A company using IFRS incurred and capitalized $2 m of devt costs during the yr.these costs were fully deductible immediately for tax purposes,but the company is depreciating them over two yrs for reporting purposes.the company has a long history of profitability which is expected to continue.which is the most appropriate way for an analyst to incorporate the differential tax treatment in his analysis.he shd include it in
A liablities when calculating the company’s current ratio
B equity when calculating return on equity
C liability when calculating Debt to Equity
they claim A is correct…bt i think it is C.
Based on this stament i read ‘‘Under IFRS all deferred tax liabities are non Current liabilites and are not included in current ratio’’…any help
They paid less in taxes this year, but will pay more in taxes in future years; that’s afuture detrement, which means it’s a DTL: a liability.
It is a liability, so it should be included in liabilities; it isn’t a current liability, so it won’t affect the current ratio: answer A is correct. (Sneaky!)
It isn’t equity, so answer B is incorrect.
It is a liability, so it should be included in liabilities; it isn’t interest-bearing, so it won’t affect Debt-to-Equity; answer C is also correct. (Hoisted by their own petard.)
The question says: "for an analyst to incorporate the differential tax treatment in his analysis"
So, I am assuming that by “including in liability”, the question setter wants to convey that by including in the appropriate portion of “liability” used in the current calculation.
It is a DTL; They pay less taxes on their tax return but show more on their IS. So, they have to pay at some point in the future; now, I am not sure at what point in the future. I am also skeptical of the explanation that IFRS talks- what is mentioned in the explanation- about DTL.
B is definitely incorrect. Let’s see between A and C. Now it isn’t C too, because, D/E ratio must have interest bearng debt; DTL ain’t intr bearing. So, C is gone, which means I am left with A.
I can reject B and C with a good degree of confidence, but I fail to support A, because I am not sure for what time is the liability deferred. All-in-all, like S2000Magician pointed out, it’s a poorly constructed question, unless what they talk about IFRS is carved in stone.
It isn’t included in the current ratio. It’s included in liabilities, but in a manner that doesn’t affect the current ratio (i.e., it’s not a current liability).