What is DTA and DTL really?

Glad to help Maroon5. Keep asking questions excellent way to jog our memories. =D

@Diya that was a great explanation. Thanks!

I’m guessing that’s FRA. I will get to that part next weekend, and then I might be able to help you..

I suggest you move on and then visit it back after trying to resolve some questions from both the book and the other material you use. It has helped me greatly before (IS-ML curves…)

I am sorry but depreciation and warranties both can be a DTL or a DTA depending on the carrying value being greater or lesser than the tax base. But by reading your explanation at face value, it seems like you assume depreciation to always be a DTL. Not the case. 

Thanks for the explanation @diya!

#ERROR!

Now you’re freaking me out. I’ll be checking up on this too 🙂

I’ll try to answer this question.

Deferred tax assets and deferred tax liabilities occur due to the difference between financial statements prepared for investors and the tax authority. Some examples would be the difference caused different depreciation schedules used for reporting purposes and for the tax authority (this is an example of a deferred tax liability). Taxable income is smaller than reported income however it is a temporal difference and will reverse in the future. Since it is a deferred tax liability remember that is it a representation of future taxes that the firm will have to pay.

Deferred tax assets is the opposite, in that taxable income is greater than the income reported. This can result from recognizing warranty expense or bad debt expense but the tax authorities do not allow you to deduct these expenses for tax purposes. Deferred tax asset is also due to temporal differences and will reverse when you finally do have an actual cash out flow due to warranty expense or are unable to collect some accounts receivables and realize that lose. So the deferred tax asset is the amount of tax you have prepaid.

Hope this helps.
=D

Just one more thing to remember, deferred taxes can be classified as an asset, liability, or equity (this is DTLs). A DTL can be classified as equity if it is not expected to reverse in the future. If the DTL is not expected to reverse then it will reduced and the amount that it was reduced will then be recognized in the equity section of the balance sheet.