Quick run through to confirm: A deferred tax asset is when there is a difference between the interest tax expense (which is what the company is actually paying in the current period) and the taxes payable which is to remain on the balance (which will not disappear unless all of the interest tax expense accounts for it). I don’t understand how a liability is created when the interest tax expense incurred is greater than the taxes payable, being that we covered the entire amount and then some. I would presume a deferred tax asset is created in this instance, but it is not.
See if this helps. http://minute-class.com/finance/video-deferred-tax-due-to-depreciation-exercise-for-cfa-exam/ http://minute-class.com/finance/deferred-tax-liability-dtl-basics/ Courtesy of Minute-Class.com of course. (I am bounded by Standard I-C: Misrepresentation.)
I don’t fully understand your example, but I can explain it this way: A deferred tax asset results when the income tax expense as shown on the tax return exceeds the income tax provision on the income statement. An example of this situation can occur, for instance, with vacation pay. Under GAAP, vacation pay has to be accrued, whereas for income tax purposes, it is only deducted when paid. This timing differential means that vacation pay is deducted for income tax purposes later than for financial statement purposes. The income statement shows a lower net income, and deferred tax savings becomes an asset on the balance sheet. As a result, the balance sheet will typically report a liability for the vacation accrual and a deferred tax asset representing the marginal tax savings associated with the timing differential. levitsa101 Wrote: ------------------------------------------------------- > Quick run through to confirm: A deferred tax asset > is when there is a difference between the interest > tax expense (which is what the company is actually > paying in the current period) and the taxes > payable which is to remain on the balance (which > will not disappear unless all of the interest tax > expense accounts for it). > > I don’t understand how a liability is created when > the interest tax expense incurred is greater than > the taxes payable, being that we covered the > entire amount and then some. I would presume a > deferred tax asset is created in this instance, > but it is not.
Robert A Wrote: ------------------------------------------------------- > A deferred tax asset results when the income tax > expense as shown on the tax return exceeds the > income tax provision on the income statement. To clarify, CFAI uses the term like this. DTA = Tax Payables > Tax Expense (You paid more tax than stated in income statement, hence an asset is created) DTL = Tax Payables < Tax Expense (Vice Versa)
Maybe I’m wrong but I don’t think that the information that you received is correct. My understanding of deferred tax is that it is essentially a future tax asset or liability that is created from taxable/deductible temporary differences on your balance sheet. So to calculate deferred tax you would simply take the carrying (accounting) values on the balance sheet and you would compare these to the tax basis. I will try to show you an example of a deferred tax asset and a liability. Example 1 Deferred Tax Asset – Company A purchased a Building for $150,000, the companies depreciation policy is to depreciate the building over 20 years, therefore the company records depreciation in the current year for $7,500 and therefore the carrying value for the building at the end of the year is $142,500. Now for tax purposes a building is a class 1 CCA asset and therefore tax rules only allow for a 4% deduction for a similar type asset, therefore the CCA for the current year is $3,000, and therefore the tax basis for the building would be $147,000 (CCA is depreciation for tax and there are specified rates to apply for different CCA classes). Now we need to apply future tax rates to the temporary difference to determine are deferred tax asset, lets assume a 25% future tax rate for simplicity. Carrying Value Tax Basis Temp Differ PP&E $142,500 $147,000 $4,500 Temp diff * future tax rate Deferred Tax Asset (4,500*.25) = $1,125 Therefore as you can see we will have a deferred tax asset of $1,125. Example 2 - Deferred Tax Liability – Company A manufactures and sells airplanes, as part of the sales agreement Company A is responsible for providing any maintenance or repairs on the airplanes for the initial 5 years, so essentially they offer a warranty with the purchase. The cost to purchase a plane is $1,000,000 and the estimation of the fair value of the warranty is $100,000. Therefore Company A sells a plane to a local air carrier, the sale is recorded as $900,000 as revenue and $100,000 as a warranty. So we have a liability on our balance sheet of $100,000 that represents the warranty. Over the course of the year, Company A was responsible for $5,000 in repairs and preventative maintenance on the plane. The companies revenue recognition criteria is to apply a systematic method that will recognize revenue on the warranty over the course of the contract, therefore they recognize 1/5 to revenue each year on the deferred revenue, so they will recognize $20,000 (100,000/5) a year to revenue from the deferred revenue that relates to the warranty. So at the end of the fiscal year, the carrying value of deferred revenue is $80,000 (100,000-20,000) and the tax value is $95,000 (100,000-5000). Under tax rules only the expense that you actually paid is deductible, therefore only $5,000 is deductible in the current year, whereas for accounting we recorded $20,000. Carrying Value Tax Basis Temp Differ Warranty $80,000 $95,000 $15,000 Temp diff * future tax rate Deferred Tax Liability (15,000*.25) = $3,750 Therefore as you can see we will have a deferred tax liability of $3,750 in the current year. It should be noted that a deferred tax asset or liability is created separate from the tax expense and the taxes payable account. Deferred tax assets and liabilities are created from balance sheet accounts, whereas your tax expense is made up from income statement accounts. My examples from above were made using CDN tax principals, therefore there may be a slight differences if applying US tax principals, but the concept of deferred taxes is the same under CDN or US GAAP.
Those videos were really good. Thanks!
Actually the videos were incredibly helpful, very graphical and layman language. Thank you everyone