[cpatobe1234]

Hi I am currently studying for FAR and I am having some trouble with DTA/DTL. I am using becker to study, but i am confused by the information provided in the pass key and if anyone can help clarify, it would be greatly appreciated.

Anyways in becker they describe
DTL as future tax accounting income > future financial accounting income
DTA as future tax accounting income < future financial accounting income

I was thinking as future tax income as being on the tax return and financial accounting income as being on the IS, but i was confused because I thought if the tax income > financial income it is a DTA, which contradicts the information in the becker book unless I am misunderstanding the information?

AUD - NINJA in Training
BEC - 75
FAR - NINJA in Training
REG - 77

 

 

[RJ26]

The difference in taxable income exists because a lot of companies are on accrual basis, however, IRS taxes all companies on cash basis.

So let’s say a company is on accrual basis and they receive $1000 for services that won’t be performed until the following year. That amount is considered a liability for the company for now because the services haven’t been performed so it’s unearned income, which means it won’t show up on the income statement as income. However, they will still include that as income for tax purposes because IRS will tax them because the company received the cash so IRS thinks it’s income right away. This will create a DTA because the company is paying tax on that income in the current year. In the following year when the services are performed the company will recognize that as income. They received the cash in the previous year so on accrual basis they’ll recognize the income in the year they performed the services. But they won’t be paying tax on it in that year because they already paid the taxes on that income in the previous year when they received the cash.

Same logic applies for DTL. If the company is on accrual basis and they pay cash for supplies, then the supplies will be recorded as an asset and converted to supplies expense as they are used up. If all of the supplies aren’t used in the period they bought them, then that will cause the supplies(asset) to carry forward and be recorded as expense in the future periods when they are consumed. So in this case, the company will save tax in the year they purchased the supplies because IRS is on cash basis so the entire amount will be recognized as expense in the year the company purchased it. This will create a DTL because the company will convert supplies to supply expense in the future periods. But that won’t result in a tax saving that year because the company already took advantage of the entire supplies amount as supplies expense(for tax purposes) in the year they purchased the supplies. To sum it up, in year 1 the company purchased the supplies for let say $1000. They will use some of it in year one and they will use the rest in year 2 or later. On accrual basis some of the supplies will be recorded as expense in year one and rest of it will be recorded as expense in future years. IRS will tax them on cash basis so the company will deduct that entire $1000 in year 1 from income because that’s when the supplies were purchased. Which means their taxable income will be lower in year one, thus creating a DTL because the company won’t be able to deduct the supplies as expense in the following years since they were already deducted in year one because of IRS being on cash basis.

If the company is already on cash basis, then DTA and DTL won’t exist because the taxable income on the company’s books will be the same as income that IRS will tax them on because both are on cash basis.

I know I typed a lot, I hope this helps. If I completely missed your point, then clarify it and I’ll see if I can help sort it out.

[Biff Tannen]

If you have access to Ninja monthly I would watch the Bob Monett videos. He explains this topic very thoroughly

AUD - 78
BEC - 84
FAR - 79
REG - 85

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[Author]

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