On page 263 Schweser notes section Deferred Income Taxes, it says “if the liabilities are likely to be reversed in the future, they should be discounted to present value and treated as liabilities…” what does it mean if the liabilities are going to reverse in the future? any examples would be great too. Thanks.
A deferred tax Liability occurs because you are using Accelerated Depreciation on the tax statement and straight line depreciation on the Financial statements. This gives you a lower taxable income and hence shows up as lower income taxes. But the difference is creating a future liability you would have to pay. Over time, the DTL would be paid (since anyway over life of the equipment that is being depreciated, total depreciation expense is the same) and reduce to 0. So if this is going to happen (which means that no new DTLs are being added year on year) showing the DTL as a liability does not make sense. Equivalence is to reduce the DTL . To balance the A=L+E equation - you would increase the E portion by the amount of the DTL. This would help comparison of two companies in the industry, one which is in the early stages of life - hence buying a lot of equipment, and creating DTLs on its books and another company which is more mature, and hence not buying as much PP&E.
Very well explained CP. Thanks alot.