hello there, im studying financial statement analysis and i cant seem to work out why a deferred tax liability that is not expected to reverse turns into equity. could someone pls explain. thanks
It doesn’t turn into equity per se. The basic concept is that for analytical purposes only, liabilities should only include those obligations that will be satisified with cash (or refinanced) on or before some specified future maturity date. A DTL that is not expected to reverse does not meet that criteria, so for anylitical purposes it is included with equity. (not something I personally agree with. this is one of many subjective financial statement adjustments out there)
how else could this be adjusted? (besides just ignoring it) ??
if it’s never likely to reverse then it’s not really a liability (ie. need never be paid)… so, consider it equity instead when adjusting
yeh but i mean, ‘turning’ it into equity is just an arbitrary adjustment anaylsts make… how else can you make this adjustment? (the only reason i ask is cos super mentioned it was a subjective adjustment, so was just wondering what other ways you could adjust it)
debit liability, credit equity (exstinguishment of liability not going to be paid)
The comment on DTLs is just my opinion, has nothing to do with what you need to know tomorrow. It’s one of a bunch of things that everyone does in practice, but doesn’t make much sense (but hey, everyone does it). The other way is to just ignore it and keep it as the liability that it is. We accrue future pension obligations that include non-vested amounts and assume that future servcies will be provided (a violation of the basic matching principal). Analytically capitalizing operating leases can also be just as meaningless becuase it doesn’t factor in current rental rates in the market, so in essence it isn’t recorded at FMV. You penalize a compnay with a long-term lease by recordning more debt than you would for a peer with a shorter one, even tho they may have locked in a much better rate than the renewal cost that the peer will pay. Just my venting. But don’t worry aboutt this for the next couple of days. Eye on the prize.