Page 44 - FINAL CFA I SLIDES JUNE 2019 DAY 8
P. 44
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 assets, p251: Warranty costs –accrued but only allowed on cash basis for tax purposes.
Suppose: Sales of $5,000 for each of two years; projected warranty expense = 2% of annual sales ($100); the
tanties
actual expenditure of $200 to meet all warranty claims was not made until the second year; tax rate = 40%;
Calculate the firm’s income tax expense, taxes payable, and deferred tax assets for year 1 and year 2.
Income tax paid? Difference of $40 is DTA
Yr1. DTA = tax rate * difference in tax base/CV = 40%* $( 0 Tax Base -100 CV ) = -$40
Income tax expense = $2,000 taxes payable + increase in DTA (-$40) = $1,960
For expense: Tax base (0) < Accounting base ($100) or
Taxable income ($5000) > pre tax income ($4,900) (expected to reverse) = DTA
Otherwise, a DTL (or reduction in DTA)
