“The portion of a deferred tax liability not expected to reverse should be treated as equity. In addition, the remaining liability should be discounted based on the estimated reversal period.” This is the answer from a schweser question, and the first I think I’ve heard of discounting the DTL based on the reversal period… does this also mean that all DTL’s should be discounted based on the time to expected reversal? And would this discounted value be the value placed on the balance sheet, or is it one of those adjustments analysts should make?
I would ignore discounting liabilities. The key things to remember (this only pertains to analysts’ adjustments: 1. Analyze whether or not the DTL will be paid, if capital expenditures continue to rise for example, then chances are that they won’t be paid and DTL should be lowered by the amount that’s expected to remain unpaid and you should increase equity by the same amount. If capital expenditures slow down, and DTL’s will be paid, then leave them as is and treat as liablity. I am surprised this is even in Schweser, you are allowed to discount DTL’s, but not required.
let say you 10000 in DTL in your balance sheet. The portion that is not expected to be paid it shoud be treated as equity. The other portion which lets assume is $7000 needs to be discounted to its PV. the reason behind it is becuase you will pay DTL sometimes in the Future, so you will pay 7000 sometimes in the future, therefore you have to discounted the amount to what it is worth today. This discounted value should be used to make adjustments before calculating ratios such as leverage ratio, debt-to-equity ratio.
Thanks, but ssdnola, do you think a similar adjustment should be made to the dtl even if the entire dtl is expected be reversed? and is this an analyst adjustment you’re referring to, or something the firm should do in reporting it’s dtl?
No, if the whole thing is expected to not be paid, then the whole amount should be added back to equity before caculating ratios. This is just an analyst adjustment and for fair comparabilty between other firms ( If i remember right). i will go back and review that stuff.
No, i mean if the entire DTL IS expected to be paid, or reversed. So you’re saying an adjustment is made to the remaining amount of the dtl after accounting for an amount that is turned into equity, but what if no amount is turned into equity? is it part of the process to always discount a dtl ?
Yes if it is expected to be paid , then the entire amount can be discounted. But again this is just for better comparison, it is not a requirement.
Thanks ssdnola, Can you possibly point out in which reading this is stated?
Reading 38 page 439 in CFAI FSA book