Effect of discounting the asset for future income taxes

felixc5

effect of discounting = (RR - 0.95*MIN(APV, RR)) * tax rate * (1- PV factor)

that means the effect of discounting is never 0 based on this formula

The definition of asset for future income tax

asset for future income taxes represents the prepayment of tax arising since the tax credit taken for losses is less than the actual balance sheet amount

if losses = actual balance sheet amount (APV = RR?) then there would be no asset and discounting 0 to time t-0 would still be zero....but that's not what the formula is suggesting.

Fall 2019 Q15(d) examiner report says a common error was "Assuming that there is no discounting effect because the reported amount equals the APV"

What am i missing to reconcile the 2 concepts?

AnLaPe

This is my understanding, but I'd like confirmation it is accurate

• Companies are taxed on their income, and losses reduce the income
• The company estimates that the losses will be RR, the AA estimates that they will be APV

• For tax purposes, the government requires that future losses used in the calculation be 0.95 * min(APV, RR)

  • This means that losses used for the calculation of tax are lower, or equivalently, income is higher than what the company expects it to be at ultimate
  • This creates an asset, as losses develop, they expect that their income will be lower than what was initially used for tax calculation, so the government will pay back some of what was originally paid in taxes

• So the 95% factor is the reason for the asset and not whether RR = APV or not

Staff-T1

AnLaPe is spot on with the explanation