Tax rate change + DTA and DTL - clueless

CFA Level I FRA
#1

I am unable to folow the tax rate change example in the curriculum.

Carrying value for 2006,2005 and 2004 are 14,000 ; 16,000 ; 18,000 respectively.

Tax base for 2006,2005, and 2004 are 11,429 ; 14,286 ; 17,143 respectively

Differece amounts 2571 ; 1714 ; 857 respectively

The DTL for the 3 years are 771 ; 514 , 257 (Assuming Tax rate to be 30%)

Now letz say tax rate for the year 2006 changes to 2006. The new DTA is (25% x 2571) = 643

The book says 771 to 643 is reduction of 128 and this caused by diffrence in

  1. dereciation method 2) tax rate change

The benifit of accelerated depreciation is now only (857 x 25%) = 214 (not 257). There is a reduction of 43.

The “beginning carrying value of the deferred tax liability” furhter reduces income tax expense in 2006.

(NO IDEA WHAT THE ABOVE STATEMENT MEANS)

The reduction in income tax expense attributable to tax rate change si (5% x 1714) = 85

S0 43 + 85 = 128.

I desparately need help in understanding this.

DTA as I understand is nothing but future tax payments asrising due to time diffrences and accounting methods.

But how is DTA carried forward ? Any help will be deeply appreciated.

Thanks in Advance !

#2

Basically, when tax rates increase, DTLs and DTAs also increase. And vice versa. So if taxes go down, like in this example, the DTL goes down which means the company now benefits less. The tax shield or protection from the DTL changes which means the amount of taxes they have to pay changes. A DTA getting carried forward means that it’s cumulative. So if you have a DTA of 2 in 2011 and a DTA of 5 in 2012 then the cumulative or total DTA in 2012 is 7.

#3

Than you for your reply.

I understand uptil the point that the tax rate decrease from 30% to 25% causes the DTL in 2006 to come down from $771 to $663 which is a $128 change.

But I am still not very clear as to how the number $43 and $85 are arrived at which contribute to $128 reduction?

Also is DTL always assumed to be cumulative ?

In this example is DTL of 771 ; 514 , 257 for 2006 ; 2005 ; 2004 considered cumulative. It is definetely as of the balance sheet date and so is not delta DTL.

Thanks in Advnce !