Impairment effect on deferred tax liability

CFA Level II
#1

Does an increase in impairment result in an increase in dtl or reduction in dtl? Can some one explain this for me?

#2

The key to understanding DTAs and DTLs is to realize that assets and liabilities tell you about what’s going to happen in the future, not what’s happening today:

  • Assets represent potential future economic benefits
  • Liabilities represent potential future economic detriments

If you impair an asset, you get a loss on your financial statements today, but not on your tax return. Thus, in the future (when you dispose of the asset) you will be able to show a loss on your tax return and pay less in taxes: that’s a future potential economic benefit: a DTA.

#3

Thanks a lot for the detailed explaination.

#4

You’re quite welcome.

#5

cool… well explained…

#6

Thanks.