Why/how is a deferred tax liability created when Tax base is greater than carrying value for a liability? can somebody explain this with an example.
Hello Hanuman,
As per taxation thumb rule says.
Assets;
If Tax base > carrying value then DTA will be created
If carrying value > Tax base then DTL will be created.
Higher carrying value of a asset due straight line depreciation in income statement and DDB depreciation method used in Tax return
Liabilities;
Carrying value > Tax base = DTA
Tax base > carrying value = DTL
Customer advance is the good example for DTA unfortunately I don’t have any example for DTL
When you receive advance from customers the cash will be taxed and this will be no more taxed and the tax base is reduced in tax return but the carrying value in accounting return will be reduced once the goods delivered to the customer.
Hope this will help
Kumar
1 way of remember it: if tax based (tax reporting) of a liability > carrying value (financial reporting), this simply means you recognize LESS liability in your balance sheet as compare to tax reporting. So when the liability is going to be settled in future, this will have tax implication, that’s why you have a liability.