Joined: 29 May 2008
Online Status: Offline Posts: 115
Posted: 18 Sep 2009 at 15:01 | IP Logged
Hi everyone,
I am unable to understand whether to recognize deferred tax asset or liability in a given situation?
For eg. it is given that the financial reporting basis of a company's plant assets exceed the tax basis, then in this case should a deferred tax asset or liability be recognized for the differences in depreciation?
Therefore, in your example if the book basis of an asset is greater than its tax basis, it will result in future taxable amounts, or a DTL.
On the other hand, if tax basis was greater than book basis, from a tax viewpoint you have more asset left to depreciate than you do from a book perspective = future deductible amounts. DTA.
Another way to look at it (this is a double edged sword, but sometimes works) is to think in terms of "prepaid taxes". If you are get paid up front for a project that will take 2 years, from a tax viewpoint, you have already paid the taxes on that amount. Thus when you recognize the income on the books, you will have already paid the taxes.
Therefore, this "prepaid tax" will result in future economic benefit and will thus be a DTA.
You can also think of it as a plug figure. Inc tax expense is based on the book position, tax payable is based on the tax position, so just balance the entry with a debit to an asset or a credit to a liability. So in your example, Inc tax expense for book will be higher than for tax and will require a credit to balance. Credit to DTL.
These are just ways to look at it. Its tough even then. I notice if I think I know the answer quickly - I really have to think it through from many angles because I can convince myself of a wrong answer often enough to worry me.
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Topic: Deferred taxes
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