Effect of tax rate change on deferred tax liability?

CFA Level I FRA
#1

Why when the tax rate changes, the DTL (or DTA) left from the previous years have to be readjusted as formula:

DTL carried from last year = DTL last year x new tax rate/old tax rate

Thanks a lot.

#2

DTL are taxes to be paid in the future as a result of timing differences in tax and book depreciation. Since the company is expecting to pay said taxes at a later date and they were originally calculated using the now historical tax rate, the future taxes owed need to be adjusted to account for the changes in the tax rate relative to the original tax rate used to calculate the DTL in the first place.

#3

More simply:

You’ll be getting $100 less in tax deductions in the future.

The old rate was 30%, so you thought you’d have to pay an extra $30 in taxes (DTL).

They changed the rate to 40%, so now you think you’ll have to pay an extra $40 in taxes; adjust the DTL upward by $10.

Similarly for DTAs.

#4

Thanks S2000magican and Would you look.

#5

My pleasure.