Can someone explain this to me?
a) the carrying amount of a Liabilty exceeds its tax base
b) the carrying amount of an asset exceeds its tax base
c) the carrying amount of an asset s less than its tax base
Answer: A
i understand how to calculate taxes payable and tax expense and i’m very solid on DTAs and DTLs, but the language of the ncome tax secton still trips me up…can you explan why B and C are wrong here?
thnx
If the carrying amount of liability exceed its tax base, you have a tax loss carried forward which creates DTA for you, and thus temporary difference that is likely to reverse in the future.
I was just lookingn over this question and I don’t get it either. 1st, I am assuming when they say “asset” and “liability” they mean tax related components on the balance sheet, not deferred tax asset or deferred tax liability. I think the key word is temporary. non temportary differences in tax expense and taxes payable do not create DTA or DTL. I don’t know why A is correct, but B and C concerning an asset would not be temporary.
Reversal depends of some factors. If firm continue accumulate losses, the DTA reversal is not certain. In some legislatives loss carried FW has expiration, it’s not infinite (f. ex 5 years after which 1st year of carried loss has been erased etc.). So DTA cannot be considered as regular asset. It has value in company overtaking and aquisition process only if aquisiter can use merged DTA to deduct its current or future tax liabilities.
Temporary differeneces - reversal expected in future period, DTA or DTL.
Permanent differences- permanent differences between accounting (P/L) result and tax base in CIT Return.Those differences make stated and effective tax rate mainly not equal. So, reversal is not expected in the future, the difference between accounting income and tax base is permanent.
Example of permanent differences - in some legislatives some expenses are not recognized as tax deductible what mean that those expenses does not deduct than increase tax base. Same example could be within revenues area. Also, expenses may be deductible once again and reduce tax basis in addtional amount while in accounting (P/L) result those expenses are recognized as actualy incurred (example - Tax Authority encourages some expenses as part of fiscal policy etc.)
May have something to do with goodwill? I mean, once you have a temporary difference, the same rules of recognition apply to both assets and liabilities, so that´s why the three answers look correct.
However, there are some special kind of assets that are not recognized at all , like goodwill, and that doesn´t happen with liabilities, where is more a black and white case.
Just throwing a possibility, for me that´s a devious question.