DTA AND DTL

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saulherman

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As I have gone through the books this subject is tough for me to grasp.

I am starting to understand it more but one part that confuses me is:
Carrying value > Tax Base results in a DTL for an asset account
CV > TB results in a DTA for a liability account

Can someone provide examples of both an asset and liability account and then try and explain in simple terms those two points above??

Thanks
 
think in 2 sets of books: 1) financial statements and 2) tax books
If I record the value of something on my financial statements as MORE THAN what i record it for on my tax books, then therefore I pay less in taxes so thats a LIABILITY (DTL). Vis-versa for DTA.
Does that help? I would look in the book or Schweser/Stalla for examples, post them here if you need to
 
hmm
i understand this about DTA/DTL: if the tax expense that ends up on the financial stmt is greater than the tax payable on the tax return, then this is a DTL because you have not paid it yet. If tax exp less than tax on the return, DTA is created cause you paid for something you haven’t booked yet.
but that’s the extent of what i know.
can someone plz explain the tax base of asset/liabilities and how this works into all of it? for example in terms of cash received in advance. there is no tax expense so how would this work?
thanks!
 
I was just referring to a section in the schweser prep.
the section is “tax base of liabilities” then the first example is “customer advances”.
says at year end you receive 10k from a customer for goods to be shipped next year, this will create a deferred tax asset.
How does that work?
 
Here is my take. Under GAAP, revenue is recognized when earned. In this case, goods have not been shipped therefore it is unearned revenue. For reporting purposes, you create a liability because you still have to deliver the goods. However, for tax purposes, since the cash has been received, the tax man will tax you in the current year. Therefore, it is a deferred tax asset (think pre paid). The following year when you deliver the goods you reverse the liability and no taxes are payable on this transaction. Hope this helps.
 
A better way to think about it is:
Make two columns, name one F and name the other one T (F for financial reporting and T for tax reporting, arbitrary names).
Under F, first write the difference you are referring to.
For e.g.,talking about the CV of an asset, I would write CV with an upward pointing arrow under F to show that CV is greater.
Under T, I’d write TB (tax base) with a download pointing arrow to show that it is lower than CV.
Now, write down the effect on NI. If CV is greater, means that depreciation is lesser. If depreciation is lesser, NI with an upward pointing arrow under F.
Similarly, if depreciation is higher, NI is lower, so a downward sloping arrow and NI under T.
Now, if the NI is lower under tax reporting, the tax you pay is ALSO lower. If tax you are paying is lower, you have a DTL.
My $0.02. I am not sure if it works for everyone.
 
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