Future Tax Lia

[AJF]

Does the balance sheet account, Future tax Liability represent a sum of all the differences of taxes paid to govt vs. tax paid on F/S for each asset of the company that is subject to a timing difference?

 

[CFAHouston]

I'm assuming you mean deferred tax liab. Deferred tax liab represent all the difference (straight vs. accelerated dep method, tax recongnization method).

Deferred tax liab = Diff in Income tax exp in F/S vs. taxes payable.

 

[jamespucyk]

To be technical it reperesents taxes (for a DTL), that will be paid in the future, based upon different GAAP and Income Tax expensing conventions.

I remember it as follows, since less taxes are actually paid out under a higher expensing convention (for income tax) there is more taxes to be paid out in the future, all things equal. Think about a situation where there is only has one asset owned by a company worth $1000. If the company depreciates it as $500 the first yr., $300 the second and $200 the third for income tax purposes, while for GAAP acocunting purposes depreciates it straightline over 5 yeras you will actually have a significant DTL over every year until the asset is fully depreciated to zero.

Basically the tax savings in years 1-2 will rear it's ugly little head in year 4 and 5, hence the decrease the DTL in those years (4&5) and the need for one to begin and end with.

 

[AJF]

I get that, but on the B/S does that value that is presented represent the cumulative dtl of all the assets of the company at a point in time?

 

[AJF]

I get that, but on the B/S does that value that is presented represent the cumulative dtl of all the assets of the company at a point in time?

Thanks for your help guys!

 

[CFAHouston]

Yes, its cumulative. There is only one account for DTL.

 

[AJF]

Thanks a lot. I know it is silly question, but I want to make sure I am getting the in-depth meaning to all of this.

 

[CFAHouston]

No problem