Page 45 - FINAL CFA I SLIDES JUNE 2019 DAY 8

LOS 30.e: Evaluate the effect of tax Session Unit 8:
rate changes on a company’s financial 30. Income Taxes
statements and ratios. p.252

Any change in tax rates will alter income tax
expense. If tax rates decrease…

Example: Accounting effects of a change in a firm’s tax rate, p.253: A firm owns equipment with a carrying value of
$200,000 and a tax base of $160,000 at year-end. The tax rate is 40%.

Taxable income < pre-tax income: DTL = $16,000 [40% * ($200,000 CV – $160,000 tax base)].
tanties
Bad debt expense of $10,000 recognised but not yet deductible for tax purposes.

Taxable income > pre-tax income: DTA = -$4,000 [40% * ($0 - 10,000 tax expense base].

Calculate the effect on the firm’s income tax expense if the tax rate decreases to 30%.

DTL balance reduces to $12,000 [30% * ($200,000 CV – $160,000 tax base)]

–$4,000

DTA balance reduces to -$3,000 [30% * (0 - $10,000 tax expense base)

-$1,000

Rates drop from 40% to 30%,
+ -$4000 - - $1000 = -$3,000 tax expense drops by $3000