CFA CFA Level 1 Effect of change in tax rate on deferred taxes.

Effect of change in tax rate on deferred taxes.

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    • navaneeth
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      Hello people,

      Why does deferred tax asset and liability change when tax rates change? Its the deferred tax amount for the income in previous years when the tax didn’t change right? If the tax changes in the subsequent years, why is the tax amount owed being recalculated? What am I missing here?

      Thanks,
      Navaneeth

    • Scipio_Academy
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      A deferred tax
      asset (DTA) and a deferred tax liability (DTL) are derived from differences in
      taxes payable and the amount of tax expense recognized on the income statement.
      DTA & DTL represent an amount of income tax expense that a company will receive
      credit for, or be liable for in the future. Increases (decreases) in tax rates
      will increase (decrease) DTA and DTL. Tax rates dictate the amount of deferred
      taxes to be recorded because it determines the amount of taxes to be paid. 

      Formula

      Income Tax Expense = taxes payable + Change in DTL – Change in DTA

      Increases
      (decreases) to DTL will result in higher (lower) income tax expense. Increases
      (decreases) to DTA will result in lower (higher) income tax expense.

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