inconsistent meaning of the D (deferred) in DAC and DTA?
If I understand correctly, deferred acquisition costs refer to acquisition costs which a company has already paid (there's less cash in the bank as a result) for which recognition is being deferred in GAAP. If so, then deferred here refers to deferred recognition of a transaction that has already been executed.
On the other hand, deferred tax assets refer to tax credits which the company hasn't been able to use yet but which they are recognizing as an asset now. As such, deferred here refers to a deferred transaction which has already been recognized. (And similarly, deferred tax liabilities are liabilities the company is recognizing now for taxes that will be paid later.)
First of all, do I have all of that right? Assuming I do have it right, does anyone else find the use of the word deferred on the balance sheet with two essentially opposite meanings at all confusing?
Comments
Lol. You interpretation makes sense. I laughed because if you try to apply strict logic to disciplines like accounting you'll sometimes be frustrated. Of course, that's my mathematician's bias. (Side note: The 4 Principles of Ratemaking have the same issue. For example, Principle 2 is redundant because it's subsumed by Principle 3. And Principle 3 is never strictly followed anyway.)
I don't know if you've ever heard this joke: Engineers speak only to physicists. Physicists speak only to mathematicians. Mathematicians speak only to God. (That's the pecking order! And accountants aren't even mentioned!)
Anyway, that's all beside the point. It's admirable that you're very mindful of the words and their meaning. That's a good habit of mind, but it will be better to temporarily keep this tendency in check while studying for this exam. :-(
Unfortunately, your goal is not always to actually understand the material. The goal is to memorize the facts that are asked on the exam. Sometimes that overlaps with true insight and understanding. Sometimes it doesn't.
Can you please explain how, under GAAP, deferred acquisition costs are considered an __asset __that is amortized rather than an _expense _that is deferred and amoritzed over time to match incoming earned premium.
I think your question is "why" rather than "how." I guess it's because it's a mechanism that functions for the intended purpose. In GAAP, as in SAP, full amount of acquisition costs are subtracted from earned premium in deriving income. But additionally in GAAP, an asset is set up for the deferred portion of AC, which in turn augments surplus.
I can't think of a mechanism (i.e. a "place") in the existing statement where AC would be split to now vs deferred. It could conceivably be created, but this is how GAAP people decided to handle it.