DTL

CFA Level II
#1

I don’t have my L1 books with me and I need to remember this stuff. Is the equation for deferred taxes: tax expense (from income statement) = taxes payable (from tax statement) + change in DTL - change in DTA ? So if I am calculating free cash flow, at some point I’ll have to add back the net change in deferred taxes (change in DTL - change in DTA) as I need to reconcile my free cash flow to firm to reflect that I only actually paid taxes payable? Is that correct?

#2

You are correct Ali – ITE = TP + change in DTL - change in DTA TP is the real cash outflow due to tax transactions The DTL and DTA are just accounts in BS to maintain the tax accruals, deferrals - but no real cash outflow takes place. So which calculating FCF, I think, we need to add back this noncash differential.

#3

but if you start with the CFO – the DTL and DTA parts are already in the CFO – aren’t they? Change in Liabs and Assets would have made it to the CFO already… Also the Net Income (if used as a starting point) would have used the adjusted Tax Expense number on the calculation… If you are thinking that this is a non-cash-charge that needs to get added - I do not think so…

#4

TheAliMan Wrote: ------------------------------------------------------- > I don’t have my L1 books with me and I need to > remember this stuff. > > Is the equation for deferred taxes: > > tax expense (from income statement) = taxes > payable (from tax statement) + change in DTL - > change in DTA ? > > So if I am calculating free cash flow, at some > point I’ll have to add back the net change in > deferred taxes (change in DTL - change in DTA) as > I need to reconcile my free cash flow to firm to > reflect that I only actually paid taxes payable? > Is that correct? Change in ‘Net’ DTA because of the valuation allowance.

#5

cpk, that’s correct, if you start with CFO, DTL and DTA are already factored. If you are starting with net income, then you need to add back net deferred taxes since your tax rate on net income doesn’t correspond with taxes payable. I believe Schweser considers net deferred taxes non-cash charges because technically that’s what it is: a charge that doesn’t incur cash flow, like depreciation. So from study session 12: Net Income + after tax cost of debt + non-cash charges - fixed cost investment - working capital investment non-cash charges include depreciation and deferred taxes There’s another form for corporate finance that is similar.

#6

DanLieb: good point