In the example for asset tax base, research cost for the year = 100; If tax rules require cost to spread over 4 years then ,isn't the tax base is 75? Can any one explain how could it be 80
@IFT could you please explain this line: "Tax credit reduces your taxes so you end up paying more" In order to create a deferred tax asset, ITP > ITE. I am confused about whether the tax credit reduces Tax Payable or Tax Expense.
A tax credit is a sum of money that taxpayers are able to subtract from their tax liability. Tax liabilities are money owed to the government. Tax credits are different than tax deductions. Tax deductions reduce the amount of taxable income reported; however, tax credits are applied afterward to reduce the actual amount of tax payable. IFT Support Team
The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes with respect to that liability in future periods. So, if the carrying amount and tax deductible is same, then tax base will be zero. IFT support team
Dear Student. Thank you for your great comments. We are really pleased that you are able to benefit from IFT TH-cam videos. Be sure to Like the videos; share IFT videos with your social media circles. Thank you! - IFT Support Team
Dear Avdhesh, Yes it effects both, and it is also mentioned in the video lecture, please watch the video lecture again to clarify your confusion. IFT Support Team
Hello Sir, could you please explain a bit on why an indirect tax credit will create a DTA instead of DTL. Because from my perspective, a tax credit will temporarily decrease the tax payable but the tax expense on the book will not be affected. Could you please clarify my doubt. Thank you!
A tax credit is a type of tax incentive that can reduce the amount of money a taxpayer owes the government. The general principle in IAS 12 is that a deferred tax asset is recognised for unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. IFT Support Team
Dear Sagar, Tax credit is the amount that a taxpayer can deduct from the tax owed. However, if a tax credit directly reduces taxes, a permanent difference is created between tax expense and tax payable. A permanent difference does not lead to a deferred tax asset or liability. Lastly, tax credits reduce your taxes so you may end up paying more, hence there would be DTA. IFT Support Team
Permanent differences that form part of the current period’s ITE and ITP difference do not create deferred tax assets or deferred tax liabilities, this includes tax credits that are deducted in the current period. However, in case the firm reports a loss in that period, the tax credit will be carried forward to the next period. The slide at 19:59 talks about unused Tax Credits that are carried forward. This ideally will result in a DTA because we expect it to reduce the Tax Payable in a future profitable period. @IFT , I hope my explanation is correct. Please correct me if am wrong
@@shiyuelang3071 From what I can infer from this is that a Tax Credit can work both ways, as a permanent difference (if it is direct) and a temporary difference ("vaguely" if not direct). Now other things equal, if it is a temporary difference you can show a reduced tax expense but your tax payable stays the same. This leads to "Tax Payable>Tax Expense" and hence DTA Not an official answer though. Hope that helps, best of luck!
Why is the "payment received in advance for sales" the only liability where "Tax Base = Carrying amount less any amount that will NOT be taxed in the future"?
Effective tax rate = Income tax expense / Pre tax income because we know that Tax expense = Pretax income * Tax rate so Tax rate = Tax expense / Pre tax income IFT support team
Yes, decrease in statutory tax rate will make net DTA less valuable; however, due to lower rate, interest expense would decrease, which would result in higher NI and higher RE. IFT support team
@@IFT-CFA In the last video you said ITE = ITP - Change in DTA so wouldn't a decrease in DTA result in a higher interest expense (ITE), which would result in lower NI and lower RE?
Hi, Can you please help me to understand the question of FRA, reading #27 (Income taxes) page-500 of CFA book, question-18, why the answer is "c"? Q-18: If the valuation allowance had been the same in Year 3 as it was in Year 2, the company would have reported $115 higher: A net income. B deferred tax assets. C income tax expense.
If the valuation allowance in Year 3 was 1,360 (same as Year 2) rather than 1,245, the company would report lower net income. Recall that high valuation allowance can be thought of as high depreciation which results in lower income. High valuation allowance would result in lower DTA. A lower DTA means that the income tax expense is higher. IFT support team
IFRS provides an exemption (that is, deferred tax is not provided on the temporary difference) for the initial recognition of an asset or liability in a transaction that: a) is not a business combination (e.g., joint ventures, branches and unconsolidated investments); and b) affects neither accounting profit nor taxable profit at the time of the transaction. US GAAP does not provide an exemption for these circumstances. As a simple example of a temporary difference with no recognition of deferred tax liability, assume that a holding company of various leisure related businesses and holiday resorts buys an interest in a hotel in the current financial year. The goodwill related to the transaction will be recognized on the financial statements, but the related tax liability will not, as it relates to the initial recognition of goodwill. IFT support team
Dear Avdhesh, Company has received the payment in advance, so that whole amount is taxable for that period only and not for future periods. Hence tax base is zero. IFT Support Team
personally, I think it's hard to remember everything even if you've understood it completely at the time. Shortcuts/tricks for recalling something arent a bad thing. Maybe you have more memory power so you don't find a need to memorize but for some of us, it's definitely helpful.
Read IFT’s 101 KEY CONCEPTS for Level I here: ift.world/category/101-concepts/
In the example for asset tax base, research cost for the year = 100; If tax rules require cost to spread over 4 years then ,isn't the tax base is 75? Can any one explain how could it be 80
it is 75, not 80
Dear Mrudhuka,
Yes, you are correct, the tax base should be 75. We will fix this soon.
IFT Support Team
How did you come up with 75?
IFT can you leave explain how we get a tax base of 75 from 100 and 4?? Thanks
@@tinadinh218 100/4 = 25. Tax base = 100-25 = 745
Think of tax base = net book value (but for tax)
Bad debt expense can be an example where CV
1:35, how is the tax base 80 for the third item?
Dear Aravind,
Yes, you are correct, the tax base should be 75. We will fix this soon.
IFT Support Team
You are right. It should be 75
@IFT could you please explain this line: "Tax credit reduces your taxes so you end up paying more"
In order to create a deferred tax asset, ITP > ITE.
I am confused about whether the tax credit reduces Tax Payable or Tax Expense.
A tax credit is a sum of money that taxpayers are able to subtract from their tax liability. Tax liabilities are money owed to the government. Tax credits are different than tax deductions. Tax deductions reduce the amount of taxable income reported; however, tax credits are applied afterward to reduce the actual amount of tax payable.
IFT Support Team
@2:34 mins why is unearned income ( liability) is created instead of DTA
Can you please explain further how tax base is 0 at 2:51 ? Are all tax base of liabilities 0 if there is no more to be paid in the future?
Also, why does a decrease in DTL bring an increase in Equity?
Finally, isn't CA > TB always DTL? how come 11:24 says otherwise?
The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes with respect to that liability in future periods. So, if the carrying amount and tax deductible is same, then tax base will be zero.
IFT support team
Excellent explanation, thank you!
Dear Student. Thank you for your great comments. We are really pleased that you are able to benefit from IFT TH-cam videos. Be sure to Like the videos; share IFT videos with your social media circles. Thank you! - IFT Support Team
at 7:35 it should effect both income statement and Balance sheet( as explained in Q-17 in CFA curriculam
Dear Avdhesh,
Yes it effects both, and it is also mentioned in the video lecture, please watch the video lecture again to clarify your confusion.
IFT Support Team
Hello Sir, could you please explain a bit on why an indirect tax credit will create a DTA instead of DTL. Because from my perspective, a tax credit will temporarily decrease the tax payable but the tax expense on the book will not be affected. Could you please clarify my doubt. Thank you!
A tax credit is a type of tax incentive that can reduce the amount of money a taxpayer owes the government. The general principle in IAS 12 is that a deferred tax asset is recognised for unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised.
IFT Support Team
How a tax credit will lead to DTA (19:59)? Isnt it true that we can not reverse it? Also if true, then why DTA not DTL?
Dear Sagar,
Tax credit is the amount that a taxpayer can deduct from the tax owed. However, if a tax credit directly reduces taxes, a permanent difference is created between tax expense and tax payable. A permanent difference does not lead to a deferred tax asset or liability. Lastly, tax credits reduce your taxes so you may end up paying more, hence there would be DTA.
IFT Support Team
@@IFT-CFA I'm still confused about why tax credit will create DTA instead of DTL?
Permanent differences that form part of the current period’s ITE and ITP difference do not create deferred tax assets or deferred tax liabilities, this includes tax credits that are deducted in the current period. However, in case the firm reports a loss in that period, the tax credit will be carried forward to the next period.
The slide at 19:59 talks about unused Tax Credits that are carried forward. This ideally will result in a DTA because we expect it to reduce the Tax Payable in a future profitable period.
@IFT , I hope my explanation is correct. Please correct me if am wrong
@@shiyuelang3071 From what I can infer from this is that a Tax Credit can work both ways, as a permanent difference (if it is direct) and a temporary difference ("vaguely" if not direct). Now other things equal, if it is a temporary difference you can show a reduced tax expense but your tax payable stays the same. This leads to "Tax Payable>Tax Expense" and hence DTA
Not an official answer though. Hope that helps, best of luck!
@@dianaomari8886 great explanation.
Why is the "payment received in advance for sales" the only liability where "Tax Base = Carrying amount less any amount that will NOT be taxed in the future"?
isn't it effective tax rate= Tax paid/ total income? could you please explain
Effective tax rate = Income tax expense / Pre tax income
because we know that Tax expense = Pretax income * Tax rate
so Tax rate = Tax expense / Pre tax income
IFT support team
@@IFT-CFA i think it should be 25/100. If difference is permanent then statutaory and effective rates should be different.
So for the first item in determining tax base it's a deferred tax liability because income tax expense is greater than income tax payable?
Dear Dev,
Can you please be more specific when you say "first item".
IFT Support Team
if the firm has net deferred tax assets then decrease in statutory taxes will decrease assets and increase equity with higher retained earnings no?
Yes, decrease in statutory tax rate will make net DTA less valuable; however, due to lower rate, interest expense would decrease, which would result in higher NI and higher RE.
IFT support team
@@IFT-CFA In the last video you said ITE = ITP - Change in DTA so wouldn't a decrease in DTA result in a higher interest expense (ITE), which would result in lower NI and lower RE?
Hi, Can you please help me to understand the question of FRA, reading #27 (Income taxes) page-500 of CFA book, question-18, why the answer is "c"?
Q-18: If the valuation allowance had been the same in Year 3 as it was in Year 2, the company would have reported $115 higher: A net income. B deferred tax assets. C income tax expense.
If the valuation allowance in Year 3 was 1,360 (same as Year 2) rather than 1,245, the company would report lower net income. Recall that high valuation allowance can be thought of as high depreciation which results in lower income. High valuation allowance would result in lower DTA. A lower DTA means that the income tax expense is higher.
IFT support team
Can you help explain in exception to the usual rule for temporary different which is included the curriculum?
IFRS provides an exemption (that is, deferred tax is not provided on the temporary difference) for the initial recognition of an asset or liability in a transaction that: a) is not a business combination (e.g., joint ventures, branches and unconsolidated investments); and b) affects neither accounting profit nor taxable profit at the time of the transaction. US GAAP does not provide an exemption for these circumstances. As a simple example of a temporary difference with no recognition of deferred tax liability, assume that a holding company of various leisure related businesses and holiday resorts buys an interest in a hotel in the current financial year. The goodwill related to the transaction will be recognized on the financial statements, but the related tax liability will not, as it relates to the initial recognition of goodwill.
IFT support team
at 2:28 how come the tax base is 0?
Dear Avdhesh,
Company has received the payment in advance, so that whole amount is taxable for that period only and not for future periods. Hence tax base is zero.
IFT Support Team
Why is this not a deferred tax asset then? If we've paid more taxes than what we have on the books?
13:50 Stop giving tricks to memorize. These formulas should be understood by heart. We are here for learning, and not mugging.
personally, I think it's hard to remember everything even if you've understood it completely at the time. Shortcuts/tricks for recalling something arent a bad thing. Maybe you have more memory power so you don't find a need to memorize but for some of us, it's definitely helpful.