I’m confused about what the secret sauce says about how to handle deferred taxes on the B/S. I understand that if they are going to reverse you bring it back to PV and treat it as a liability, since you feel you will owe that amount. What I don’t understand is why this would decrease the debt to equity ratio. Also, if the deferred liability is not going to reverse, I understand it should be treated as equity because you’re not going to have to pay, but what is the offsetting entry? Here it makes sense that the debt to equity ratio would decline, because equity is larger. Its just tough to remember they both decrease debt to equity when you’re treating them differently if you don’t understand why.
decrease tax liability and increase equity or decrease tax asset and decrease equity if deferred tax asset/liability are not reversible
In the first case: The PV of the DTL which is expected to reverse will be LESS than the current BS DTL value. The diff between the current B/S value of DTL and the PV of DTL will be added to equity and the current B/S value will be replaced with PV of DTL. Thus Equity up and Liability down. Effectively, that will lead to a lower D/E ratio. Second case: You just remove DTL from Liability in B/S and put it in Equity. So, Equity up and Liability down. Again, lower D/E ratio. Hope that helps. -Amit
That makes a lot of sense, thanks! adb258 Wrote: ------------------------------------------------------- > In the first case: > The PV of the DTL which is expected to reverse > will be LESS than the current BS DTL value. The > diff between the current B/S value of DTL and the > PV of DTL will be added to equity and the current > B/S value will be replaced with PV of DTL. Thus > Equity up and Liability down. Effectively, that > will lead to a lower D/E ratio. > > Second case: > You just remove DTL from Liability in B/S and put > it in Equity. So, Equity up and Liability down. > Again, lower D/E ratio. > > Hope that helps. > -Amit