Under US GAAP, which of the following factors is an analyst least likely to consider when determining if a company’s tax liability should be treated as a liability or equity: A. growth rate of the firm B. average discount rate of liabilities C. expectations that temporary differences will reverse D. the use of accelerated depreciation methods for tax purposes
Its A
But isn’t it written in the CFA book, FSA on page 438 that as a result of a growth the net deferred tax liability will increase over time. I don’t get it.
how would "average discount rate of liabilities " effect the decision if tax liab should be treated as Equity or Liab? "Growth rate of the firm " will decide if DTL is reversable or not.So I think answer should be ‘B’.
I thought Avg discount rate of liabilities will decide present value of liabilities that in turn impact NI. But rethinking again, it should not impact Tax payable or Tax expense in a way to create temporary difference (tax liabilities/asset). I think I was wrong. B is correct. neagu.alexandru - Can you please give the answer to it?
The odd thing is that the answer shown is A, but after reading this posts I conclude that is wrong. What do you think? http://www.analystforum.com/phorums/read.php?11,767121,767124#msg-767124 http://www.analystforum.com/phorums/read.php?11,741781,741781#msg-741781 Alex.
The classification of deferred taxes as liabilities or equity depends on the likelihood, or expectation, of reversal. For growing firms and those using accelerated methods of depreciation, the temporary differences tend not to reverse. If the analyst determined the deferred tax liabilities were likely to reverse, and hence should be classified as liabilities, then it would be appropriate to discount them at the company’s average discount rate. But the discount rate is not a factor in determining if reversal is likely.
Agree with Northeastern Student.
its B by the process of elimination. firms discount rate will have nothing to do with this decision whereas the others are all relevant.