B. Explain how deferred tax liabilities and assets are created and the factors that determine how a companys deferred tax liabilities and assets should be treated for the purpose of financial analysis

Question 1

How deferred tax liabilities are created (mostly when diff. depr. methods are used on the tax return and the IS)

Answer 1

When inc tax expense;IS > taxes payable;tax return due to…

…temp differences

Rev’s (or gains) are recognized in the income statement before they are included on the tax return

Expenses (or losses) are tax deductible before they are recognized in the IS

Expect def. Tax L’s to reverse when the taxes are paid - aka, deferred tax paid = Cash outflow

Question 2

The factors that determine how a company’s deferred tax liabilities should be treated for the purposes of financial analysis

Answer 2

Is reversal is expected in the future, classify then the deffered. tax L as an L. But if reversal isn’t expected, classify as an equity and record DTL to -, but equity to +

Question 3

How deferred tax assets are created

Answer 3

Created when taxes payable;tax return > income tax expense (IS) due to temp differences.

Temp differences

Rev’s or G’s are taxable b4 they are recognized in the IS
Expenses or L’s are recognied in the IS before they are tax deductible
Tax loss carry forwards are available to reduce future taxable income.

Reversals are expected through future operations, but DTA provide future tax savings.