FRA DTA and DTL

[Taycfa]

Wrt CFA website practice questions related to FRA : Shouldn’t the answer be DTA of £460?

[question removed by moderator]

[Taycfa]

Did they do this:

1. add back depreciation exp and accounting exp that are non deductible to arrive at a tax base of 9,270?

2. Subtract depreciation exp (both a/c and tax base) from the above figures.

3. Take the difference of these figures and apply the tax rate?

[Taycfa]

One more question, I understand the differences between IFRS and GAAP valuations for impairment, valuation, etc. But when I am solving questions, I completely mess up. For instance, I understand that if fair value goes down of an investment property, then the loss or gain is booked in the income statement. There is no OCI. But when I solve such questions, I treat investment property as regular PPE and book the gain in OCI. I don’t know what to do to! In time constraints it is worse! And questions related to leases are the worst! So basically, is there any tip for careless mistakes?

[Jbro1228]

@Taycfa

Wrt CFA website practice questions related to FRA : Shouldn’t the answer be DTA of £460?

Q. The following data are available for a company’s first year of operations:

Metric** £ thousands** Earnings before tax reported on the income statement 2,640 Depreciation expense included in earnings before tax 4,500 Accounting expenses that are not deductible for tax purposes 2,130 Depreciation expense deductible for tax purposes in first year of operations 6,340 Corporate tax rate 25

The company’s end-of-year balance sheet will most _likely_include (in thousands) a deferred tax

1. asset of £73.
2. liability of £460.
3. liability of £733.

The answer is #2 DTL of £460. This is created by a difference between depreciation expense on the financial statement and the taxes. The depreciation expense on the financial statement is 4,500 and the depreciation for tax purposes is 6,340, a net difference of 1,840. Multiply 1840 by your tax rate .25 and you will get 460. Since you are paying less tax now and will have to pay more in the future, this creates a deferred tax liability.

the accounting expenses that are not deductible will only effect the total tax owed, not the deferred tax asset or deferred tax liability created by timing differences. The writer of this question just added extra info to try and confuse you.

DTA means you are paying more tax now and will have to pay less in the future.

DTL means you are paying less tax now and will have to pay more in the future.

hope this helps

[Taycfa]

Thanks so much! Very helpful.

[Taycfa]

Can anyone also explain the connection of DTA and DTL with 1. Provision of income tax and 2. Tax credits? Thanks.

[Haroldjames]

DTA and DTL are opposite

DTA comes from paying more tax NOW and paying less in the future ( that arises because tax are basis on CASH ) so more often you will pay taxes on unearned revenue .

DTL is just the contrary you paying LESS today because you might be using double declining depreciation method but at the end the DIFFERENCE (if not permanent ) between the tac basis and accounting basis will converge to 0. Does it make sense?

[Haroldjames]

DTA and DTL are opposite

DTA comes from paying more tax NOW and paying less in the future ( that arises because tax are basis on CASH ) so more often you will pay taxes on unearned revenue .

DTL is just the contrary you paying LESS today because you might be using double declining depreciation method but at the end the DIFFERENCE (if not permanent ) between the tac basis and accounting basis will converge to 0. Does it make sense?

[Taycfa]

Thank you! How do DTL and DTA relate to 1. Provision of income tax and 2. Tax credits?

[Taycfa]

A