Deferred Tax Asset query

Hi all

Can anyone advise why a DTA wouldn’t be created in this example? The value is declared as a temporary difference as opposed to a DTA…



First you need remember rules when is DTA and when DTL created.

In given example if Company use straight line depreciation for accounting and accelerated deprecitaion for tax purpose the result is higher book value of asset in BS than in Corp. Income Tax Return.

The rule is Asset in BS > Tax Retun (Tax base) = DTL, DTA equals opposite thus Asset in BS

Second, temporary difference is amount for which tax base in BS differ from tax base in tax return and deffered tax is tax fee (percentage) x temporary difference. In this case it would be = (500.000 x 10%)-(500.000 x 15%)=50.000 - 75.000 = -25.000 temporary difference for amount less depreciated in BS than in Tax Return, what means that BV is in higher amount in BS. DTL would be -25.000 x Tax rate (40 %) = -10.000.

Since there is not such solution among given solutions, the right answer is temporary difference in amount of 25.000. The other two solutions are incorrect so you may eliminate them.

Also note that with prefix - above I marked a liability or shortfall amount of asset in BS, just don’t be confused about it.

I wrote an article on DTAs and DTLs that may be of some help here:

The short answer to your question is that you’re using accelerated depreciation for taxes and straight-line for financials. Thus, your future tax liability will increase (lower depreciation for taxes in the future), leading to a future detrement: that’s a DTL, not a DTA.