Income taxes UGH

Hi all,

I failed twice and this is my third time studying the material and everytime I reach income taxes I can’t understand it very well. I feel I only understood 20% of it. How many questions I probably get in the exam from this reading? I am reading and watching videos for three days and everytime I just feel it is impossible for me to understand it. Is there any source other than IFT and Scheweser videos expalin this reading very well.

What don’t you understand? I don’t recall it being a big part of the material?

For example Tax base >< and yes it is not a big part but is too dificult ! I want to start non current liabilities but I keep thinking I have to understand Income Taxes before and it is wasting my time I think I will study it again at the end maybe will understand it later !!

I suggest leave it alone for a bit and come back to it. You don’t want it to drag down the rest of your studying.

Why waste valuable time and not get anywhere when it will only benefit you in a very small way on the exam if you finally get it?

Yes you right, it is a small part this is what I wanted to hear

I am probably afried from failing for the third time >< and I am trying to understand 99% or 100% from each reading

I think I will leave it forever loool

And that is oaky, just don’t do it too often.

For L2, I completely skipped the reading on credit risk models. It was frustrating and there were no practice questions on it anyways.

Disclaimer: There will probably be a question or two on the L1 test on taxes, but that is not as important as mastering 3 or 4 other readings in the time it would take to understand taxes.

Income taxes look daunting from afar, but if you get into it, you’ll understand that the most important things to remember is:

  1. The definitions

  2. ITE = TP + Diff in DTL - Diff in DTA. Everything goes smoothly if you understand the above formula. Also, understand that tax base is mirrored by carrying value, and that for assets:

If CV > TB : DTL increases (if CV > TB it’s logical that ITE > TP, so DTL increases if DTA is constant)

If CV < TB : DTA Increases (same reasoning).

And it is the reverse if we are talking about liabilities.

The company creates 2 financial statements, one for the public using IFRS or GAAP (everything we studied in FRA) and another for the tax authorities, using the tax authorities standards, not IFRS and not GAAP).

For example, a company with a warehouse might use a accellerated depreciation model for tax reporting. This increased expense reduces ‘taxable income’ they show to the tax authority, and so they pay less tax (this year). The same firm with the same warehouse could use staight line depreciation in their financial statements… this lower expense means an increased ‘net income’ figure that they show to investors.

An item’s ‘tax base’ is it’s carrying value on the tax statement. In this example the ‘tax base’ is historical cost, minus accellerated depreciation and ‘carrying value’ is historical cost, minus straight line depreciation.

I’m starting the reading later today but it looks like the whole reading comes from the difference between financial statements and tax reporting




Thank you, and good luck on your level 3 exam.


Thank you for your help and replay.


So Tax base for tax authority and carrying value for Financial reporting. and because of depreciation they have different values, finally got it. Thanks alot, good luck on your exam.

There are other reasons that they may have different carrying values.

For example, if an asset is impaired, you’ll write it down for financial reporting, but tax authorities generally won’t let you do that; you cannot show the loss until you sell it.

A deposit from a customer is shown as a liability for financial reporting, whereas for tax purposes it is generally taxed as income (and, thus, becomes part of retained earnings).

Thanks alot S2000magician

My pleasure.