Ok I understand that the DTL needs to be recognized on the balance sheet, but what is the offsetting account? You can’t put it to tax expense because that would defeat the purpose of the timing difference. Liabilities up, but how does equity decrease? Thanks
I figured it out. The DTL gives rise to an increase in Tax Payable. Tax expense is not affected by the DTL because it’s derived from a percent of pretax income.
Actually there isnt any one single offsetting account for the DTL. Changes in the tax payable account are not directly linked to the DTL although changes in the tax payable account would refect on the cash balance on the asset side. It is important to remember that tax assets / liabilities result from temporary differences in carrying values of assets / liabilities DTL will directly affect the following accounts 1. Carrying value of asset that results in the DTL 2. Retained earnings For example, if the accounting depreciation is $100 and depreciation for tax purposes is $200, taxable income is lower by $100 and this would result in a DTL. On the asset side: Carrying value of asset is higher by $100 (due to lower depreciation) On the liability side: Assuming a 25% tax rate, the DTL is ($200-$100)*25% = $25 Retained earnings are higher by $75 (after tax value of the difference in depreciation) Hope this helps.
I have another DTL question. I know it’s very simple but my brain is simply not processing. Ok, so: ITE= TP- Change in DTA + Change in DTL this is ok but while going through the Schweser vids I noticed that they keep adding the DTL to a negative TP while in the CFAI text they add DTL to a positive value for TP. In fact the Schweser vids seem to add both DTA and DTL to negative values of TP. Could someone clear this up for me. Thanks in advance. This Income Tax section certainly wants o give me a beating =(
I havent gone thru the Schweser vids but an easy way to remember this concept may be in terms of the impact on the balance sheet 1. ITE = decrease in equity 2. Increase in TP = increase in liability 3. Increase in DTL = increase in liability 3. Increase in DTA = increase in assets For the balance sheet to “balance” Increase in DTA = Increase in TP + Increase in DTL - ITE Do the vids make sense now? Agreed, this income tax section is my worst part of the curriculum (along with hypothesis testing)!
its an increase to deferred tax expense. Increase expense and increase the DTL. equity gets reduced via lower retained earnings (because you booked an expense)
Thanks for the response guys. Oz i just wanted another source to brush up on this topic that’s why i went to Schweser. I still don’t know what Schweser was doing but I’ll just stick to what I know and hope it work out.