Looking for some more explanation for this reading (the most complicated reading ever):
I may be over thinking it but would appreciate some insight anyways.
Firm A has a DTL and Firm B has a DTA. The governmenent annouces a decrease in Tax rate. What is the impact on taxes payable?
I know that if the tax rate decreases it will decrease both the DTA and DTL, and vice versa. However I dont understand how if a firm has a existing DTL and the tax rate decreases why does it decrease the existing DTL that the firm has.
The answer states that the DTL would decrease and therefore the taxes payable (lets assume for next year) would be lower, but why would the DTL decrease in this current year?
For Firm B im essentially wondering the same thing. The answer states that the decrease in tax rate would decrease the DTA which means that the taxes payable(lets assume next years) would be higher then it would if the tax rate had not increased. but again why would the DTA in the current year decrease?
If anyone could help out that would be great thanks!