Page 43 - FINAL CFA I SLIDES JUNE 2019 DAY 8
P. 43
Session Unit 8:
30. Income Taxes
LOS 30.b: Explain how DTLs and DTAs are created and the factors that determine how a company’s DTLs and DTAs
should be treated for the purposes of financial analysis. p.246
LOS 30.c: Calculate the tax base of a company’s assets and liabilities, p.247
LOS 30.d: Calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and
calculate and interpret the adjustment to the financial statements related to a change in the income tax rate. p.249
Example: Deferred tax liabilities, p249: Original asset cost = $600,000; Life = 3 year; salvage value = 0; Tax
depreciation = accelerated method (Yr.1= $300,000; Yr. 200,000; Yr. 3 $100,000). Financial reporting
tanties
depreciation = straight line = $200,000 per year. EBITDA = $500,000 each year; tax rate = 40%. Calculate
income tax expense, taxes payable, and deferred tax liability for each year of the asset’s life.
Income tax paid? Credit DTL with $40,000 ($120,000- $80,000)
Yr1. DTL = tax rate * difference in tax base/CV = 40%* $(400,000 - 300,000) = $40,000
Income tax expense = $80,000 taxes payable + change in DTL ($40,000) = $120,000
Yr2. Taxable income = pre tax income (no change in DTL), hence income tax expense = $120,000 + 0 change in DTL
Yr3. Taxable income more than pre tax income (change in DTL), hence income tax expense = $160,000 + - 40,000 change in DTL
CV ($400,000) > Tax base ($300,000) or
Taxable income ($200,000) < pre tax income ($300,000)
(expected to reverse) = DTL
Otherwise, a DTA (or reduction in DTL)
