Could somebody explain to me why an increase in pension liability will result in decreases in deferred tax liability and shareholder’s equity? deferred tax liability usually comes in to play when pretax income and taxable income are different. But here’s there’s no I/S effect and Pension expense is the same for the old / new standards… Also what exactly is the comprehensive income? Why? I think I am ready to give up on pension.
A = L + E as Pension Liability incereases -> ‘L’ increase As liabilty increases your TAX shield increases, therefore DTL goes down Also as Liabilities increase, SHE decreases. hence the balance in the balance sheet equation. So suppose TR = 40% and if PL increases by 100 then DTL decreases by 100*[40%] and SHE decreases by 100*(1 - 40%)
dinesh.sundrani Wrote: ------------------------------------------------------- > A = L + E > > as Pension Liability incereases -> ‘L’ increase > > As liabilty increases your TAX shield increases, > therefore DTL goes down I don’t get this dinesh. Can you explain a little more? > > Also as Liabilities increase, SHE decreases. > > hence the balance in the balance sheet equation. > > So suppose TR = 40% and if PL increases by 100 > > then DTL decreases by 100*[40%] and SHE decreases > by 100*(1 - 40%)
liabilty increases your TAX shield increases, therefore DTL goes down – why?
tax shield should decrease…i think that was a typo.
dudes, it’s always for me to remember this convention increase in pension liability --> decrease in SHE and decrease in DTL. but wouldn’t it be nice to truly understand why this happens?
Sorry guys was trying to help and have instead caused confusion here with my typo. Tax Shield should DEC
Does the increase in pension liability as a result of recognizing the whole funded status increase pension expense on the income statement? If so, then I can see the tax shield there.
Here is what I think might happen: For post retirement benefits, for fin. reporting purpose the pension expense is recorded when it is earned but for tax purposes it is recorded when it is actually paid (refer - Level 1 material for this year). So you are reporting less tax on fin. statements but paying more actually. So in future your tax will go down. This should create a DTA normally but can create DTL if we have pension asset. If I now increase the pension liability it means that pension expense for the current period has increased (at least in B/S terms). But still this increase in pension expense is not recognized for tax purposes therefore you will pay even more tax this period. This would further increase DTA. In case we have pension asset and try to increase the liability this would result in decrease of DTL. Hope it helps…let me know if something is wrong.
There is a mistake in above post, for DTL you don’t need to have a pension asset. I am sure about the effect of liability increase on DTA but not so sure about the DTL part. I guess DTL would be created when benefits paid is more than pension expense.
Hi, we come up with an example when a company is showing a pension asset under the old standard and now under the new standard the company would show a liability? I tried to work an example however I am still uncertain about it… let us say the under old standard pension Asset was 500 and under the new standard pension liability is 700. what is the effect on assets, liabilities, deferred tax and equity? Can someone guide me please on this. There was one example in book 2 and i am still uncertain about it…
ideall you’re moving from a net pension cost to a net pension liability (assuming this is funded status - not JUST PBO) Here’s what you need to do: Reduce Pension Asset by 500 Increase Pension Liability by 700 Your total effect on the Liabilities side to adjust for the above (so as to maintain A = L + E)is -500-700 = -1200 let’s say your tax rate was 40% you’d have to : 1. Reduce your DTL by (1200*.40) = 480 2. Reduce your Equity by (1200 * (1-.40)) = 720 Total Changes Asset Side: -500 Liabilities Side: +700-480-720 = -500 all is balanced…happinesss
mum thank you so much.