Template for DTA/DTL
A simple logic or template can be developed to determine whether a particular timing difference results in a deferred tax asset (DTA) or a deferred tax liability (DTL). Such a template would help clarify the outcome in various scenarios, relieving some of the confusion. Let's try to break down this logic in a simple way. When considering an expense item, it either reduces an asset or increases a liability in the books of accounts. Compare this asset or liability in the books with its tax base.
If the accounting base of an asset is higher than the tax base, we can perceive the asset as being "overloaded." This overloading can be balanced by creating a liability or reducing the asset, which would result in the creation of a DTL or the reversal of a DTA. However, this doesn’t imply that a matching sum must be created as a liability or reversed; rather, it indicates the emergence of a DTL or the reversal of a DTA. Similarly, if the accounting base of an asset is lower, it would lead to the creation of a DTA or the reversal of a DTL. This logic also applies to overloaded or underloaded liabilities.
By CA L.Muralidharan and CPA L.Mukundan
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