DTL as Liability or Equity

CFA Level I
#1

Hi Guys, Pls help me with this confusion If company has DTL (Deferred Tax Liability), 1) if company has been making good profits,what does it mean? Does it imply that company will have $$ to pay off DTL and hence DTL can be reversed and should be treated as Debt? 2) What if company runs in losses, what does it mean from DTL Perspective? Does it mean company will not have $$ to pay debt and hence DTL will never be paid and increase the equity? If a company has DTA (Deferred Tax Asset),and if company has been incurring losses,DTA is reduced by Valuation Allowance because Company might never take advantage of Asset. However,if company starts making profit,DTA can be moved up. 3) Is this revaluation of DTA allowed under US GAAP? Will appreciate prompt responses. All the best Cheers,

#2

dontknow1987 Wrote: ------------------------------------------------------- > Hi Guys, > Pls help me with this confusion > > If company has DTL (Deferred Tax Liability), > 1) if company has been making good profits,what > does it mean? Does it imply that company will have > $$ to pay off DTL and hence DTL can be reversed > and should be treated as Debt? > > 2) What if company runs in losses, what does it > mean from DTL Perspective? Does it mean company > will not have $$ to pay debt and hence DTL will > never be paid and increase the equity? > > > If a company has DTA (Deferred Tax Asset),and if > company has been incurring losses,DTA is reduced > by Valuation Allowance because Company might never > take advantage of Asset. > However,if company starts making profit,DTA can be > moved up. > > 3) Is this revaluation of DTA allowed under US > GAAP? > > > Will appreciate prompt responses. > > > All the best > Cheers, Regarding the last point DTA, yes. If the company start making profit, it will reduce the valuation allowance. This is only in us gaap as under ifrs, DTA are booked only when it’s probable that the company will use them, while us gaap just ask you to book dta as they incurr. Regarding DTL, if the company is making losses, that means it won’t be able to pay the DTL, so the DTL is reversed through equity

#3
  1. If a company has been pulling in consistent profits, it means it would be able to meet its obligations without issues. In this case, the firm would be able to “reverse” its DTLs over time. Hence, DTLs would be part of the firm’s debt. 2) If a company is making losses, then the losses should be reflected directly in the retained earnings (equity). 3) Not sure about this. I would think this would be allowed based on the recognition criteria for DTAs. In general, DTLs should be treated as debt if the firm has consistently been making payments and is expected to generate enough income to meet its obligations in the future. As a side note, the DTL should be excluded from both debt and equity when there is uncertainty about the company’s ability to meet its obligations in the future AND there is uncertainty about the timing of company’s future income.