Reversal of Deferred Taxes

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EnricB

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I’ve come across a question related to Deferred Taxes, where one of the correct answeres (given that it’s a least likely type) states “Deferred taxes may never reverse in the companies that are growing”. I haven’t been able to find a suitable explanation for this, maybe I just have to assume is correct given the openness of the statement?
Any ideas?
 
deferred tax liabilities are created due to purchase of fixed assets - where the difference in tax depreciation of the asset vs. the financial statement treatment of depreciation of the asset creates the DTL.
If the company continues to grow - more fixed assets will be purchased - which means that the DTLs will never reverse - and continue to grow.
 
I thought this would be because a growing company will start to have higher tax rates and if they keep growing the tax rates will not go back down making this a perminent difference
 
DT is not a permanent difference, it is a temporary difference.
If company with DTA (loss carried forward) contiunes business with losses instead profit, it is very likely that the tax assets will not be used. Also in many legistalives loss carried forward (DTA) may be used within certain period, after which maturity the “tax assets” is partially deleted. This is also the reason for cautiously approach for showing such assets in the balance sheet or the formation of allowance account under USGAAP. It is always significinat probabilty that it will not be used in full.
However situation with “diminishing” DTA (loss carried forward) cannot be applied if company reverses to grow thus doing business with profit in further period in case of DTA that will be utilized.
So, not reversed amount in this case may happen in DTL position (opposite influences to utilization than DTA). Therefore, I would agree with cpk123 to assumption that company may continue (due to its super growth phase) purchasing assets and using accelerated depreciation method for a tax purpose. IMO,by IFRS application only a company also may contiune with assets revaluation indefinititely which will lead to fact that DTL would never been settled to current tax liability in case it should be recognized as equity.
 
cpk123 wrote:
If the company continues to grow - more fixed assets will be purchased - which means that the DTLs will never reverse - and continue to grow.
Click to expand...
To piggyback on cpk’s anwer:
Note also that Tax depreciation is typically accelerated (like MACRS), while financial is Straight-line - this is (as he said) what causes the timing mismatch.
New asset purchases (whic are typical of a growing firm, since a growing firm needs fixed assets to support higher sales) “recharge” the higher early depreciation on the tax side.
 
busprof wrote:
Note also that Tax depreciation is typically accelerated (like MACRS), while financial is Straight-line - this is (as he said) what causes the timing mismatch.
Click to expand...
Such maybe is in the USA, I’m not sure for the rest of the world. The common is that timing differences will appear beacuse of differences in tax treatment and accounting treatment various A/L positions and correspodent revenues and expenses in P/L.
 
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