Deferred tax liabilities might be considered neither a liability nor equity, when: A) financial statement depreciation is inadequate. B) non-reversal is certain. C) they are likely to result in cash out flow. D) some components are likely to reverse and some components will grow.
A) if tax depreciation is a better indicator of economic depreciation then accounting depreciation, then treating the associated DTL as equity will overstate the value of the company.
I agree with Char-Lee. You will find the answer in the third full paragraph of p. 440 of Reading 38. It is nearly verbatim.
Thanks Char-Lee and Cadlag… I read the CFAi text but still its not very clear. How do you relate inadequate financial depreciation and economic depreciation. Can you guys please make it more clear. Sorry for late follow-up. Thanks in advance.
When you are using an inadequate level of financial depreciation, what occurs is the book value of that asset becomes overstated compared to the tax basis–which comes from your tax reporting–since the tax basis is more in line with the economic value of that asset. So even though you may postpone that future tax outflow, even indefinitely (and thus relieving the “liability” element of the DTL), you can’t simply call it equity because the asset’s value (and your equity) will be overstated on your books (thus offsetting any economic enhancement).
i think i understand it better now. thanks gdiddy