There are two questions and answers (one from CFA text and the other from Schweser) where I don’t understand. Appreciate if you can explain. From CFA Text, FSA page 418, question #3 Q. Income tax expense reported on a company’s income statement equals taxes payable, plus the net increase in a)deferred tax assets and deferred tax liabilities b)deferred tax assets, less the net increase in deferred tax liablities c)deffered tax liabilities, less the net increase in deferred tax assets. I chose “c”, but according to CFA text the answer is “b”. The solution in CFA text states “B is correct. Higher reported tax expense relative to taxes paid will increase the deferred tax asset, whereas lower reported tax expense relative to taxes paid increases the deferred liability”.
I can take a stab at the second question. If the firm is expected to continue to grow it will continue to have accelerated depreciation on its new investments that creates more DTL which is why it wouldn’t reverse.
For question 1 – refer errata… it says In solution 3 (p. A-18), C is correct. Change asset to liability (2nd line) and liability to asset (3rd line).
Thanks all CPK123 - I’m going to print that errata page of the cfa website. Totally forgot to do that. Does other folks agree with DMT86’s answer on the second question?
I’m on this chapter as well, and I made the same mistake as well. DTM’s explanation seems to make sense to me.
Yes, i agree with DTM, just completed the chapter and if the company is assumed to continue to grow, it will buy new assets and these assets will keep getting depreciated hence no reversal in the foreseable future.
thanks all