Dear all, Wishing you a very prosperous New Year. I am a CFA newbie and started with my Level 1 exam in Dec.'08. Recently, i am studying the Balance Sheet and its components. I get very confuse of deferred tax when it is in both assets and long-term liabilities. Obviously, in the long-term liabilities deferred taxes are the cumulative difference between what the income statement has reported as income taxes and what the company has paid in taxes, the difference usually arises because of differences between the accounting methods used for financial reporting and tax filing. But, in assets there is any explain what deferred tax is included? Could u pls kindly make it clear the difference between deferred taxes in assets column and liabilities column? And how to calculate them each case? Thank you very much!
Hi Thu You are probably reading this in SS 7 - when you are looking at the Financial Statements in isolation. You would learn about Deferred Tax Assets and Deferred Tax liabilities in SS 10. A DTL – difference between Tax Statement and Financial Statements because of difference in Depreciation methods (e.g.). In the Tax Statement a company would account for depreciation with a method that takes a higher depreciation expense, while on the Financial statements a method such as Straight Line would be used. This causes a higher income and higher taxes to be shown on the Financial Statement, a lower figure on the Tax statement. This means that an income tax expense is being postponed – hence it is a liability. A DTA – Deferred tax asset – is created e.g. because of a difference on Warranty expense. In the Financial statement - a higher Warranty expense is accounted for, but on the tax statement, you cannot show the Warranty expense until it has actually been incurred. In this case, on the Income statement (Financial statement) - you would see a higher expense being shown, hence lower income, and lower taxes. But on the Tax statement a lower expense would be shown – and this means that you would have paid a higher tax. So this is a Deferred tax asset. Hope this helps you understand these concepts. CP
Hi, cpk123, I looked at FS in isolation and so confused! As yr guide i have had a look at SS 10. Everything is now clear Thank u very much for your explain carefully!
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