred tax assets and liabilities and their tax base... HELP

I have tried too much already to understand this. There is not much time left, but this has become something that I have to understand to defend my brain honor (?)

The conclusion for this DTA and DTL is that if the taxable income (on the tax return) is less than pretax income (on the income statement) a DTL is created. On the contrary, a DTA is created.

I get this logic... If the income before taxes I use for my accounting statement is higher than the income I report to tax authorities, I will have to pay more taxes according to my statement (100 x 40% = 40 vs 80 x 40% = 32). I don't pay them right now, but I know I will have to pay them, so I create a liability called DTL.

If that is correct, then I don't understand some of the books examples... but some others I do.

* If I depreciate an asset slowly in my income but faster in the tax inc, I will have more utilities, more taxes to pay compared to the other one, so I create a DTL: I will have to pay them soon.
* R&D: If I expense 75k this year in my income stmt, but I capitalize most and only expense a part of it in the tax stmnt, I will have to make a DTA, because the income in my statement is lower, I paid less taxes than I "should have", that will reverse in the future.

Okay... WTF... It looks like reading this and thinking hard about it made me understand... erm..

Well, thank you for reading my thoughts... I'm still going to post this because it might be useful to someone. I would like however that you post something additional or what you think about what I just "thought" (I'm right, RIGHT???)


  • DanDan Posts: 91 Sr Associate
    edited November 2013
    ...On a second thought, what I don't really understand well are the tax base and the carrying value, and their respective implications... a hand please?
  • The tax base is the value you work off in calculating what you owe the relevant tax authority, while the carrying value is what you list the value according to your own in-house methodology. If there is a difference between these values a Deferred Tax Asset or Deferred Tax Liability is created.

    A pretty basic way of remembering whether a DTA or DTL is created is to look at whether the carrying value is LESS than the tax value. In this case, if we are talking about a liability, a DTL will be created. If we are talking about an asset, a DTA will be created.

    The other way of thinking about it is through logic, as you reasoned in your question.

    On that point, your second example seems to be incorrect (though I might just be reading it wrong). If you paid less tax than you needed to (and so presumably have to pay the difference at some stage) a DTL will be created.
  • I just read through this section for the first time, and this was the first reading I wrote "this section didn't click" on page 1.

    I get the DTA and the DTL. Everything else didn't get through.

    I'm going to finish (mercifully) my last FRA reading, and then I'm going to go back and hopefully button this up. Maybe on the 2nd go it will get through my noggin.
  • Obviously it's not advised, but if you score 80% on 80% of the material (then take a guess at the rest) you should be on track to pass.... Which means ideally there are less than 24 questions per 120 question set that you're unsure of. Pick your battles, win the war.

    Given the way CFAI questions are worded, I reckon it's better to know most of the topics (but not all) back-to-front that to have a good (but not excellent) knowledge of everything. (i.e., 100% confidence on one question + guess (1/3) on another = av. 65%, versus 50% confidence on two questions = av. 50%)
  • Yeah, this was the reading where I asked Regis for the "Ask an accountant" phone call. Only one that stumped me.
  • I recently finished reading Quality of Earnings and the point made about differences between tax income and annual report income stuck with me. I'm not clear though on how this is disclosed. For example, in the below table (Corning inc 2003), I understand that there is a deferred tax asset.Then my friend who worked in Chicago IRS Lawyer office tall me all about income tax and annual report income stuck.
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