Deferred Tax Liabilities might be considered neither a liability nor equity when : 1.Non-reversal is certain 2.They are likely to result in cash outflow 3.Some components are likely to reverse and some components will grow 4. Financial statement depreciation is inadequate
Has to be 1 No reverse, then the difference is permenant between tax statement and accounting statement.
actually, the answer should be 4 if non reversal is certain, you reclassify the liability as equity, if any components are likely to reverse, then it’s liability you remove it only when the accounting depreciation is inadequate…
I think it’s 4…
- Since Fin Stmt Depreciation is inadequate, the assets are likely to be written off in the future, so the liability may never materalize. However, since it likely to be written off, it is not an equity
Ans = 4 1.Non-reversal is certain ------ classified as EQUITY 2.They are likely to result in cash outflow - DONT MAKE SENSE 3.Some components are likely to reverse and some components will grow ------ classified as LIABILITY 4. Financial statement depreciation is inadequate — only choice left But can anyone what they mean by ‘inadequate’ here? do them mean the depreciation employed for Financial Reporting are less aggressive (like SL) than employed for Tax Reporting (like DDB) and which is almost always the case (in US atleast)?? - Dinesh S
I think Inadequate would be if you overstate salvage values or depreciable life