DTA (deferred tax asset)
shouldn’t there be a valuation allowance already in place (if firm knows it might sell certain assets contributing to DTA in foreseeable future) ? experts need to step in btw good question ! PS Wolwol - just out of curiosity, how are you preparing for FSA… notes or CFAi text ? Are you doing CFAi textbook questions too ?
i do CFAi textbook and i have a hard time with the after-reading questions
I beleive there shouldn’t be a reversal of DTA in this case. Since the asset would not generate enough future income for the firm to be able to utilize it, valuation allowance should be added to income stmt and the DTA would never reverse. This should be the opposite of when the firm keeps adding new assets and the DTL is never reversed. BTW if you got this quest. from somewhere can also let us know the correct answer?
i got it from the answer of question 7 of cfa1 textbook. it said asset sale reduced DTA in one paragraph, but it also said asset sale increased DTA in the following paragraph.
We need experts here - please answer… How does asset sale affect DTA?
my current taking on this is at the time of asset sale, all the DTA or DTL will be instantly reversed and eliminated. Correct me if I am wrong.
wolwol Wrote: ------------------------------------------------------- > my current taking on this is at the time of asset > sale, all the DTA or DTL will be instantly > reversed and eliminated. Correct me if I am wrong. Been a while since I looked at this stuff, but I don’t think that an asset sale would affect the DTA balance (at least not immediately). The DTA’s are created by a difference between taxable income and pretax income. These numbers are compared at the end of the year, not every time an asset is sold. Selling an asset wouldn’t immediately change the DTA. In fact, if you sell the asset for book value, there would be no effect on the DTA ever. Can you explain why you think the DTA would immediately reverse?
DTA or DTL are due to the different method used in tax report and financial report, right. Once the assets are sold, the source of DTA or DTL is gone, so the DTA or DTL associated with those assets should be gone too, right
I am no expert on the subject, but it seems to me that this liability/asset doesn’t go away just because you sell the underlying asset. You have a deferred tax liability because a certain amount of taxes are due, but you are choosing to “defer” this amount of tax until a later date. Just because you sell the asset, doesn’t mean these liabilities disappear.
DMF Wrote: ------------------------------------------------------- > I am no expert on the subject, but it seems to me > that this liability/asset doesn’t go away just > because you sell the underlying asset. You have a > deferred tax liability because a certain amount of > taxes are due, but you are choosing to “defer” > this amount of tax until a later date. Just > because you sell the asset, doesn’t mean these > liabilities disappear. -------------------------------------------------------------- I agree with DMF, the DTA/DTL is still there. and probably can’t be reversed since the asset is sold, no depreciation anymore to generate the opposed different between pretax income and taxable income.
If the original deferred tax balance was attributable to different depreciation methods, it would eventually reverse. It just wouldn’t be done at the time of the sale; it would reverse at the end of the fiscal year. The different depreciation methods would result in different book values of the asset being sold. Because of the different book values of the asset, there would be different reported gains. Therefore taxable income would be different than pretax income, causing a reversal of the deferred tax balance. We could illustrate this with an example… but I am lazy.
I made up some data to reflect what apcarlso wrote equiptment original cost: $12,675 5 years straight line depreciation in F/S in tax report, depreciation of 1st year is 35% of book value, 2nd year also 35%,3rd year 30%. sales: $7,192 each year in 5 years tax rate: 41% -----------Financial Statement---------------- ………………………Y1………….Y2 sales………………7192………7192 Depre. ……………2535………2535 pre-tax income…4657…….…4657 tax expense….….1909….……2688 -----------Tax Report------------------------ ……………………Y1………….Y2 sales………………7192………7192 Depre. ……………4436………4436 taxable income.…2756………2756 tax payable.….….1130………1130 ----------------------------------------------------------- DTL………………779…………1558 at 1st day of 2nd year, we sold this equipment at different price ………………….F/S…………T/R book value………10140……….8239 …………………………………………… if sold at………………8239………… gain(loss)………(1901)……….…0 tax……………(779)……………0 the negative tax expense(779) offset the DTL$779 ……………………………………………… if sold at………………10000………… gain(loss)………(140)…….…1761 tax……………(57.4)……….722 the negative tax expense(57.4)and tax payable 722 offset the DTL$779 as apcarlso said, this offset won’t happen until end of fiscal year. thanks, apcarlso.
annexguy - kudos for having the initiative i lacked!
as you explained there will be only effect on DTL but not DTA at all… or i mistake some points???
I have a tough time being specific when answering without seing the actual questions . In general, re asset sales, just as on PP&E you have differences in depreciation for books and tax that result in DTL/DTA, when you sell an asset you will have a difference between book and tax gains and losses on those sales, which also affects the DTA/DTL that was on the balance sheet for those assets.