Module 4 : Recoupment of tax losses
If you’re studying CPA Financial Reporting and up to Module 4, then you’ll be familiar with recoupment of tax losses.
When an entity has a tax loss, it gives rise to a DTA and the rule relating to the recognition of the DTA is that only the portion that satisfies the probability criterion can be recognised. The remainder would not get recognised.
Now, in the future, when the entity makes a profit, it will have to pay tax on the profit. But what will happen is the entity will say ‘wait a minute, I have tax losses from the previous year which I want to use to reduce the tax that I now have to pay’.
This is called ‘recouping the tax loss’.
That is, the entity is using up the tax losses.
Now when this happens, the rules relating to the recoupment would apply.
The rule states that we must first use up tax losses for which no DTA was recognised.
So according to the rule, we would recoup against this first.
The journal entry for recouping against this is given in my KnowledgEquity flowcharts (Dr Deferred tax expense | Cr Current tax income).
If there is still a remainder of taxable profit after you recouped the tax losses for which no DTA was recognised, then you can recoup against the tax losses for which DTA was recognised.
Again, the journal entry for doing this is given in my KnowledgEquity flowchart (Dr Deferred tax expense | Cr DTA).
As simple as that. If you use my flowcharts in Module 4, you cannot go wrong !
In KnowledgEquity’s Financial Reporting Support for your CPA course, there are short explanatory videos, practice exams, module quizzes, webinars and flowcharts to help you embed your knowledge and be able to understand the subject. These are available as part of our Financial Reporting. Once you have concepts like these embedded in your knowledge data bank, you will be ready to take on your CPA exam!