Understanding Future Deductible Amounts (FDA)

and Future Taxable Amounts (FTA)

Lots of CPA students struggle with the concept of future deductible amounts and future taxable amounts. The best way to
explain these two concepts is in bite-size chunks.
Chunk 1. Deductible and taxable amounts are used for the calculation of tax. These are terms that relate to the calculation
of taxable profit. And current tax is equal to taxable profit x tax rate. So, the higher the taxable profit, the more tax we will
pay. The lower the taxable profit is, the less tax we would pay. NOTE that taxable profit is different to accounting profit
that you would see in your income statement. The calculation of taxable profit and the inclusion of taxable amounts and
removal of deductible amounts do NOT occur in the income statement but rather in the company’s tax returns.
A deduction will reduce the taxable profit. Meaning we would pay less tax. It is a good thing for the tax payer. We all like
to pay less tax! A taxable amount increases the taxable profit meaning we would have to pay more tax. This is a bad thing
for the tax payer. No one (in their right minds) likes to pay more tax.
Chunk 2. In the CPA Financial Reporting subject you are not expected to know the specific tax law and when something is
deductible or taxable. An exam question will give you the relevant information so, for example, the question says that tax is
calculated on a cash basis, then you should know that the FDA and FTA would relate to the cash payment or receipt in the
future.
Chunk 3. You can only claim a deduction ONCE. You can only get taxed on an item (i.e. taxable amount) ONCE. If the
item was included in taxable income in the current year, then it will NOT be taxed again in the future. Hence the FTA
would be 0. If only 10% of an item was included in taxable income in the current year, then 90% would represent FTA
since the remaining 90% would be taxed in the future. Similarly, if a deduction was allowed in the current year, then FDA
would be 0 because you cannot get a deduction twice.
Chunk 4. Now let’s consider an example:
Assume that I have a NET debtors balance of 100 after taking out the provision for allowance of doubtful debts of 20. (so
my gross debtors would have been 120). The debtors were included in the calculation of taxable income for the year and a
deduction for tax purposes would only be given once the debt is actually written off.
The TB for an asset = CA + FDA – FTA
CA = 100
FDA = 20 This is because the 20 provision for doubtful debts is the accounting treatment but for tax purposes the debt
has not yet been written off. In the future, if this 20 is written off, there would be a deduction of 20 allowed to reduce your
taxable income. That is, you would pay less tax. This 20 is a FDA.
FTA = 0 This is because the information said that the revenue from the debtors was included in the calculation of
taxable income. In other words, it was taxed in the current year. If it is taxed in the current year, it will NOT be taxed again
in the future (i.e. you are not going to get taxed twice). The FTA is 0
TB = CA + FDA – FTA
= 100 + 20 – 0
= 120