The Spanish government approved a new directive which
will give Spanish Banks a capital boost of 30 billion euros, according to the
Dow Jones News Wire.
The minister of finance of Spain approved to transform
the Deferred Tax Assets (DTA) plan into tax credits for the banks’ balance
sheets. This means that the banks may use these DTA as core capital under the
International Financial Reporting Standards.
This basically means that Spanish banks may use their
DTA as basic core capital, and according to the finance minister, Spanish banks
have about 50 billion euros of such financial assets, and 60% of the 50 billion
will be transformed into capital.
This bookkeeping accounting issue was decided in order
to make the Spanish as competitive as their other European counterparts, and
was approved by the IMF. However, it warned that this should not be the only
measure and that other steps are also necessary to make the balance sheets more
credible.
What are deferred taxes? Companies use different
accounting methods for tax and accounting purposes. The choice of different
depreciation methods for tax and book purposes creates differences between
income reported on the books and income to the revenue authorities.
For example, a company may report earnings before
taxes $2,200 on their books, and $667 to the tax authorities. If we assume for
example sakes a tax rate of 30%, then under the financial statements, tax
expense would be $660, and under the tax returns, taxes payable would be $200.
The difference is a deferred tax.
The accounting entry would look like this:
Dr. Tax Expense (+E, -SE) $660
Cr.
Taxes Payable (+L) $200
{+E = increase in Expense, -SE = decrease in Stockholder’s’
Equity, +L = increases in liability}.
The earnings
before taxes on their books uses a straight line depreciation method, while
under the tax reporting, it uses depreciation method schedule from the tax
authorities. Management chooses the depreciation method used (most use the
straight line method), the salvage value, and the useful life.
Because of these differences, the corporation has two
tax amounts that are different: Income tax expense on the financial statements
(decreases owners’ equity), and Income Taxes Payable (a liability) under the
tax returns. These differences can be categorized as permanent and temporary.
Permanent differences are those revenues that are not included in taxable
income. For example, under US IRS rules, interest income from municipal bonds
is tax exempt. This will never appear in the tax returns.
Temporary differences are expenses or revenues that
are recognized in different periods of time. In the above example, a
depreciation difference is such a temporary difference, and is stored in DTA.
So the difference between tax expense and taxes payable is a plug in, in the
case above (660 – 200 = 460, which would be a credit in order to keep the
accounting rules between credits and debits in balance.
This plug represents taxes that will eventually have
to be paid by the corporation, later. So DTA arise from temporary differences
(depreciation), where, initially tax rules(see example above) require smaller
expenses. The DTA represents the benefit of tax savings in the future.
